Edited version of private ruling

Authorisation Number: 1011605684883

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Ruling

Subject: Property partially used for income producing purposes

Question and answer:

Does the Commissioner accept that 75% of the expenses incurred in relation to the property is a reasonable apportionment for the purposes of claiming deductions for your expenses?

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The dwelling in which you are currently living contains three bedrooms and two car parks of approximately equal size.

You live in one of the bedrooms (bedroom A).

You have leased the other bedroom (bedroom C) to an individual. You will make assessable income from renting bedroom C.

You have determined the commercial rental rate by reviewing two websites that provided the advertised rate in your area.

At the time that you negotiated the lease, the rental rate was slightly above the commercial rate due to the fact that no commission is payable to real estate agents.

You have provided a copy of the Residential Tenancy Agreement between yourself and the tenant. The agreement shows that the tenant is entitled to access all areas of the dwelling except for the master bedroom.

You review the rental rate regularly and it is adjusted if it is determined that a higher rate can be charged without losing the stability of the income stream.

Common areas such as the kitchen, bathroom, living area, dining room and garage are shared between yourself and the tenant. The tenant has a copy of the keys to every door and window of the house.

You believe that the proportion of the area of the property that has been rented out is 75%. The only area of the property that is not accessable by the tenant is your bedroom (and ensuite) which accounts for less than 25% of the whole area of the property.

The tenant uses the living room, kitchen, dining room and garage.

You only occupy the common areas of the dwelling during the evening from Monday to Friday and on weekends.

The tenant is not a relative but rather a friend (not a close friend).

At all times, you and the tenant act at arms length.

You have advised that the tenant gets to use the main bathroom in the dwelling and that you do not have access or use of this room, however you have provided no documentation that indicates that you do not have the right to use this room.

The rent does not cover utilities. Therefore, you and the tenant have a private and domestic arrangement in place. The arrangement, which is not in the form of a contract, ensures that gas, electricity, heating, food, internet and breakages are recovered based on proportional estimated actual use that is regularly reviewed on an arms length basis. This results in the tenant bearing the appropriate costs actually incurred.

The remaining bedroom (bedroom B) is used by you in engaging in income generating activities. The tenant often decides to sleep in this bedroom during summer as it is cooler than bedroom C.

You have provided a copy of the plan for the dwelling. These plans indicate that a percentage of the total area of the dwelling is solely occupied by the tenant and another percentage is solely occupied by you. The remaining area of the dwelling is shared by you and the tenant.

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 43

Reasons for decision

Expenditure incurred in relation to a rental property may be an allowable deduction under various sections/ Divisions of the Income Tax Assessment Act 1997 (ITAA 1997). These include the following:

Section 8-1 of the ITAA 1997 which allows a deduction for a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income except where it is of a capital, private or domestic nature, or relates to the earning of exempt income.

Section 25-10 of the ITAA 1997 which allows a deduction for repairs to premises or assets to the extent that they are used to produce assessable income.

Division 40 of the ITAA 1997 which allows a deduction for the decline in value of depreciating assets used to produce assessable income.

Division 43 of the ITAA 1997 which allows a 2.5% capital works deduction in relation to buildings to the extent that they are used to produce assessable income.

Consequently, where a property is used partly for income producing purposes, apportionment of the expenses incurred in respect of that property may be required.

Taxation Ruling IT 2167 provides the Commissioners view on the letting of property.

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 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 occupancy 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.

For costs such as utilities and household items, the actual use should be estimated and apportioned reasonably.

In your situation, you are leasing a portion of your property and your tenant is paying rent at the commercial rate. This payment is assessable income. Consequently, you are entitled to a deduction for a portion of some of the expenses relating to your property while part of the property is leased to the tenant.

Using the approach provided in IT 2167, a reasonable apportionment in your circumstances would be A%. The tenant has the sole use of an area of the dwelling and the rest of the dwelling is shared by you and the tenant.

While we acknowledge that you may only actually use the common areas of the dwelling during the evenings from Monday to Friday and on weekends, you still have the right to use these areas of the dwelling for the entire day and weekend. Furthermore, while you may not use the main bathroom of the dwelling, once again you still have the right to use it.

Please note: you cannot claim a deduction for any expense that relates solely to bedroom A.

For further information on the types of expenses that are deductible please refer to the taxation office's website.