Edited version of private ruling

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Ruling

Subject: sub-leasing of rented premises

1. Is the rent you receive from the sub-tenants assessable income?

Yes.

2. If the rent received is assessable income, should the entire rent received from the sub-tenants be declared as income?

Yes.

3. If the rent received from the sub-tenants is assessable income, should it be apportioned in accordance with the head tenancy agreement?

Yes.

4. If the rent received is assessable income, can you claim a portion of the rent you pay as head tenant as a deduction plus a portion of the utility expenses?

Yes.

5. If the rent received is assessable income, are you required to apply for an Australian Business Number (ABN)?

No.

6. If rent is received on 30 June 2010 for a period in the 2010-11 income year, is it assessable in the year of receipt?

Yes.

7. Where a bill is received and paid in the 2010-11 income year that includes charges applicable to the 2009-10 income year, can you pro-rate the bill between the two income years?

No.

Relevant facts and circumstances

You and your spouse are the tenants of a rented property under a general tenancy agreement. The rent charged by the landlord is a commercial rent.

The lease agreement between you and the landlord specifies that four people may reside at the property.

You have sub-leased half of the property to another couple under a separate general tenancy agreement that shows you alone as the head tenant. The rent you charge is a commercial rent.

Electricity, gas, hot water and internet expenses are included in the rent paid by the sub-tenants.

The sub-tenants pay for their food separately.

Your arrangements with both the property owner and the sub-tenants are at arm's length.

Reasons for decision

Question 1 - Is the rent you receive from the sub-tenants assessable income?

Income Tax Ruling IT 2167 provides the Commissioner's views on the arm's length letting of an identified part of a taxpayer's residence and notes that ordinarily, where a taxpayer grants a lease of a property, whether wholly or in part, whether at arm's length or otherwise, the amount received as rent is assessable income. This is illustrated by the decision FC of T v. Kowal, 84 ATC 4001; (1984) 15 ATR 125.

However, if the arrangement is considered to be non-commercial because of its nature, any deductions claimed may only be allowed up to the amount of rental income derived.

In your case, you have entered into an arm's length arrangement with sub tenants in which you charge a fair market rent for what appears to be the use of half the property by the sub tenants. The rent charged by you is considered to be commercial in nature and therefore, forms part of your assessable income. Expenses incurred in deriving the rental income will be allowed as a deduction unless the expense is of a capital, private or domestic nature.

Question 2 - If the rent received is assessable income, should the entire rent received from the sub-tenant be declared as income?

Section 161A of the Income Tax Assessment Act 1936 (ITAA 1936) prescribes that the return must be in the approved form prescribed by the Commissioner. For individuals the prescribed form is the tax return for individuals. This return includes a supplementary return that deals with rental income, among other matters, and provides instructions on how to complete the relevant part of the supplementary return. By following the instructions, it is clear that the entire amount of rent received is to be declared in the return of income.

Question 3 - If the rent received from the sub-tenants is assessable income, should it be apportioned in accordance with the head tenancy agreement?

Taxation Ruling TR 93/32 explains the basis upon which the Commissioner will accept, for income tax purposes, the division of the net income or the loss from a rental property between co-owners of that property. It states that the income or loss must be shared according to the legal interest of the owners. The ruling however, concedes that the legal and equitable interests may not be the same in those very limited circumstances where there is sufficient evidence to establish that the equitable interest does not follow the legal title.

A person's legal interest in a property is determined by their legal title to that property under the land law legislation in the state or territory in which the property is situated. In a situation such as yours where you do not have an equitable interest in the property but derive income by sub-letting a portion of the property, it is considered that your entitlement to such income will be determined by your rights under the head lease. As both you and your spouse are named in the head lease as the tenants of the property, it is appropriate that the rental income derived should be apportioned between you and your spouse.

Question 4 - If the rent received is assessable income, can you claim a portion of the rent you pay as head tenant as a deduction plus a portion of the utility expenses?

Expenses may qualify as a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) if they satisfy the basic requirement for deductibility of being incurred in gaining or producing the taxpayer's assessable income and are not of a capital, private or domestic nature.

Deductions for rental expenses are claimed under section 8-1 of the ITAA 1997 to the extent to which the expense is related to income production. Where a property is used partly for income production purposes, apportionment of the expenses incurred in respect of that property may be required.

As a general approach, apportionment should be made on a floor area basis, that is, by reference to the floor area of the residence to which the tenant lodger has sole occupancy together with a reasonable figure for access to the general living areas including the garage and outdoor areas. The floor area used to produce income is divided by the total area of the building to arrive at the percentage of the costs that can be claimed as a deduction.

Paragraph 10 of IT 2167 states that:

If, for example, the tenant/lodger had sole occupation of one room in the residence and shared the general living areas equally with the owner/occupier, it would be appropriate to add one half of the floor area of the general living areas to the floor area of the room of sole occupancy in order to make the necessary apportionment.

If a property is used to produce income for only part of the year of income then apportionment of expenses may also be necessary on a time basis.

You have incurred rent and household expenses in sub-letting your rented unit. As the rent received from the sub-tenants is assessable, a proportion of the expenses incurred will be deductible under section 8-1 of the ITAA 1997. In determining the amount of the utility costs to claim, you can only deduct that portion that is applicable to the sub-tenants.

Question 5 - If the rent received is assessable income, are you required to apply for an ABN?

An ABN indicates that you are registered for Goods and Services Tax (GST) among other things. You are only required to register for GST if:

· you are carrying on an enterprise and your GST turnover is $75,000 or more

· supply taxi or limousine travel for fares

· are a representative of an incapacitated entity

· are a resident agent acting for a non-resident.

As your turnover, based on the information provided, will not exceed $75,000 per annum there is no legal requirement for you to register for GST and consequently there is no need for you to apply for an ABN.

Question 6 - If rent is received on 30 June 2010 for a period in the 2010-11 income year is it assessable in the year of receipt?

Under subsection 6-5(2) of the ITAA 1997 resident taxpayers must include in assessable income the ordinary income derived from all sources. Rental income is ordinary income.

Where income is earned in one year of tax but received in another, the adoption of an appropriate method of determining when income is derived in a relevant year of income, is an issue of practical concern to taxpayers and their advisers. Two commonly used methods of determining when income is derived in a relevant year of income are the cash basis and the accrual basis.

This issue was considered by the Commissioner in Taxation Ruling TR 98/1 which examined the factors that are relevant in determining when each method should be used to bring income to account for income tax purposes. The ruling states that rent is generally assessable when received or applied at the taxpayer's direction. However, where rent constitutes business income, a substantially correct reflex of that income may be given by use of the accrual basis.

The receipt of rental income from sub-leasing part of your residence would not constitute the carrying on of a business and the cash basis would be the correct method of bringing the income to account. Therefore, the full amount of the rent received should be declared in the year of receipt.

Question 7 - Where a bill is received and paid in the 2010-11 income year that includes charges applicable to the 2009-10 income year, can you pro-rate the bill between the two income years?

For a taxpayer not engaged in carrying on a business, section 8-1 of the ITAA 1997 allows a deduction for any loss or outgoing that is incurred in deriving their assessable income, so long as the loss or outgoing is not capital, private or domestic in nature.

As you commenced receiving rent from the property in the 2009-10 income year and are not considered to be carrying on a business, any expenses that were relevant to the 2009-10 income year but were not billed until the 2010-11 income year, would normally be claimed in the year in which they are paid. Therefore, you cannot pro-rate the bill between the two years.