Airbnb has grown into an idea of epic proportions. A website that was once used for couch surfing wonders is now a worldwide short term rental facilitator. Why pay excessive amounts of money for a hotel when you can pay half the price and stay at someone’s home? Or why leave your apartment empty while you’re away for a week when you could have someone pay you to stay in it?

The website has fast become a popular alternative to booking a hotel when travelling. On one hand it’s a great way to find accommodation without the cost of booking expensive hotels, however renters are jumping on board and effectively ‘sub-letting’ their homes to pay their rent and (in some cases) make a profit without informing their property manager or landlord. Not only is this breaking the lease terms (in most cases), but raises issues such as insurance validation if something happens to the property, apartment security breaches and the amount of wear and tear a property withstands. Renters aren’t the only ones taking advantage, with people buying properties purely to rent through Airbnb to avoid taxes and make substantial profits on their investments, rather than leasing them out as ‘holiday rentals’ or finding tenants to sign a lease.

Is this illegal?

Potentially! Airbnb takes the stance that it is the users responsibility to fully comply with their local laws, as well as ensure their lease conditions are not broken (if renters). As The Australian reports, ‘ The Tenants Union says you cannot sublet without the landlord’s written consent. However, the landlord cannot unreasonably withhold their consent’. It has also been reported that a third of New York City’s Airbnb properties are being rented in an illegal matter, and are effectively on the site as hotel rooms which does not comply with local law.

It could be that you are receiving complaints from neighbours or strata managers regarding high numbers of travellers traipsing luggage through the apartment block, or your tenants asking for new keys as often as they change their undies. Or the wear and tear after an inspection is far more than expected, with more maintenance issues reported. Whatever the trigger to realising that your tenant is acting as a part time property manager, you need to ensure that action is taken. Contact your landlord to ensure that they know what is occurring and how they would like to handle it. In most situations, a simple warning of the contract breach works and the tenant takes the listing off. However if the tenant denies what they are doing and you have evidence, further action may be required. If this is the case always seek legal advise, and ensure you keep all communication and evidence between all parties involved.

Due to the nature of the online community these sorts of situations will keep appearing. And it’s only going to increase in Australia, with the recent appointment of an Aus/NZ Country Manager to help increase awareness of Airbnb in the region. So think about it as an opportunity to be aware. When taking on new tenants make it clear that their contract stipulates no subletting, and keep an eye out for warning signs that your tenants are playing part time hotel tycoon. And if you’re a tenant, think twice before you pop your room up on the site and read your lease agreement thoroughly. The extra coin may not be worth potential out of pocket expenses if your insurance doesn’t cover damages made by an external person, or lease breaking issues with your property manager and landlord.

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Subdividing your PPOR (principal place of residence) is a strategy we often get asked about. If you’re thinking about going down this path, there’s a lot to consider before making your decision.

There are many different strategies with different outcomes, depending on whether you’re planning to sell the part with the house, or the vacant land, or build and move in, build and rent out or build and sell straight away. All these are options to consider and each has its own tax issues!

An example of the most common subdivision situation and the capital gains tax and tax deductions is set out below:

SUBDIVIDE AND SELL VACANT LAND

Jacinta purchased a half-acre block with a house in 2012 for $600,000. At that time the house was valued at $180,000 and the land at $420,000. Jacinta incurred stamp duty and conveyancing fees of $32,000.

In 2014 Jacinta subdivided the land into two equal blocks. The costs associated with subdivision totalled $16,000 and included application fees, survey and legal fees. She also paid $2000 to have water and drainage connected.

In January 2015 Jacinta sold the vacant block for $400,000. The main residence exemption can’t apply to vacant land so Jacinta will have a CGT liability. She contacted a couple of real estate agents and was advised that the two blocks are equal in value so the original cost of the land can be split equally.

There were real estate agents fees of $10,000 and legal fees of $1000 associated with the sale.

The cost base of the rear block is calculated as follows:

Cost of the land (50% of land value at purchase of $420,000)$210,000
50% of the stamp duty & legal fees on purchase$16,000
50% of the subdivision costs$8,000
Cost of connecting water and drainage$2,000
Agents fees and legal fees on sale$11,000
TOTAL COST BASE$247,000
Sale price$400,000
Less: cost base$247,000
GROSS CAPITAL GAIN$153,000

Capital Gains Tax

Jacinta will be entitled to the 50 per cent capital gains tax discount, as she has owned the above land for more than 12 months. The remaining capital gain of $76,500 will be added to her taxable income and taxed at her marginal rate. When we’re talking about dates for this CGT discount, we’re referring to the contract dates, not settlement dates.

It’s important to note that the subdivision itself does not trigger any CGT liability; it’s only the actual sale (and change of ownership) that results in a CGT event.

Should Jacinta decide to sell her home in the future, she will still be entitled to the full main residence exemption, assuming she hasn’t used the property to produce assessable income.

Other tax considerations

If Jacinta had built on the back block and sold that new property she may have found she had a GST liability to consider as well as tax, which can make a huge difference to your profits. However, if she built on the back and moved in, or rented it out for a few years, then when she sells she shouldn’t have any GST liability.

As always, everyone’s situation is different and you should discuss your specifics with your accountant and/or financial adviser, crunch some numbers and check out different scenarios before making any decisions.

A recent Propertyology study that ranked each of Australia’s 550 local government authority (LGA) property market performances since the turn of the century concluded that 26 of Queensland’s 63 LGAs performed better than the state’s capital city property market.

Given that some property markets have higher rates of growth and others have higher rental yields, Propertyology calculated the ‘total return’ (average annual growth rate plus rental yield) and we then ranked the LGAs from one to 550 based on this performance.

Interestingly, the mining industry appeared to be something of a common denominator among the state’s best performers.

This is in spite of the recent price downturn in some mining-related property markets.

The LGA of Isaac (which includes the traditional mining towns of Moranbah and Dysart) was Queensland’s best performing property market for the 15-year period 2000 to 2014.

In fact, Isaac is officially the third best performing market out of 550 across Australia.

Seven Queensland regional locations featured in Australia’s top 20 best performing markets.

The large regional cities of Rockhampton, Gladstone and Mackay all performed better than Brisbane.

Smaller towns, such as Warwick, Emerald, and Mount Isa, also performed better than the state capital.

Greater Brisbane was Australia’s third best performing capital city over the 15-year period and is currently the second most affordable capital city housing market, after Hobart.

The Brisbane LGA sits within greater Brisbane and is Australia’s largest city council. The city scraped in to Australia’s top 33 per cent (ranking 173th for total return).

Brisbane’s median house value has increased from $134,615 in 2000 to $585,000 as at December 2014.

Brisbane property values increased by a whopping 93.2 per cent for the three years ending 2004, including growth of 36.6 per cent in 2003

A group of elderly tenants surviving on aged pensions are battling rental increases and eviction from their inner west retirement village, a situation that is likely to become increasingly common as the city’s property prices continue to climb.

Princess Marina Gardens Retirement Village, in Croydon Park, is in four blocks, each with 11 single-bedroom apartments. They are mostly filled with elderly residents on below market rental agreements. At 86, Roslyn Firth is the oldest resident and has lived in the same unit since 2004.

“I’m worried about my home and my neighbours,” Ms Firth said. “A few nights ago I heard a scream and then weeping from my neighbour’s place. Jacqueline had just been told she would receive an eviction letter – probably the next day.”

The residents are on a range of tenancy agreements, each with slightly different rights and protections. Of the group, 10 say their tenancy agreements protect them under the terms of the 1999 Retirement Villages Act, whereby they cannot be evicted without specific grounds and face rental increases limited to the rate of inflation.

Another group of about 18 are fighting proposed rent hikes of up to 38 per cent in the NSW Civil and Administrative Tribunal. Two of the tenants left earlier this year as they were on standard leases and could not afford the rent increase. Several others have received eviction notices in the last three months.

“I’m on the pension. If my rent goes up by that much, where am I going to go? We can’t afford that,” Ms Firth said.

New owner Paul Simmons justified the rent increases in a letter earlier this year, explaining significant rate increases have necessitated lifting rents.

Mr Simmons bought the property for $4.1 million in November 2013, from the Whiddon Group, which bought the property for $1 million less in 2004. In the past eight years, property prices in Croydon Park have increased by 87.5 per cent. The 2014 advertisement said the property was bringing in $475,000 in rent a year.

Mr Simmons told Fairfax Media he understood the tenants were concerned about changes to their rental properties, but said the block was not a typical retirement village and leases could be reviewed on a case-by case basis for all but one tenant, who he recognises as protected.

“Forty-three out of 44 tenants are renting on residential tenancies leases. There may be changes for some of these tenants from time to time. Any changes to a tenant’s right to occupy will be communicated to the tenants with plenty of time and in compliance of NSW law,” Mr Simmons said.

“Last November we had a serious and acceptable offer to sell the property, but the prospective buyer insisted on vacant possession and we were not willing for that to happen.”

The Princess Marina Gardens Village tenants are just one group facing rental stress in Sydney’s exploding property market. The Australian Bureau of Statistics reported recently that 44 per cent of Australians are struggling with high rental costs that were limiting their opportunities.

The Strathfield MP, Jodi McKay, said the fate of the Marina Garden residents was another example that proved the state government needed to provide more options and protect lower-income tenants.

“These tenants are older and have little prospect of finding a safe place to live in Sydney. The current social housing waiting list is well over 100,000 in metropolitan Sydney, so where will they go?” Ms McKay said.

The Australian rental market has made a substantial shift since the first interest rate cuts during the global financial crisis in September 2008.

Data has revealed the most affected was Gen Y (aged 18 to 24), who experienced record highs of unemployment, increased reliance on government benefits and salary growth only marginally over inflation.

The economy began to emerge again in 2009; however, consumers were still wary of spending in the belief that their personal circumstances had declined.

The rental market changed substantially, yet younger investors still appear to be driven by the same factors they were – even before the GFC.

Surveys show one in three Gen Ys believe they will never be able to afford to buy and trends show that as early as 2006 they were staying in the family home much later. However, it appears that since the GFC this has elongated and left a sizeable void in the lower end of the market.

Now, with borrowing restrictions and large deposits now required, staying home later has become the norm for Gen Y. The shift has left higher vacancies in the lower end of the market, which historically has been the strongest sector, while the middle has emerged as the worthy alternative.

This is clearly evident in recent vacancy rates, which show family homes are experiencing the tightest vacancy rates while townhouse and units are experiencing record highs.
A unit maybe more affordable than a house, however; negative gearing may be an option – if it’s still around; that’s for another day.

Investors, now more than ever, must look at the demographics of the area they will potentially buy in; knowing the probable target market has become imperative. The considerable decline in this sector of the prospective tenant pool may substantially affect their ability to lease their new investment.

As someone who works analysing housing markets every day it is good to see that housing policy is back on the agenda especially considering that we currently don’t have a Federal Housing Minister. The lack of a Housing Minister at the Federal level is intriguing when you look at some of the statistics relative to the housing market.

According to CoreLogic RP Data the total value of residential property at the end of May 2015 was $5.9 trillion. To put this in perspective, gross domestic product (GDP) for Australian was recorded at $1.587 trillion over the 12 months to March 2015. The Australian Bureau of Statistics’ housing finance data showed that as at April 2015 there was $1.392 trillion in outstanding mortgage debt to Australian banks, building societies and credit unions. Meanwhile, the share market garners plenty of attention, as at April 2015 the market capitalisation of listed domestic equities was $1.693 trillion. Based on this data it would be fair to say that housing is Australia’s largest and arguably most important asset class. Even the value of Superannuation clocks in at a much lower $2 trillion, nearly three times smaller than the overall value of housing.

Given the importance of shelter and the runaway growth currently being experienced in Sydney and, to a lesser degree, Melbourne home values, it is no wonder that housing is becoming a politically very sensitive topic. In particular negative gearing has become a topic of plenty of debate over the past few weeks. While the current Government have ruled out changes to negative gearing, both the Labor and Green parties are highlighting potential changes to their policies.

Negative gearing allows owners of investment properties to offset their expenses (losses) against their taxable income and as a result it can reduce their taxable income. While this most certainly makes investment attractive the suggestion that negative gearing alone drives up the cost of housing is somewhat debatable.

The above chart shows the total value of net rent claimed by individual taxpayers by financial year up to 2012-13. Net rent is gross rent minus applicable deductions such as rental interest, depreciation and costs such as capital works. What you will immediately note is that prior to 1999-00 the net profit or loss made from rent was fairly negligible. The Federal Government made changes to capital gains tax in September 1999 and this has seemingly helped to make negative gearing much more attractive than it was previously. In September 1999 the Federal Government made changes which offered investors a 50% discount on capital gains tax when they sold their property if they held their investment for at least 12 months. As the first chart shows, since the 1999-00 financial year net rental losses have spiked. This would seem to suggest that the 50% discount to capital gains tax has conspired to make negative gearing of residential property a much more attractive investment option.

If we take a look at the most recent financial year’s taxation data available there are some interesting statistics about negative gearing and who is claiming the benefit. In terms of the number of individuals claiming net rent, 68.9% of claimants had a taxable income of less than $80,000. While more taxpayers with a taxable income of less than $80,000 claim net rent losses, only 13.1% of all individuals with a taxable income below $80,000. On the other hand, more than a quarter (25.8%) of all taxpayers with an income of more than $80,000 claimed net rent. In terms of the value of these losses, individuals earning less than $80,000 claimed rental losses of $2.781 billion or an average of $2,050 per claimant. Individuals earning more than $80,000 claimed $2.613 billion in rental losses at an average of $4,276 per claimant. More people on incomes below $80,000 claim rental income but that is largely due to the fact that 81% of taxpayers had a taxable income of less than $80,000. Conversely, a greater proportion of total higher income earners own rental properties and the typical losses claimed from these properties are much larger than those with taxable incomes below $80,000.

In my opinion negative gearing is essentially a way in which the Government outsources social housing to the private sector or at least this should be how it works. If we take a look at dwelling approvals data you can see that very few new approvals have been granted to the public sector over the past three decades. Typically more than 90% of all dwelling approvals over any month are granted to the privates sector with very few being approved and ultimately constructed by the public sector. Ultimately the private sector takes on the role of construction of homes and it appears private citizens are incentivised to provide rental accommodation via the provision of negative gearing. If negative gearing were removed no doubt housing would still be an attractive investment for some who are seeking to be positively geared however, you may find that fewer people are attracted to housing as an investment option because of the absence of the tax deductions which negative gearing provides.

The data shows that a greater number of people on lower taxable incomes claim rental losses than those on higher incomes however, as a proportion of total taxpayers a greater proportion of high income earners claim rental losses and the value of these losses is greater for higher income earners. The longer term net rental losses chart indicates that negative gearing alone didn’t really result in a high level on net rental losses however, when the capital gains tax discount was halved that seemingly made negative gearing much more attractive and the losses began to add up.

While scrapping negative gearing would likely provide a saving to the Budget bottom line, I believe it is unlikely to result in the substantial improvement in housing affordability that many are hoping for. Arguably removing the capital gains discount which was introduced after negative gearing is a good first step to addressing the problems and then Government can revisit negative gearing.

The housing market has many moving parts that result in relatively expensive housing prices here in Australia. While the removal of negative gearing may help improve the Budget bottom line it is unlikely to be the silver bullet which improves housing affordability. Zoning restrictions on developable land which drive up the cost of housing, the tax-free nature of the family home, stamp duty, the mass-centralisation of our population and shortage of jobs away from the major capital cities all conspire to make housing less affordable. Any discussion about improving housing affordability shouldn’t solely focus on just one of the issues such as negative gearing rather it needs to look at all of the factors which contribute to high housing costs.