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Edited version of private ruling
Authorisation Number: 1011584926355
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Ruling
Subject: interest deductions
1. Will rent received from your investment property, where you have reduced the level of rent charged to reflect the amount saved on management fees, be assessable income?
Yes.
2. If the rent received from your investment property is assessable, will you be entitled to claim 100% of all your allowable deductions?
Yes.
This ruling applies for the following period
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commenced on
1 July 2010
Relevant facts
You have recently purchased an investment property.
The property was already tenanted when purchased and is currently receiving weekly rental income.
You believe the current tenants are not looking after the house properly and you are not planning to extend the lease when it comes up for renewal in the near future.
The current rental being received is high for the area where the property is located.
Once the property is vacant, you plan to rent it privately, preferably to a friend or relative, to save on the cost of agent's fees and to better protect your investment.
You do not want to charge a friend or relative the current rental when you will not be incurring agent's fees but you are unsure how to calculate a reasonable rent amount that will be considered commercial for taxation purposes.
Reasons for decision
Letting of property to relatives
Taxation Ruling IT 2167 discusses the Commissioner's views on non-economic arrangements where property is let to relatives. There are situations where payments that are described as rent will not be assessable income and expenses will not be allowable deductions. This is particularly the case where the arrangement is not conducted at arm's length.
Where property is let to relatives the essential question is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purposes from any other owner in a comparable arm's length situation. If property is let to relatives at less than commercial rent other considerations arise.
The Federal Court in Madigan v. FC of T 96 ATC 4640; (1996) 33 ATR 164 (Madigan's case) held that:
a property may be let to a good tenant at a lower than market rent on the basis that the tenant will look after the property. The mere fact that the rental is thus below market rental will not preclude deductibility of the whole of the outgoings.
Madigan's case supports the view that a discount in the commercial rent of a property to secure a long term, reliable tenant, who will ultimately reduce maintenance and repair costs, need not affect the deductibility of the property's expenses. Similarly, where a discount can be offered because a landlord has avoided property management fees by letting their property privately, providing the discount is reasonable, should not mean that 100% of the property expenses are not deductible.
These issues are valid commercial considerations that would be taken into account when setting the level of rent for any rental property. What level of rent is considered commercial would need to be considered on a case by case basis.
In your case, you purchased an investment property for the sole purpose of producing assessable income. You intend to rent the property privately and, in doing so, will not incur agent management fees. You also hope to rent the property to someone you know and trust to look after your property thus reducing on-going maintenance and repair costs. These are valid commercial considerations when setting a reasonable commercial rent for your property and consistent with normal commercial practices.
Providing any reduction in rent is reasonable, such as by the amount saved in agent's fees, it will be considered a commercial arrangement for taxation purposes. Therefore, the rent received from your investment property will be considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and you will be entitled to claim 100% of your allowable rental deductions.
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