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  • Rental property as investment or business

    If you own a rental property or holiday home, you will need to work out if your rental arrangements are in the form of an investment or a business. The outcome will help you work out what records you need to keep, income you need to declare and expenses you can claim.

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    Common rental arrangements

    Common rental arrangements include where you:

    • rent part of the property (rent out a room)
    • rent the property for part of the year
    • have a domestic arrangement with family members (meaning, you receive payment for board and lodging)
    • rent the property to your family or friends
    • rent your property consistent with normal commercial practices (arms-length arrangements).

    Rental investors

    Most owners are investors who are not in the business of letting rental properties, even where there is more than one investment property. This is because they:

    • have minimal involvement in rental activities (such as, interviewing potential tenants or inspecting the property)
    • still rely on income from their job.

    Carrying on a business of letting rental properties

    As the owner of rental properties, some of the factors that show you are carrying on a business of letting rental properties are the:

    • significant size and scale of the rental property activities
    • significant number of hours spent on the activities
    • extensive personal involvement in the activities
    • business-like manner in which the activities are planned, organised and carried on.

    There are eight indicators to determine whether a business is being carried on. These are listed in paragraph 13 of TR 97/11. Although the ruling refers to primary production, these are equally relevant to non-primary production activities.

    See also:

    Domestic arrangements

    Where you receive payment from family members in the form of 'board and lodging', your arrangement is of a domestic nature. This means you don't declare the rent as income and you can't claim expenses.

    However, where you rent out your property to relatives or friends, the essential question to work out is whether the arrangements are:

    • consistent with normal commercial practices in this area
    • less than commercial rent.

    If the arrangement is consistent with normal commercial practices, we treat you the same as any other owner in a comparable arms-length situation. If the property is rented out at less than commercial rent, other considerations arise and your claim for expenses may only be allowed up to the amount of rent you received.

    See also:

    • IT 2167Income tax: rental properties – non-economic rental, holiday home, share of residence, etc. cases, family trust cases

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    Last modified: 16 Jul 2021QC 66425