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Edited version of your written advice
Authorisation Number: 1012931496189
Date of advice: 23 December 2015
Ruling
Subject: Rental property expenses
Question 1
Is the trust able to claim the property as an investment property and claim all relevant deductions?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The trust was set up as a family investment trust.
The trust purchased a residential property.
The majority of the funding was from a bank loan and remainder of the funding came from the trustees family fund.
The property is rented out to the trustees under an arm's length agreement at prevailing commercial rates.
The trustees moved into the property and pay rent to the Trust at the market price established from a real estate agent appraisal.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-10
Income Tax Assessment Act 1997 Division 40
Income Tax Assessment Act 1997 Division 40
Reasons for decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.
Taxation Ruling TR 95/25 sets out the deductibility of interest expenses. Whether an interest expense has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. The 'use' test, established in Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153; [1926] HCA 58, is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. The interest incurred will be deductible to the extent that the property is used to produce assessable income.
A loss or outgoing is not deductible where it is incurred to gain or produce benefits for other persons.
Taxation Ruling IT 2167 discusses arms-length and non-arms-length letting of a residence. Generally the approach to be followed is based on whether the rent charged by the owner represents a normal commercial rent. Where property is let at a commercial rent then, apart from the effect of any express statutory provision to the contrary, expenses incurred in letting the property under an arm's length arrangement is fully deductible. That is, the arrangement is treated no differently for income tax purposes from any other owner in a comparable arms-length situation.
In Federal Commissioner of Taxation v Janmor Nominees Pty Ltd (1987) 75 ALR 15; (1987) 15 FCR 348;19 ATR 254;87 ATC 4813 (Janmor Nominees) the court had to consider whether the rent received from a residential property purchased by the trust with money borrowed by the trust and rented to associates at a market rate constituted assessable income. The Full Court held that the rental receipts constituted income according to ordinary concepts of the trust. The payment of interest by the trust was an outgoing incurred in the course of gaining or producing the assessable income of the trust.
In your case, the trust borrowed funds to be used to purchase a rental property which was intended to be rented out for the purpose of producing assessable income. The trustees, who are also beneficiaries, of the trust rent the property from the trust at normal commercial rates with a formal lease agreement in place.
It is therefore considered that in the light of the Janmor Nominees decision the rent received by the trust will constitute assessable income and any losses or outgoings to the extent to which they are incurred in gaining or producing the rental income will be allowable deductions.
As long as the property is being rented at a commercial rate, the trust will continue meeting section 8-1 of the ITAA 1997 to claim the interest expenses charged on the loan related to the rental property.
Similarly, repairs and maintenance, depreciation and capital works deductions will be allowed against the trust's rental income.
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