Several months ago, we posted an article The law is catching up with short stay - Airbnb style accommodation in Australia which concluded that the regulation of short-term letting in Australia was in a state of flux.

On 19 October 2016, The NSW Parliamentary Inquiry into the Adequacy of the regulation of short-term holiday letting in New South Wales handed down its report.

The recommendations in the report can be summarized as:

  • Overall, a light regulatory approach is the objective.
  • Short-term rental accommodation needs to be defined and made a permitted planning use, administered by Local Councils.
  • Rental of spare rooms in a residence where the host is present be permitted as exempt development, provided that it has a low impact. Conditions might apply such as the installation of smoke alarms, fire evacuation plans, a code of conduct, and minimum standards of waste disposal.
  • A Holiday and Short-Term Rental Code of Conduct needs to be adopted.
  • Local Councils be given investigative and enforcement powers including Queensland-style powers to designate ‘party houses’ and restrict their use.
  • Strata owners corporations be given the right to prosecute unruly behavior and damage, and recover compensation, but not have the right to restrict short-term lettings.

The NSW Government’s response is due on 19 April 2017.

What has emerged from the hearings and the report is considerable clarity upon four areas of the law that Airbnb hosts and other short-term stay hosts need to observe, namely:

  • Town planning approvals
  • Liability and damage insurance
  • Taxation
  • Short-term letting in strata apartments

This article sets out the current state of the law in those areas.

What town planning approval is needed to operate an Airbnb?

Airbnb hosts offer residential rentals, in the sense they offer guests a place to stay.

They need town planning approval if the use changes from residential rental to a commercial use, which is to say, if the use becomes providing temporary or short-term tourist or visitor accommodation on a commercial basis. There are two situations;

  • Renting rooms

Rooms, especially if they have their own bathroom, make up 40% of Airbnb rentals in Sydney. A ‘spare room’ is normally a room inside an owner-occupied house or apartment.

An Airbnb host will need Local Council approval (and a licence) as Bed and Breakfast accommodation (a B&B) if they provide on a commercial basis: (a) rooms for overnight accommodation; and (b) at least breakfast or common cooking facilities; and (c) more than two or three double rooms for rent (or which accommodate more than 6 people). A manager will usually reside in the property. The precise requirements vary between Local Councils.

  • Renting whole houses or apartments

Whole houses, apartments, and self-contained buildings (with a kitchen facilities and bathroom), make up 60% of Airbnb rentals in Sydney. Almost 30% of Airbnb hosts have multiple properties for rent.

For town planning purposes, not only houses and apartments but also granny flats, garden apartments, studios and cabins are Serviced apartments if they are rented to tourists or visitors as short-term lettings on a commercial basis and are regularly serviced or cleaned by the owner or manager or their agents. If they are rented with standard residential leases (for a term of three months or more), then they are normal rentals, not serviced apartments.

Airbnb hosts with serviced apartments need to check if the zoning permits the use. If so, they need to check whether Local Council approval is needed for use as serviced apartments.

Overseas, some cities like London have adopted permissive policies while other cities like New York City have restrictive policies for short-term lettings:

  • In London, an owner is permitted to short-term let up to a total of 52 days a year.
  • In New York City, urban apartment-dwellers must be present if they rent out their units for less than 30 days. This explains why Airbnb marketing emphasises the personal touch: ‘earn more income welcoming guests’.
  • In Berlin, in Vienna and in Barcelona, most short term rentals are barred.

What additional insurance cover is needed for Airbnb rentals?

There are two events – injury and malicious damage – which need additional cover.

What if someone is injured (Public Liability Insurance)?

Airbnb in your own home: Home Owner Insurance and Strata Owner policies do not protect Airbnb hosts who rent out rooms in their own home or in a building on their own residential property because they do not cover business use. It is the same for a home office. This means that Airbnb hosts should obtain additional public liability insurance cover for short-stay lettings. If the short-stay lettings are treated as bed and breakfasts, then business insurance will be needed.

Airbnb in an investment property: Landlord Insurance policies do cover Airbnb hosts for short-stay lettings if their guests are injured on their rental property, because they are tenants. If the short-stay lettings are treated as serviced apartments, then business insurance will be needed.

What if your property is damaged (Malicious Damage)?

Malicious damage is excluded from standard insurance policies. This means that the host is not covered for damage caused in a ‘party house’ situation such as where glass doors are broken, carpets are ripped and ruined, walls are splattered with paint and toilet cisterns are cracked.

For this reason, Airbnb offers ‘The Airbnb Host Guarantee’ which applies automatically to every booking. In Australia, it covers guest damage to the building and to fittings, fixtures and other contents up to $1,000,000 AUD. It has the same procedures for claims as an insurance policy.

But there are policy exclusions, such as: Airbnb advises hosts to take out their own insurance to cover valuable items (‘fine art’) like jewellery, artwork, antiques, rugs or collectibles which are damaged or stolen. Also, the accommodation must have been built with planning approval and be in good condition.

Airbnb requires hosts to comply with ‘Hosting Standards’, including verification of the identity of the guests to have the benefit of The Host Guarantee.

Airbnb has a two-way review which means that hosts and guests rate each other (for cleanliness personal safety, security of belongings, décor). This helps Airbnb identify guests to be placed on the ‘watch list’ and in some cases ‘blacklisted’.

How is Airbnb income treated for tax purposes?

The Australian Taxation Office has a webpage – The sharing economy and tax which provides this advice for Airbnb hosts who are renting out a room or a whole house or unit for a short-time basis:

  • Income Tax: Airbnb has the same tax treatment as property investments. These are extracts from the ATO website:

When you rent out all or part of your residential house or unit through a sharing economy website or app you:

  • need to keep records of all income earned and declare it in your income tax return
  • need to keep records of expenses you can claim as deductions
  • don't need to pay GST on amounts of residential rent you earn.

If you are carrying on an enterprise in which you rent out commercial residential premises you will have different income tax and GST obligations.

Airbnb notifies its hosts annually of the income they have earned through Airbnb.

Expenses such as service fees, cleaning expenses, repairs and maintenance, food, photography for the listing are deductable and the cost of furnishings is depreciable.

If the property is an investment property, then the normal investment property deductions will be available, such as loan interest, council and water rates, strata levies, building and contents insurance, electricity and gas, and building, fixtures and fittings depreciation.

  • Capital Gains Tax (CGT): If the Airbnb is part of the family home (the main residence), then:

You cannot usually obtain the full main residence exemption from CGT if you used any part of it to produce income during all or part of the period you owned it; 

In most cases, the calculation is the proportion of the floor area of the home that is set aside to produce income and the period you use the home to produce income. This includes if the dwelling is available (for example, advertised) for rent.

Therefore an Airbnb use will result in a partial loss of the main residence exemption from CGT on the sale of the family home.

  • Goods and Services Tax (GST): GST applies to residential rent if the property has a business use.

You do have to pay GST if you provide accommodation like a hotel room or serviced apartment, a bed and breakfast. These types of accommodation are subject to GST, if you carry on an enterprise.

Airbnb in Strata Apartments

Most complaints about short-term lettings in strata apartments concern noise disturbance late at night and damage to the common property. Strata By-laws deal with noise disturbance and damage to common property caused by visitors and occupiers in general terms.

But what Strata By-laws cannot do is to restrict an owner from using their apartment for short-term lettings, because the Strata Law voids any Strata By-laws which prohibit renting out an apartment.

Illustration: an owner in a high rise block in Melbourne’s Docklands, put his apartment into a pool of 14 apartments which were used as ‘executive rentals’, with a minimum stay of 7 nights. The executive rentals provider had planning approval from the Melbourne City Council.

The Supreme Court of Victoria struck down a Strata By-law which prohibited any ‘trade or business’ use in the block, because it interfered with the legal right of an owner to rent out their apartment. The decision is: Owners Corporation PS 501391P v Balcombe [2016] VSC 384.

As a result, the Victorian Parliament has set up a Committee of Inquiry into short-stay letting in apartment buildings, including the adequacy of Strata By-laws in managing the impact of high intensity short term lettings on the amenity of strata owners (due to report 17 March 2017).

As a result of this decision in Victoria, and consistent with the approaches taken in NSW and Queensland, owners in a strata scheme who object to short-term lettings need to raise their concerns with the Local Council which has the power to give planning approvals and enforce conditions attaching to those approvals.