Victorian 7.5% Short Term Accommodation Tax. Does it require a change on Strategy

The Victorian short term 7.5% accommodation tax is being imposed at a time when increased interest rates have stifled demand and fixed overhead costs have escalated. Is the new tax the straw that broke the camel’s back for budget short term accommodation? Is it time to re-evaluate your business model particularly if you are operating a value or budget one? I think so. My analysis has driven me to a new approach where I have lifted tariffs across the board of 30%. Read my reasoning below and comment on whether you see this as a business as usual scenario or you see this as a point to re-access strategy? If you are changing your business model, then in what way?

The reasoning is somewhat complex and detailed. If you are not operating in Victoria, or in some other area with or expected to have a very high short term accommodation tax, then you may not wish to read past the summary above. However if you are operating in another jurisdiction which has also introduced a very high short term accommodation tax (I think Victoria’s is the world’s highest) then comments on your experience as to how it has affected occupancy and ability to cover fixed overheads would be appreciated by hosts in Victoria.

We have been in short term accommodation business for 50 years. We started with a slightly neglected three bedroom pre-war workman’s house in the Victorian High Country near Falls Creek alpine resort. From the beginning our plan was to let out short term when our family did not need the house. After an initial spend to bring the house up to a very comfortable level above average for the area at the time, we have gradually and continually improved the house in comfort and convenience for guests.
Our business strategy for 50 years has been to operate in the value segment. Better than average facilities but lower than average prices. This has given us high occupancy and good revenue to re-invest in progressive comfort improvements and reduction in operating cost. To be successful this business model requires a low cost operation. We have kept costs very low by astute purchasing, doing as much of the maintenance and upgrades ourselves. Checkout cleaning and lawn mowing we outsource, but the deep cleans and other gardening we do ourselves. We do not provide linen as commercial laundry is very expensive in our area. There is a big demand from guests who wish to save by bringing their own linen. You cannot run a low cost holiday house model using a commercial laundry service, in my opinion. Now that we have invested in PV, battery and heat pump our variable cost per booking is significantly lower.

My observations indicate that our bookings are divided onto two basic segments. The savvy and repeat guests in one segment. Savvy guests who research their accommodation well and recognize the extra value we provide. Repeat guests who originally attracted on price and return for the value. The other category is the budget guests who only look at the pictures and book the cheapest or near cheapest price for attractive pictures.

Despite our low variable cost, our business model has been under pressure from escalating fixed annual costs that need to be covered by the variable margin on every booking. Government imposts are a key factor in this escalation. Our local rates now have a 43% surcharge for short term accommodation, we have been hit with land tax, and water rates have skyrocketed, and on top of this insurance cost has doubled. Airbnb takes 18.8% of the guest payment. The last straw is the 7.5% Victorian short term accommodation tax. A low cost, low price, high volume business model requires both low variable cost and low fixed cost. We have kept our costs low but high government charges have destroyed the value model for short term accommodation. On top of this high interest rates have savaged the budget segment of the holiday market. It feels like every arm of government is deliberately sabotaging anyone trying to offer budget holiday accommodation.

I have reassessed our business strategy. In my opinion the value segment we have so successfully operated in for 50 years is dying. We have decided our only option is to move to a high price, high margin business model as a way to cover the escalating fixed costs. When the post covid revenge travel boom hit, some of our competitors hiked their prices and left us behind in the pricing ladder. We increased tariffs only moderately and got a big boost in revenue and profitability. We reinvested funds in improving guest comfort and convenience, but most of the investment went into energy saving equipment to the extent that our net annual energy cost was reduced to almost zero. However the downside of very high occupancy is escalating wear on furniture, furnishings, bedding, appliances and increased internal maintenance and repair. Of course this is part of the variable cost for each booking and is included in the pricing calculation. But when these assets wear out it is a big capital commitment.

We modeled various alternatives. Reducing tariffs by say ten percent to offset the 7.5% tax and boost occupancy is unlikely to work in the current economic where demand is already down. A moderate increase in tariff of say ten percent, with lower demand due to high interest rates will not be sufficient to cover the increased insurance and government taxes and rates.

My modeling suggests the best strategy is to increase tariffs substantially by thirty percent. This will move our pricing from being in the bottom twenty percentile to moderately above average, but not massively out of line with other houses in our area offering similar facilities. Based on previous comparative pricing in the area. This will increase our marginal profit per booking by 35%. It is moving us from a Value business pricing strategy to an on market pricing plus strategy. It seems that high interest rates have already reduced the budget segment by about 20%. I expect that the 7.5% tax price increase will reduce bookings by a further 5%. Increasing our prices by 30% I assume will reduce bookings a further 20%. So a total reduction in budget bookings of 45%. With the savvy and repeat segment we expect the reduction will be 10% after increasing tariff by 30%. The overall net reduction we expect will be an average of 30% with a product mix of two thirds in the lower prices off-season and one third in the high season.

I have taken into account that in areas where there is significant individual short term accommodation it creates competition and it depresses how much the commercial providers such as motels and holiday flat complexes can increases prices and therefore restricts their profitability. The short term tax will reduce the competitive pressure, as commercial operators are not subject to the tax. In other jurisdictions controls and taxes on short stay accommodation has resulted in hotels and motels increasing prices and I expect that Victoria will be no different. The commercial operators can increase prices by 7.5% without affecting their relative competitive position, and it is reasonable to assume that they will do so.

As I see it there are two ways to attack this situation. One approach is to just increase prices as usual to cover the higher costs, such as land tax, rates and insurance etc. and wait and see what impact the 7.5% tax has on occupancy rates. Then when occupancy rates fall as I am sure they will, increase prices the next year to make up for the lost variable margin. When occupancy falls further due to the higher prices increase prices again for the following year to make up the reduced margin. After three or four years you will achieve equilibrium but you will have four years when you have not adequately coved your fixed overheads.

The alternative approach that I think will work better is to go hard with a new strategy and increase prices substantially from the get go to offset the expected reduction in occupancy. The advantage of being a small operator is that you can be flexible and agile. If occupancy drops much more than expected after a price increase you can quickly reduce prices to see it if it stimulates enough extra demand. But once you have accepted bookings at too low a price there is nothing you can do about it.

Overall despite a 30% reduction in bookings we expect the 30% higher tariff will generate sufficient marginal profit to cover the increased overheads of insurance and government rates taxes etc. The 7.5% tax on top of our 30% tariff increase will raise our prices to be payable by guests for 2025 to be 40% above 2024. This is sad situation where we are forced into a major reversal of business strategy. We do not aim to make significant profits from our holiday house. However after so many years of investment in time and money on our holiday house focused on guest needs we believe that now it is reasonable that short term letting for the vast majority of the year that we do not use it ourselves should generate sufficient revenue to cover all costs plus some free cash flow for modest continual improvements.

It is hard not come to the conclusion that the government wants to punish budget holiday makers. The 7.5% short term tax gets added on top of the tariff increasing the cost to cash strapped families. All levels of government also seem to have an ideological attack on people renting out their holiday homes when not using them. Local government with special levies on short term rental holiday houses, and the Victorian government with land tax and the new 7.5% levy. Annual fixed costs are being escalated at the same time that the number of days booked per year to cover the cost are reduced due to high interest rates impacting guest’s budgets to go on holiday.

Big companies and government authorities are having no reluctance to pass on their cost increases so while we would like to continue operating a value business model, a 30% Tariff uplift to a high margin, low volume model appears the only practical choice.

How are other Victorian hosts approaching the new situation? If you are from an area which also imposed a very high short term accommodation tax what was your experience?

What an incredibly long-winded post to say you need to increase your nightly rate to stay in business.

Jurisdictions bring in high taxes and restrictions on strs to discourage investor hosts who take needed long term housing off the market and because full time residents don’t want short term rentals in their neighborhoods, with a constant parade of strangers coming and going, not to “punish budget holiday makers” or because of an “ideological attack”.

And “cash-strapped families” don’t rent strs to go on holiday. Cash-strapped means you struggle to pay your rent or mortgage and put food on the table.

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Nearly every locale has established and increased taxes, many much higher than yours, ( 13.5% here )…and most everyone has dealt with these taxes. Additionally, we have Business Licensing plus a Permit Fee too. And our coastal insurance is sky high because of Hurricanes and flooding. Do we make less that we did 10 years ago…yes…but the traveler pays more too due to increased rates plus service fees of the OTA. You are in an enviable position…after 50 years I doubt you carry a mortgage and your overhead is low…thus giving you lots of wiggle room to survive.
You have had a good 50 year run…more than most businesses. Good luck adapting to the future and keeping up with the changes and the times. You are dealing with the same issues that every STR deals with…some more successfuly than others.

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So lets hear what hosts did to deal with the changes and what worked out and what did not. Sharing information and experiences between hosts is the benefit of this forum. Sounds like you are saying that make no change to strategy worked out for you, but I am not sure. Also it is relevant if a host was operating a budget or premium pricing strategy previously.

i’m going to reply with something this int’l community won’t understand: rubber bullets. After that, whatever Dan and his successors did, you voted for it. Awful govt, let’s hope the rest of the country doesn’t get emboldened by the “success” of the Vic Labor govt to throttle small business.

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So Gillian,
To get back on topic. What sort of pricing and business strategy are you running at the moment and are you going to change with this new tax. We cannot change the law in the short term but we have total control of our business strategy.

From what I have seen, this bed tax is for unhosted listings only?
Not for hotels and motels?

It would appear that the Victorian government is trying to catch the horse after it has bolted.
Melbourne city now has night limits as well?
Looks like STR is being blamed for the lack of rental housing and it is STRs fault.
I am sure the rest of the Australian states are watching this with extreme interest and it will be fascinating to see what the Victorian listings do between December and January.
I have noted the plunge of listings from September in Byron Bay, with the 60 night cap for unhosted and the increase in LTR in the area………

To clarify what I was saying. The tax increases unhosted cost to guest by 7.5%. Hosted motels, hotels, and holiday units do not have to apply the tax so they can and I expect they will increase prices to make more profit and still have the same relative competitive price against the unhosted accommodation which has to collect the tax.
I suspect that the main purpose for the Victorian government is a money grab. I expect it will back fire. Crush regional tourism and less state revenue overall. Then they will have to spend money subsidising regional councils and tourism recovery promotion expenditure. Time will tell.

Regional tourism wouldn’t be crushed unless there aren’t enough hotels, motels and hosted listings for the number of people who want to vacation in the area.

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I agree this new tax is likely to drive up the cost of STR, which harms many people as plenty use it. It may reduce supply of STR a bit, but this would also increase prices as a result. So the tax has two avenues to drive up STR prices - squeezing availability, as well as the tax itself. The guest will indirectly pay this extra price in many cases, not just the host.

I’d prefer to see a basic allowance of say 4 weeks tax free. We should ENCOURAGE more people to rent out their homes while away on holidays or otherwise not using it. This is NOT the Airbnb hotel model. This is a permanent home, being offered unhosted for a reasonable period - of say, holidays.

Maybe there could even be two tiers of tax, or somehow tied to the nights booked. The more nights booked in a year, the higher the tax. So, many hosts would not see any impact, but those especially busy ones might. The more commercial your operation, the higher the tax rate itself perhaps.

But really, STR is not the main reason for a housing shortage IMO. It’s far too simplistic to blame that - and far too easy to see STR as a cash cow to milk… when really, it’s milking the average taxpayer who now has to pay more to stay when going on holidays. Is that the solution to the housing crisis? Doubt it.

But Victoria has not got a great reputation. Remember the Police state mentality in the lockdowns? VIC was about the worst offender in the world, and I still get people overseas asking me what on earth was going on with the ‘Lucky country’ that seems more akin to North Korea lol.

The EV tax ‘per km driven’ that Victoria tried on and lost in the Federal court is another example. Putting a tax on a solution to climate change, where the rest of the world is helping subsidise the shift away from gas cars.

STR is good. Support and encourage more to adopt it, and ensure any new tax is focussed more on those who rent unhosted for a lot of days, especially if they have multiple properties.

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It’s called public health measures. I was very happy that Canada, where I go every summer, had strict lockdown, vaccination entry requirements and quarantine measures, even though it made things slightly inconvenient for me.
And not at all pleased that Mexico, where I reside most of the year, did not.
Consequently, Canada had low infection rates and Mexico had one of the highest Covid death rates in the world.

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One of the reasons Governments can be seeking to raise taxes, like the new 7.5% tax, is due to massive government over spending. USA national debt increased to 35 Trillion due to 5.5 Trillion spent on pandemic stimulus alone. Yikes!

Lockdowns were strongly criticized by many - and they severely harmed the short term accommodation industry a lot.

  • The Victorian Ombudsman’s report was very critical of the government’s approach to the hard lockdown of public housing towers, citing human rights breaches.
  • The Coate Inquiry exposed significant governmental failures in the hotel quarantine system, indirectly criticizing the circumstances that led to strict lockdowns.

While there was acceptance of the need for public health measures, these major inquiries and reports emphasized the importance of upholding human rights, ensuring accountability, and mitigating negative societal impacts during such interventions.

If governments were less harsh in measures, and spent less in measures, they would not be needing to raise additional taxes to fund incredible deficits like new taxes on STR. We should be able to easily rent our homes.

Paying income tax yes, but STR specific taxes? Just like EV per km taxes - Come on now. Enough nonsense!

It was a global pandemic. It was dealt with as best goverments thought at the time in order to prevent deaths, which were in the millions within a very short time. And there would have been millions more deaths had govts not instituted measures to try to contain the virus.

“Rights” are not limitless. Most of us live in countries where we are free to travel. But if the police have a roadblock set up due to an accident or something else, you can’t just speed through it because you have the “right” to travel freely.

Nor is free speech limitless. You can’t falsely yell “Fire!” in a crowded movie theatre, make death threats, or broadcast hate speech that is intended to instigate violence just because you live where there are free speech protections.

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One of many reasons. But conflating a tax on STRs with the national debt or the covid pandemic is simply absurd.

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This tax may be seen as ‘a way’ to solve a housing crisis, but it doesn’t seem to have much global support - few countries have implemented this, and I see it as merely raising the cost of STR for everyone, as opposed to curtailing supply.

Hosts are already paying tax on their income already, so this is a tax on a tax as it is.

Unchecked government spending is a problem. Taxes are primarily to fund spending. Today is the US election, and this absurd spiralling debt is in my mind, and Australia is no different in some crazy government spending.

I see we should focus more on government spending for any ‘crazy’ reason, than implementing new taxes to raise revenue. Do you agree the STR tax is not so far off the failed EV milage tax that Victoria implemented?

Seems to me more akin to a way to look good in raising taxes - because it’s ‘Fixing the housing problem’ - when it’s not really at all IMO.

I would never rent out my personal residence to strangers while I went on holiday. Read way too many horror stories about that and why would I want to pack up all my personal belongings or let complete strangers have access to them?

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Noted for sure. Sounds like you prefer the more hotel / motel style.
Airbnb though, built a multi billion dollar business out of sharing your own home. I think it’s an unqualified success and good on them!

The Victorian tax specifically encouraged hosts to rent out their own home - classified as their Principal Place of Residence. The government already wants to promote and support that, and only tax those who rent commercially - like a hotel motel hostel, or where you have more than one property rented out. There is NO tax on your own home being shared out.

I only own one property myself, despite many listings, and for ten years now random strangers have come to my home regularly while I move around the world for various reasons. All my personal items are there. Hard drives of data, legal paperwork, personal clothing, mementoes, some valuables.

I have hosted well over 1000 stays across various platforms, most being at my home there. Almost nothing has been stolen, broken or misused. Occasionally, but very rare there is a small problem, and nothing terrible.

It’s common to hear folk worry, but as I see it - the actual problems are so small, it should not be a worry in reality. So I encourage others to be more comfortable with home sharing, and worry more about ‘worrying too much’, or lost opportunities, than anything actual. Only once I used AirHost to recover a small damages claim, and it was pretty painless.

I don’t suggest there is anything wrong with deciding not to offer your own home for short term rentals, but I assumed this was more the norm in the industry, not the exception. The millions of Airbnb hosts are not all Airbnb Hotel operators. Some yes, but most are those renting their own home AFAIK. I think it’s 60% in fact.

Why would you assume that?Absolutely not. I have a homeshare listing. I rent out one bedroom with a private bathroom and full use of my kitchen and outdoor areas in my residence only when I am here. The original Airbnb model.

I am completely opposed to entire homes bought and used exclusively to str with remote so-called “hosts”.

And while you haven’t experienced any bad stuff with renting out your entire residence while away, it isn’t just a"worry" with no basis in reality. I have read many accounts of hosts renting out their home while on holiday, and come back to a horror show of extensive damages, thefts, guests having rifled through the host’s belongings, breaking locks on off-limits rooms, etc.

For me, it’s not even so much anxiety about guests respecting my home in my absence, it’s that my home is my home, my sanctuary. It’s a totally diffferent thing to rent out my guest room and get to meet, interact with, and share my home and good conversation with travellers from around the world, which has been a great experience, as compared to giving complete strangers access to my personal residence in my absence.

Perhaps you don’t feel any personal attachment to your residence- it’s just a place to call home, eat, sleep, shower and keep your belongings. Some people are like that, but many are not. My home was built from scratch from my design, and I have countless hours of my own labor in the finish work. It isn’t just a house.

Perfect! Then yes, you are the Airbnb model, sharing your home. Forgive me - I thought when you said you didn’t like strangers to have access to your stuff, I assumed (wrongly) that you had a separate place you rent out, not just your home. Yes, I agree with you - sharing with others is a great experience, so good to hear this works well too. I will be back in my home next week in fact, after a long absence, but have set to allow private rooms to be booked specifically to encourage such serendipitous connections while I am also staying there.

I do love my place, but having married my wife who’s work keeps her in USA and Europe for now on a long term expat assignment, I am here for a bit. But I am very much looking forward to going back home, yes.

I can see you have a lot of love invested there. Good to see, and I am sure your guests will also appreciate the energy you have built for not just a house but a home. Reminds me a bit of the movie The Castle. Sums it up so well. It’s not the walls and roof that makes the home, it’s much more than just a place to stay.

I am not a big fan of the Airbnb hotel model. For sure you can earn a lot, but I hate staying in a cheap Airbnb Ikea minimalist, where you KNOW the host doesn’t actually live there. It’s these I think should be hit with a STR tax - where a primary residence should be fully exempt IMO. Regardless of how long it’s rented for, so long as it classifies as a primary residence, and you only have one (in the world), it should be allowed to rent out. I am away more than half a year at a time, but all my stuff is in my house, and I still want to come back to it and call it home. I’d hate it seen as just a place to stay. Getting positive guest reviews and interactions is a big reason I host in fact :slight_smile: and sounds like the same for you too.

Oddly, I am looking forward to mowing my lawn too. About time I connected back with home again!

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More time studying this new act and I realise that I was wrong about the effective rate it is not 7.5% the effective rate of this tax is 8.1%. It is a tax on a tax. Example tariff for 4 nights is $1,000 you add 7.5% tax guest pays $1, 075 but host has to pay tax of 7.5% not on $1,000 but on $1,075 = $80.63. So to cover the tax the host has to add 8.11% for the Victorian tax. Guest now pays $1081.10 the host has to remit 7.5% to the State Revenue Office = $81.08 so host is left with $1,000.02 the original tariff.

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