Edited version of your private ruling

Authorisation Number: 1012450169698

Ruling

Subject: Rental property income

Question 1

Does the rental income received by your real estate agent during the relevant year which has not been passed on to you, form part of your assessable income?

Answer

Yes.

Question 2

Are you entitled to a deduction for the rental income received by your real estate agent during the relevant year, and declared as income, which has not been passed on to you?

Answer

Yes.

Question 3

Are you entitled to rental property expenses incurred on your behalf by your real estate agent where you have not been paid the rental property income received by them?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You jointly own a rental property.

You appointed a real estate agent to manage your rental property.

The rental property was rented and the tenants paid rent to the real estate agent.

The real estate agent received the rent for part of the relevant financial year.

The real estate agent incurred expenses in relation to the rental property during this period on your behalf. These expenses included rates, repairs, body corporate fees, advertising and plumbing. Letting fees were also incurred.

The real estate agent did not forward to you the net rental income, that is, rental income less the expenses paid on your behalf.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(4)

Income Tax Assessment Act 1997 Section 25-45

Reasons for decision

Summary

You are required to declare the gross amount of the rental income collected by the real estate agent on your behalf even though the rent was not paid physically paid to you.

You are entitled to claim deductions for expenses relating to the rental property that were paid on your behalf by the real estate agent.

You are entitled to claim a deduction for the rent you have not received. The amount to be claimed is the net of the gross rent less expenses paid by the real estate agent and their letting fees.

Detailed reasoning

Rental property income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident includes income derived from all sources whether in or out of Australia, 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 TR 98/1 provides guidelines for determining when income is derived for the purposes of section 6-5 of the ITAA 1997. The ruling states the 'receipts' method is appropriate to determine when investment income is derived under an investor.

Under the receipts method, income is derived when it is received. In most cases income, including salary and wages, interest, dividends and rent are derived when the amount is actually received. However, it is not always necessary that the money or property representing income actually be in your possession before it is considered to be received. This concept, known as constructive receipt, is discussed in subsection 6-5(4) of the ITAA 1997. In brief, income reinvested, accumulated, capitalised or otherwise dealt with on your behalf, or as you direct, is considered to be constructively received and therefore part of your assessable income for that particular financial year.

In your case, you and your spouse own a rental property and engaged the real estate agent to collect rent. As this rent was accumulated on your behalf, even though it has not been physically paid to you, it will form part of your assessable income.

Deduction as a loss by theft, stealing, embezzlement, larceny, defalcation or misappropriation

Section 25-45 of the ITAA 1997 provides for a deduction for a loss incurred by you through theft, stealing, embezzlement, larceny, defalcation or misappropriation by an employee or your agent. The loss must be in respect of money which has been included in your assessable income and must be discovered in the income year in which the deduction is claimed.

To be able to claim the deduction, the following requirements must be met:

1. You must incur a loss - a loss is not the same as an outgoing. A loss is a "residual item arrived at after taking into account all relevant debts and credits" (EHL Burgess Pty Ltd v FC of T 88 ATC 4517).

2. The loss must be in respect of money.

3. The loss must be discovered in the income year in which the deduction is claimed - this requirement implies that the loss must be discovered by a person other than the person(s) responsible for the loss, that is there must be an event separate from the knowledge of those person(s).

4. The loss must be caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation - it is not required that your employee or agent be convicted of an offence (of theft, stealing, embezzlement, larceny, defalcation or misappropriation) before you can claim a deduction for the particular loss.

Larceny is the wrongful or fraudulent taking and carrying away of the property of another person without the owner's consent, with the intention of permanently depriving the owner of the property. Theft or stealing catches all types of dishonest appropriation of another's person's property.

Embezzlement consists of the unlawful appropriation by a "clerk or servant" of any property received by him or her for, or on account of, his or her employer.

The chief distinctions between larceny and embezzlement are:

· larceny may be committed by anyone, whereas embezzlement can only be committed by a clerk or servant or a person deemed to be a clerk or servant

· embezzlement occurs in respect of property received by a clerk or servant from a third person for or on account of the employer before the property has passed into the latter's possession, that is before the possession acquired by the clerk or servant has been converted into mere custody on behalf of the employer. A clerk or servant who appropriated to their own use property which the employer had entrusted to the clerk's or servant's custody would be guilty of larceny (or theft) and not embezzlement.

The terms defalcation and misappropriation refer to a fraudulent defalcation or misappropriation and do not refer to a loss brought about by mere negligence or inadvertence. Fraudulent misappropriation, which may be described as the fraudulent conversion or dealing with anything by the person to whom it is entrusted, is neither larceny or embezzlement. Defalcation is a fraudulent deficiency in money matters.

5. The theft, stealing, etc must be by your employee or agent - a loss is not deductible, however, if caused by an individual employed solely for private purposes (for example, a housekeeper or nanny). If the employee concerned is employed only partly for private purposes, the loss may be deductible.

'Employee' is not defined in the ITAA 1997 and therefore should have its ordinary meaning. Whether a person is an employee (as opposed to an independent contractor) is a question of fact.

'Agent' is defined in section 995-1 of the ITAA 1997 to include, where the taxpayer is outside Australia, any entity in Australia that, for or on behalf of the taxpayer, holds, or has control, receipt or disposal of the taxpayer's money. However, whether a person is an agent of another will usually be a determined in accordance with the general principles of agency law.

6. The money must have been included in the taxpayer's assessable income for the income year in which the loss is discovered or an earlier income year.

In your case, you entered into an agreement with the real estate agent for them to collect rent on your behalf. The real estate agent collected the rent but did not forward you some amounts relating to the relevant financial year.

Your situation meets the requirements of section 25-45 of the ITAA 1997 to the extent that:

· you have incurred a loss of money as the net rent held by the real estate agent on your behalf has not been forwarded to you

· it is accepted that the loss was discovered during the relevant financial year

· the loss was caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation as the net rental income was not used for any purpose on your behalf, and

· the loss was caused by the real estate agent who was your agent.

Provided you declare the rent collected by the real estate agent on your behalf as assessable income, you will be entitled to claim a deduction for the net rental income not forwarded to you. You are not entitled to claim the gross rental income collected as deductions are allowable for expenses paid on your behalf by the real estate agent (see below) and their letting fee.

Rental deductions

Rental expenses may qualify as a deduction under section 8-1 of the ITAA 1997 if they satisfy the basic requirement for deductibility. The expenditure must be incurred in gaining or producing the rental income and is only deductible to the extent that it is not capital, private or domestic in nature.

In your case, the real estate agent paid expenses relating to your rental property on your behalf. As the expenses relate to gaining or producing the rental income they are deductible even though you have not received the rental income the real estate agent received on your behalf.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).