Up in the air: Airbnb and the Tax Office

Global upstart Airbnb is leading a charge with what is best described as open-source citizen subcontracting. It’s a collectivist, internet-based concept whereby everyday people provide accommodation services as private entities on an ad hoc basis. Airbnb basically sets up accommodation seekers with ideally placed property owners, making them provisional innkeepers. The model fosters a personal touch, but its success is driven by the potential to save money by avoiding traditional market channels. We’re seeing in Airbnb a cultural desire for crowd-funded alternatives. There’s money to be made, and assessed for tax. Naturally the Tax Office has been slow on the uptake.

Airbnb’s networking domain is app-based (on your smartphone) and web-based (on your computer). Rental property owners advertise their properties, stipulating their own personal terms, and accomodation-seekers agree to stay in those properties based on those terms. There is generally no minimum stay requirement, and the leasers and leasees devise their own personal rental agreement under Airbnb’s guidelines. It’s most important to note that Airbnb leasers and leasees correspond personally to reach a mutually beneficial agreement. They work in symbiosis; property owners have neither power nor interest in imposing unattractive fees and rigid terms.

The Tax Office’s challenge is creating tax rulings based on the largely undefined (read “informal”) terms of engagement with Airbnb. If the Tax Office does not understand the terms under which citizens become single-serving subcontractors for these companies, they can’t lay down appropriate tax obligations.

In this vacuum of legislative silence sits the matter of assessable income. Without a specific ruling distinction, it has the potential to complicate Airbnb’s operation in Australia. Consider the following with regards to an Airbnb user (henceforth Airbnb-er to us) with a property to offer paying guests.

Say the property was bought as a rental property prior to and independently of Airbnb engagement. It’s not the primary place of residence for the soon-to-be Airbnb-er, and would otherwise be let as a means for generating income. Subsequent leasing out to Airbnb users in this case may be seen as a venture for profit, and its proceeds would likely be assessable, just as those from traditional rental arrangements outside of the Airbnb model would be. But Airbnb rental arrangements are by their nature short-termed, and they don’t always involve rental properties exclusively. This may change the Tax Office’s scope for assessing earnings. It’s all a question of leaser intent.

Consider the leasing of holiday houses through Airbnb (meaning a holiday house bought with the intention of seasonal use by the owner, and not for leasing out for profit). As far as tax law goes right now, letting out a private residence (a holiday house in this case) would likely equate to entering into a boarding- style arrangement. Boarding-style lease agreements can produce income that can be assessed — but Airbnb’s model complicates things.

The Tax Office’s ruling on rental properties is holey to say the least, but provides a general reference point for the letting of holiday houses as well as boarding-type arrangements.

It defines a holiday house as “located in holiday resort areas or away from mainstream residential areas”. It understands that if such residences are let, they’ll be let short-term — presumably the length of a holiday, maybe a few weeks, months etc. The ruling says that if owners of such properties let to friends or relatives, “at no or minimal cost”, any resulting income would not be assessable. This precludes an Airbnb-style arrangement, because Airbnb-ers and Airbnb-ees are not friends or relatives. Objectively, though, the Tax Office would have a hard time determining relational connections between Airbnb-ers and ‘ees if their rental agreement is ultra-short term and, for the Airbnb-er, economically irrational.

For our purposes, the question is again about intent: Are Airbnb-ers leasing their private residences to Airbnb-ees to achieve profit? For example, consider the following scenario.

Alfred owns a holiday house in Lakes Entrance. It costs Alfred $300 a week to maintain the property. Ten months out of the year, Alfred doesn’t visit his property, so he advertises it on Airbnb. He figures he may attract a leasee during the winter, and the advertisement is low-risk.

Airbnb-ee Sam expresses interest in renting Alfred’s property for a week while doing business in a nearby town. Sam proposes a $200 a week payment for staying at Alfred’s property. Alfred agrees; he knows that Sam is paying less than the $300 weekly cost of owning the property, but sees the benefit in a once-off contribution at a time of year when he wouldn’t use the property anyway. As a result, Alfred would only wear a $100 cost for his property for that week. Alfred hasn’t achieved a profit per se, but is receiving money that eases his expenses.

Alfred is receiving income, yes, but that income may not necessarily be assessable if it does not adhere to ordinary concepts. The money is — given the period of Sam’s stay, in an off-season period of the year — not a regular or recurrent payment (conversely, a traditional holiday rental arrangement would be considered regular). This alone does not preclude it from being ordinary income. Sam’s payment may be treated as ordinary income — albeit income generated as an isolated transaction outside the ordinary course of business — if Alfred’s purpose was to make a profit. But we’ve established Alfred is not making a profit from his dealings with Sam. As their arrangement stands, Alfred’s $200 income would be counted as ordinary. His motive, as far as the Tax Office would be concerned, is economically irrational.

Airbnb allows prospective Airbnb-ers to let part of their primary place of residence, too. Now we are looking at how the Tax Office’s ruling on boarding- style arrangements fits in with the Airbnb model. If an Airbnb-er lets a bedroom of their house to an Airbnb-ee at a minimal rate, the income from that arrangement may be assessable. The Tax Office is chiefly concerned with whether the residence owner benefits from the arrangement or not. For example, consider the following.

  • Deborah’s primary place of residence has two bedrooms. She sleeps in one, and the other is unused. The bedrooms each take up one sixth of the total floor space of the residence. She decides to advertise her spare bedroom on Airbnb to attract boarders at a low rental rate. She figures that if she gets periodic, short-term Airbnb-ees to stay in the otherwise empty second room, she’ll make a little money to help pay her utility bills.
  • Airbnb-ee Charlene stays in Deborah’s second room for two weeks. She pays $50 per week. By the end of the fortnight, Deborah has made $100. She puts this $100 toward her $400 electricity bill for that month, so her electricity expense has thus dropped to $300. Deborah doesn’t attract another Airbnb-ee for the rest of that financial year.

As with Alfred’s scenario, Deborah’s $100 income may not be ordinary because it is a once off, non- recurring payment. But it is clear Deborah benefited marginally from sub-letting to Charlene for the two- week period.

However, with regard to the main residence exemption, we should consider that when Deborah comes to selling her property she may be subject to capital gains tax. This applies in the case that Charlene’s payment is counted as assessable income. The room Charlene rented represents only a part of Deborah’s residence, and Charlene only stayed for a limited period in comparison to Deborah’s total ownership period, so her capital gains tax liability may be limited to that space and that length of lease. In that case, the reduction of the main residence exemption will be minimal.

Intent must be weighted again, too. If Deborah listed her property on Airbnb as available for leasing over, say, two years, but still attracted only one Airbnb-ee over that period, the Tax Office may construe that Deborah sought to make a profit by advertising for so long regardless of how much money she actually made. We know that with matters of intent, the Tax Office is trying to make concrete out of sand. Airbnb-er profit motives, fleeting though they may be, will most likely be determined on a case-by-case basis.

Airbnb’s model is confusing because short-term open-source rental arrangements have not been broached in concrete legislative terms. The Tax Office can really only assess Airbnb proceeds where they fall in with traditional rental arrangements. Traditional rental arrangements may occur between Airbnb users, but the take-home point is that within a collectivist business network clients and proprietors work in symbiosis. They work in financial tandem, deciding upon rates and tax interpretations (see the “friends and relatives” clause) for mutual benefit. There’s no standard Airbnb arrangement, no algorithm for payments, no uniform cases to set precedence. Assessability is up for dispute. And the Tax Office, it seems, has no interest in beating Airbnb and its trailblazing contemporaries to the punch.

Posted in

Welcome to the InterActive Tax Consultants’ news – part of our personal and easy to understand approach to taxation. We are committed to working with you to achieve the best results for your business. If you have any question or would like more information on any of the articles please contact us.