Rental and rental-related income to declare and how to divide income and expenses when the rental property is co-owned.
Rental and other rental-related income is the full amount of rent and associated payments that you receive, or become entitled to, when you rent out your property, whether it is paid to you or your agent. You must include your share of the full amount of rent you earn in your tax return.
Your rental income also includes rent or associated payments that you receive, or become entitled to, when renting out part or all of your home through the sharing economy or the renting of your holiday home.
Rent and associated payments may be in the form of goods and services. You will need to work out the monetary value of these. For example, if the tenant gives you property or goods as rent instead of money, you include the market value of the property or goods as rental income in your tax return.
You must include rental bond money as income if you become entitled to retain it, for instance, because a tenant defaulted on the rent, or because damage to your rental property required repairs or maintenance.
If you received an insurance payout, there may be situations where the payout needs to be included as income, for example, if you received an insurance payment to compensate you for lost rent.
If you received a letting or booking fee, you must include this as part of your rental income.
Associated payments include all amounts you receive, or become entitled to, as part of the normal, repetitive and recurrent activities through which you intend to generate profit from the use of your rental property.
If you received a reimbursement or recoupment for deductible expenditure, you may have to include an amount as income. For example, if you received:
- an amount from a tenant to cover the cost of repairing damage to some part of your rental property and you can claim a deduction for the cost of the repairs, you need to include the whole amount in your income
- a government rebate for the purchase of a depreciating asset, such as a solar hot-water system, you may need to include an amount in your income.
For more information, see TD 2006/31 Income tax: is a government rebate received by a rental property owner an assessable recoupment under subsection 20-20(3) of the Income Tax Assessment Act 1997, where the owner is not carrying on a property rental business and receives the rebate for the purchase of a depreciating asset (for example, an energy saving appliance) for use in the rental property.
The way that rental income and expenses are divided between co-owners varies depending on whether the co-owners are joint tenants, tenants in common or there is a partnership carrying on a business of letting rental properties.
Dividing income and expenses according to legal interest
Co-owners who are not carrying on a business of letting rental properties must divide the income and expenses for the rental property in line with their legal interest in the property. If they own the property as:
- joint tenants, they each hold an equal interest in the property
- tenants in common, they may hold unequal interests in the property – for example, one may hold a 20% interest and the other an 80% interest.
Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners, either oral or in writing, stating otherwise.
Example 1: Joint tenants
Mr and Mrs Hitchman own an investment rental property as joint tenants. In the relevant income year, Mrs Hitchman phones us and asks if she can claim 80% of the rental loss as:
- she is earning $67,000 a year, and
- Mr Hitchman is earning $31,000.
Therefore, it would be better if she claimed most of the rental loss, as she would save more tax. Mrs Hitchman thought it was fair that she claimed a bigger loss because most of the expenses were paid out of her wages. Under a partnership agreement drawn up by the Hitchmans, Mrs Hitchman is supposed to claim 80% of any rental loss.
We told Mrs Hitchman that where 2 people own a rental property as joint tenants, the net rental loss must be shared in line with their legal interest in the property. Therefore, the Hitchmans must each include half of the total income and expenses in their tax returns.
Any agreement that the Hitchmans might draw up to divide the income and expenses in proportions other than equal shares has no effect for income tax purposes. Therefore, even if Mrs Hitchman paid most of the bills associated with the rental property, she would not be able to claim more of the rental property deductions than Mr Hitchman.End of example
Example 2: Tenants in common
In example 1, if the Hitchmans owned their property as tenants in common in equal shares, Mrs Hitchman would still be able to claim only 50% of the total property deductions.
However, if Mrs Hitchman’s legal interest was 75% and Mr Hitchman’s legal interest was 25%, Mrs Hitchman would have to include 75% of the income and expenses in her tax return. Mr Hitchman would have to include 25% of the income and expenses in his tax return.End of example
Interest on money borrowed by only one of the co-owners which is exclusively used to acquire that person's interest in the rental property does not need to be divided between all of the co-owners.
If you don’t know whether you hold your legal interest as a joint tenant or a tenant in common, read the title deed for the rental property. If you are unsure whether your activities constitute a rental property business, see Partners carrying on a business of letting rental properties.
Co-owners of an investment property (not in business)
A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a business of letting rental properties, either alone or with the other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.
Example 3: Co-owners who are not carrying on a business of letting rental properties
The Tobins own, as joint tenants, 2 units and a house from which they derive rental income. The Tobins occasionally inspect the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobins do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobins devote some of their time to rental income activities, their main sources of income are their respective full-time jobs.
The Tobins are not partners carrying on a business of letting rental properties. They are only co-owners of several rental properties. Therefore, as joint tenants, they must each include half of the total income and expenses in their tax returns, that is, in line with their legal interest in the properties.End of example
Most rental activities are a form of investment and do not amount to carrying on a business. However, where you are carrying on a business of letting rental properties in partnership with others, you must divide the net rental income or loss according to the partnership agreement. You must do this whether or not the legal interests in the rental properties are different to the partners’ entitlements to profits and losses under the partnership agreement. If you do not have a partnership agreement, you should divide your net rental income or loss between the partners equally. For more information, see Example 4.
Example 4: Co-owners who are carrying on a business of letting rental properties
The D’Souzas, own a number of rental properties, either as joint tenants or tenants in common. They own 8 houses and 3 apartment blocks (each apartment block comprising 6 residential units) making a total of 26 properties.
The D’Souzas actively manage all of the properties. They devote a significant amount of time, an average of 25 hours per week each, to these activities. They undertake all financial planning and decision making in relation to the properties. They interview all prospective tenants and collect all the rents. They carry out regular property inspections and attend to all of the everyday maintenance and repairs themselves or organise them to be done on their behalf. Apart from income Mr D'Souza earns from shares, they have no other sources of income.
The D’Souzas are carrying on a business of letting rental properties. This is demonstrated by:
- the significant size and scale of the rental property activities
- the number of hours the D'Souza's spend on the activities
- the D'Souzas' extensive personal involvement in the activities, and
- the business-like manner in which the activities are planned, organised and carried on.
Mr and Mrs D’Souza have a written partnership agreement in which they agreed to carry on a business of letting rental properties. They have agreed that Mrs D'Souza is entitled to a 75% share of the partnership profits or losses and Mr D’Souza is entitled to a 25% share of the partnership profits or losses.
Because the D’Souzas are carrying on a business of letting rental properties, the net profit or loss it generates is divided between them according to their partnership agreement (in proportions of 75% and 25%), even if their legal interests in the rental properties are equal, that is, they each own 50%.End of example
For more information on dividing net rental income or losses between co-owners, see TR 93/32 Income tax: rental property – division of net income or loss between co-owners.
For more information on determining whether a business of letting rental properties is being carried on, determining whether it is being carried on in partnership, and the distribution of partnership profits and losses, see:
- TR 97/11 Income tax: am I carrying on a business of primary production?
Paragraph 13 of Taxation Ruling TR 97/11 lists 8 indicators to determine whether a business is being carried on. Although this ruling refers to the business of primary production, these indicators apply equally to activities of a non-primary production nature.
- TR 94/8 Income tax: whether a business is carried on in partnership (including ‘husband and wife’ partnerships)
- IT 2423 Withholding tax: whether rental income constitutes proceeds of business – permanent establishment – deduction for interest
- IT 2316 Income tax: distribution of partnership profits and losses.
If you are carrying on a business, you may be eligible for the small business concessions.
CGT small business concessions do not apply to assets that are used mainly to derive rent.
Contact us or your recognised tax adviser if you are unsure whether:
- your rental property activities amount to a partnership carrying on a business of letting rental properties
- you are carrying on a rental property activity as a joint tenant or a tenant in common, or
- you are in both categories.
Continue to: Rental expenses