New Airbnb tax rules unlikely to deter investment owners

With the likely adoption of a national tax on short-term accommodation income, the question is whether property owners will turn their backs on it.

Every extra income dollar helps. Photo: Airbnb

In response to Melbourne’s rental crisis where vacancy rates fell from 5.5 per cent at the end of 2020 to 1.3 per cent in August 2023, former Victorian premier Daniel Andrews announced a 7.5 per cent tax on income generated from short term accommodation platforms such as Airbnb and Stayz.

As part of a broader 30 point housing package, the announcement from the Victorian government provides a convenient precedent for other states and territories to follow suit with a similar style tax, of which several have already indicated they are considering.

With the likely adoption of a national tax on short term accommodation income, the question is whether investment property owners will turn their backs on short term rental platforms such as Airbnb and revert to offering longer-term tenancies.

Apart from the 7.5 per cent tax on short-term accommodation income, there are other restrictions and charges in the works.

Sydney has put in place a 180-day per year letting limit on short-term accommodation and the City of Melbourne council has flagged they would also like to implement this. The irony is that in Melbourne, there is a 1 per cent tax on land value if a property is vacant for more than six months of the year.

Owners are caught in a no-win situation.

They face a new tax on short term accommodation income and will pay another tax on their land value if they cannot rent their property for more than half the year.

And if you think having the property “available” for rent is sufficient to sidestep the vacant property tax, think again.

The Victorian government provides a convenient precedent for other states and territories to follow suit. Picture: Asanka Ratnayake/Getty Images

The Victorian Revenue Department website notes: “It is not enough that the property is available for occupation, such as by listing on a short term rental website. It must actually have been used and occupied for more than six months.”

To better understand the financial impact, imagine a $600,000 1 bedroom apartment in Melbourne Docklands that rents out for $200 per night on Airbnb and is booked 67 per cent of the time as per average short term rental data.

The gross rental yield is $48,910 or 8.2 per cent.

However after the new short-term accommodation tax is in force, the rental return would reduce to $45,242, representing a 0.7 per cent decline in yield. Adding a vacant property tax on an assumed $200,000 land value means another $2,000 per year in taxes and the rental yield reduces by a further 0.33 per cent.

The overall impact is a reduction in rental yield from 8.2 per cent to 7.17 per cent. Several local governments around the country have also imposed additional council rates for properties rented on a short-term basis.

Brisbane Greens mayoral candidate Jonathan Sriranganathan announced as part of his election platform that he would increase council rates for properties that generated income from short term accommodation by 1,000 per cent.

But many argue that higher taxes for short term property owners is not the solution to solving the rental crisis.

Eacham Curry, senior director of government and corporate affairs at short-term rental platform Stayz says: “There is some minor impact from the short-term sector, but it is negligible in the context of the broader issues which driving those affordability and availability questions, we are neither the cause of nor the solution to a question around housing affordability and availability.”

Greens Jonathan Sriranganathan is running for Mayor of Brisbane. Picture: Lyndon Mechielsen

The numbers indicate that the new taxes are definitely going to be a nuisance for investment property owners, but probably not enough to deter them from continuing using short term accommodation booking platforms.

The average yield for a long term rental property in Melbourne is just under 4 per cent, while Airbnb and Stayz owners are expected to pick up an extra 3 to 4 per cent on top of this, even after paying the short term accommodation tax and vacant property tax.

In an environment where interest rates have increased to record highs and thousands of investment properties have sunk from positive cash flow to negative cash flow, every extra dollar of rental income helps.

If an investment property owner can double their rental income by letting the property on a short-term basis, many are likely to do so as it could well mean the difference between being able to afford the investment property or having to sell.

Instead of putting their hand out for more taxes from investment property owners, state governments should instead be looking to work with councils to reduce the red tape on building approvals that has gotten progressively worse over the past 30 years in order to boost development.

The result would be a meaningful increase in the supply of brand new properties and an alleviation of the housing shortages that we are experiencing today.

State governments should also invest significantly more money on infrastructure and amenities in regional locations to make it more attractive for people to live outside capital cities.

This is no longer a fanciful suggestion after the structural change that has occurred in corporate Australia with workers not willing to let go of work from home arrangements they enjoyed during the pandemic.

A side effect of the new tax is that the hotels industry gets a free kick as they are not captured under the new rules.

We may also see Airbnb prices go up as owners look to recoup the extra cost but if governments were hoping to turn the tide on the number of short term rentals, indications are that a 7.5 per cent tax may fall short of its desired effect with it still being financially lucrative to rent properties on a short-term basis rather than to long term tenants.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au