Edited version of your private ruling

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Ruling

Subject: Rental property let to relatives

Question 1

Are you assessable on payments received for rent?

Answer

Yes.

Question 2

Are you entitled to claim a portion of your property expenses?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You jointly own a property which is your main residence.

Your main residence is connected to a granny flat.

You decided to let the granny flat out to extended family and friends.

The flat was placed in the hands of a leasing agent to help collect funds.

The property is rented at less than the commercial market rate but more than a nominal amount.

The rent is used to help cover the costs related to maintaining the property.

You did not have the intention of renting the property to produce assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 8-5

Income Tax Assessment Act 1997 Section 12-5

Reasons for decision

Summary

The rental income you receive is assessable as ordinary income and must be included in your income tax return.

You are entitled to deductions for your rental property expenses. However, you are not entitled to deduct the full amount of your expenses. As you are letting part of your property while also using it as your own residence, you will need to apportion your deductible expenses on a reasonable basis. You will need to further apportion your deductible expenses if your property is rented or available for rent for only part of the year.

Notwithstanding the results of any apportionment of your expenses, deductions will only be allowed up to the amount of rent received.

Detailed reasoning

Assessability of rent received

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Generally, rental income is regarded as income according to ordinary concepts and should be included in the assessable income of the owner of a rental property.

Taxation Ruling IT 2167 provides the Commissioners view on whether or not particular rent receipts (including receipts of rent where a property, or part of a property, is let at less than commercial rates) are assessable income.

IT 2167 notes that in determining the assessability of rent receipts, the essential question for decision is whether the arrangement is consistent with normal commercial rental practices. If the arrangement is consistent with normal commercial rental practices, IT 2167 specifies that the owner of the property will be treated no differently for income tax purposes than any other owner in a comparable arms length situation.

In FCT v Kowal (1983); 79 FLR 75; 15 ATR 125; 84 ATC 4001 (Kowal's case), the taxpayer was renting to a relative at below market rate. The Court found that the taxpayer had two objectives in mind. One was to provide his relative with a good home at moderate cost. The other was to earn assessable income. The Court determined that the rent was assessable income.

However a different result was found in FCT v Groser (1982); 65 FLR 121; 13 ATR 445; 82 ATC 4478 (Groser's case). In this case, the taxpayer permitted his invalid brother to reside in a house he owned for a nominal rent of $2.00 per week. It was held that the nominal weekly rental payments received by the taxpayer from his brother did not constitute assessable income as the payments were a contribution to the costs of maintaining the home.

Paragraph 14 of IT 2167 states that unless the arrangements are comparable to those in Groser's case, rent received would represent assessable income.

In your case, you are renting the granny flat attached to your private residence to extended family members and friends at below the market rate. The property is being rented through a leasing agent.

Your circumstances are considered to be similar to those in Kowals case. Although the amount of rent you receive is below market rates, it is not a nominal amount.

Based on the facts you have provided, the rental income you receive is assessable as ordinary income under the provisions of section 6-5 of the ITAA 1997. Your rental income will include amounts paid as rent.

Deductions for rental expenses

Section 8-1 of the ITAA 1997 provides that a taxpayer can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for that purpose. However, a taxpayer cannot deduct a loss or outgoing under this section that is of a capital, private or domestic nature.

If a deduction is not available under section 8-1 of the ITAA 1997, section 8-5 of the ITAA 1997 provides that it may be available as a specific deduction. A summary list of specific deductions allowed by tax law is contained in section 12-5 of the ITAA 1997. The list includes such things as borrowing expenses, capital allowances, mortgage discharge costs, and repairs.

Where a rental property is used for income producing purposes, relevant deductions will be available either as general deductions or specific deductions under the provisions of sections 8-1 and 8-5 of the ITAA 1997.

Apportionment of rental expenses

In some situations, a taxpayer who owns a rental property will need to apportion their allowable deductions. Apportionment is required in cases where:

· the property is available for rent for only part of the year,

· only part of the property is used to earn rent, or

· the property is rented at non-commercial rates.

Property available for rent for only part of the year

Deductions for expenditure incurred by the owner of a rental property can only be claimed for the period the property is rented or is available for rent. In cases where a property is only rented or available for rent for part of a year, the expenditure must be apportioned on a reasonable basis. Generally, this will be the period of time the property is rented or is available for rent.

Only part of a property used to earn rent

In cases where a taxpayer is residing in a dwelling and also using part of the dwelling to earn rent, only that portion of an allowable expense which relates to the rental income can be claimed as a deduction. As a general guide, apportionment should be made on a floor-area basis that is, by reference to the floor area of that part of the residence solely occupied by the tenant, together with a reasonable figure for tenant access to the general living areas, including garage and outdoor areas if applicable.

Rental of properties at non-commercial rates

A taxpayer who derives assessable income from letting out part of a private residence is entitled to appropriate income tax deductions. However, the amount of deductions that can be claimed may be limited. As a working rule, paragraph 16 of IT 2167 specifies that deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received (that is, deductions claimed cannot exceed the amount of rent received).

In your situation you are entitled to deductions for your rental property expenses. Those expenses which relate to the entire property, and cannot be identified as relating specifically to the granny flat, need to be apportioned between the two uses of the property.

In addition, as the property is rented at non-commercial rates, you are only entitled to claim a deduction up to the amount of rental income received if your rental expenses exceed that income.

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