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Edited version of private ruling
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Ruling
Subject: Rental property income
Question 1
Are you entitled to deductions for costs incurred on your property that you live in and pay rent?
Answer
No.
Question 2
Is the rent you pay yourself regarded as assessable income?
Answer
No.
This ruling applies for the following period:
Year ending 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
You sold your primary residence to build another house.
You moved into your investment property, with the intention to move out on completion of your new house.
You have been paying the market rate of rent for your investment property to the real estate agent, who in turn pays you back the money.
You have been living in your investment property for approximately 10 months and anticipate that you will be required to live there for at least another 12 months.
You have an outstanding loan on the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Summary
When a property is not rented or available to be rented to an independent party in a commercial arrangement, no deduction is allowable. Therefore, from the time when you commenced using your investment property for private purposes, it was no longer considered to be a source of rental income and subsequently no further deductions are allowed.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (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.
Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident includes all ordinary income derived directly or indirectly from all sources.
Ordinary income is defined to mean income according to ordinary concepts. Income tax legislation does not provide any specific guidance on what is meant by 'income according to ordinary concepts'. A substantial body of case law, however, has evolved to provide guidance of what is ordinary income. Rental income is normally regarded as ordinary income and therefore forms part of a taxpayer's assessable income.
The Commissioner provides guidance on the issue of letting of property to relatives in Taxation Ruling IT 2167.
Where a taxpayer grants a lease of property, whether wholly or in part, whether at arms length or otherwise, the amount received as rent is usually assessable income. However, cases may arise where the arrangement is not at arm's length, and an amount described as or said to be rent is not of an income nature and, therefore, not assessable income. For example, this could be the case when property is leased to family members and/or provided under arrangements which are not consistent with normal commercial practices.
For some rental arrangements, the principle of mutuality may also apply. The principle of mutuality is based on the proposition that a taxpayer cannot derive income from himself or herself. That is, a taxpayer's income consists of moneys derived from sources outside of the taxpayer.
In your case you sold your primary residence to build another house and moved into your investment property. Although you have been paying the market value of rent to the real estate agent, using this third party doesn't separate the fact that you are effectively paying rent to yourself to live in your own property.
Therefore, from the time when you commenced using your investment property for private purposes, it was no longer considered to be a source of rental income and subsequently no further deductions are allowed. The rent you pay is not regarded as assessable income.