Edited version of your written advice

Authorisation Number: 1012997042603

Date of advice: 12 April 2016

Ruling

Subject: Rental income

Question 1

Is the income received from renting your home through entity A assessable?

Answer

Yes.

Question 2

Are you entitled to a deduction for the expenses incurred in relation to the period your place is rented?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2016

The scheme commenced on

1 January 2015

Relevant facts

You occasionally rent out your home to visitors using entity A as a facilitator.

Entity A recommend a rental amount, however you set your own rate.

You charge an amount for full use of the house, garden and BBQ and pool area, breakfast and a range of food.

Your whole home is offered to visitors which is your primary and only residence.

Accommodation includes full laundry, double beds and breakfast and catering for children. You also offer additional food.

You provide a full manual and tourist information and suggestions based on the activities of each guest.

Your expenses include commission to entity A, chemicals for cleaning and food. You also have a contract cleaner as you cannot physically clean to the standard required. You use a laundry as your washing machine does not launder/dry to the standard expected. You have purchased linen to be used by the visitors.

You and your spouse spend two days in preparing the home and gardens and pool to a standard much higher than you would normally do. You also spend two days returning the home to normal. On each occasion you have the expense of alternative accommodation and travel.

Place B has many events throughout the year when accommodation is fully booked. At these times the local authority appeals to residents to make their home available. They also facilitate this process and keep registers of homes that are available.

You make your home available to help the community and you enjoy sharing your home.

Because of the high demand and many special events in place B, your gross income is more than expected. You intend to reduce the periods your home is available.

You do not have an ABN and do not operate a business.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Division 43

Reasons for decision

Assessable income

Under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), your assessable income includes ordinary income. Ordinary income has generally been held to include income from rendering personal services, income from property and income from carrying on a business.

In your case you are receiving income from renting out your property.

Income Tax Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases provides guidelines about rental properties and discusses when rental income is regarded as assessable income. Where you rent out your property or part of your property, the rental income is normally regarded as ordinary income and therefore part of your assessable income.

However, as highlighted in paragraph 17 of IT 2167, where there is a non-commercial arrangement and where a payment is received for board or lodging, then the income is considered to be a domestic arrangement not giving rise to assessable income. It follows that the question of income tax deductions for losses and outgoings does not arise.

When using your home for visitors, the essential question is whether the arrangements are consistent with normal commercial practices.

In determining whether a particular receipt is income, consideration needs to be given as to whether the intention of providing the accommodation is to make a profit or a genuine commercial relationship exists between the parties. Where these factors exist it can be argued that such receipts are in the character of assessable income (FC of T v Kowal 84 ATC 4001). However, the receipts will not be considered assessable if they merely defray the cost in looking after the boarders (FC of T v Groser 82 ATC 4478). In such cases, there is generally no gain or benefit to the home owner. Therefore, it is not reasonably arguable that they had a profit making intention.

In your case, you have visitors staying in the house. The visitors are not related to you. You receive an amount for the full use of your home, garden and pool area. You obtain the visitors through using entity A. Although you did not have a profit making intention when listing your home with entity A, it is considered that the payments and arrangement are commercial in nature. The arrangement is more than a private or domestic arrangement where your property is let to family or friends for a non-commercial rate. Therefore, the payments you receive in relation to renting your home are considered to be assessable income. 

Allowable deductions

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.

In your case, you are using your home partly for income producing purposes. Consequently, you are entitled to claim a deduction for the portion of the expenses that relates to the period where the property is earning rental income.

The commission paid to entity A is an allowable deduction. The cost of food purchased for the visitors and the cost of cleaning after the visitors leave is also an allowable deduction. Similarly, the cost of using a laundromat to wash the linen used by the visitors is an allowable deduction.

A portion of the following expenses is also an allowable deduction for the period the property is rented:

• interest on your property loan

• rates

• insurance

• electricity and gas

• heating costs

As you rent out your home and also use it for your own private purposes, you cannot claim deductions for the proportion of expenses that relate to the private use when you are living in the property.

Your expenses are apportioned on a time basis and the portion that relates to the period the property is rented is an allowable deduction.

A deduction is allowed for certain capital expenses under Division 40 and Division 43 of the ITAA 1997.

A capital works deduction is allowed for rental properties built after 17 July 1985. The rate for rental properties is 2.5% of the construction expenditure.

Depreciation is also allowable on assets such as hot water systems, televisions, refrigerators and other appliances used by the visitors.

For more details on allowable expenses please refer to Rental properties 2015 and Guide to depreciating assets 2015 which is available on the Australian Taxation Office website www.ato.gov.au.

Please note where the property is jointly owned with your spouse, you are only entitled to your share of the deductable portion of the above expenses.

Please ensure you keep records of your rental income and expenses. Where receipts are not available, you may request the supplier to provide a copy of the original receipt. For small amounts, you can keep a diary of expenses and the date incurred. Where a receipt is not issued by a supplier, please make a record of the cost, the date incurred and details of the item.

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