Edited version of private ruling

Authorisation Number: 1011745088063

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Ruling

Subject: Assessable income - boarder

Question 1

Are the payments you receive from a boarder assessable income?

Answer

Yes

Question 2

Are you entitled to a deduction for interest and other costs incurred against the rent received?

Answer

Yes, but limited to the amount of rent received.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You have recently purchased a two bedroom unit being your principal place of residence.

You intend to let one of the rooms to a friend.

Your friend would have access to the living areas, bathroom and kitchen.

There will not be any formal agreement and no minimum time period and your friend is free to leave at any time.

You are considering charging your friend an amount per week being an amount that your friend can afford and that would contribute towards your household costs (including interest on your mortgage).

This amount does not cover half of your expenses of electricity, gas, rates, water, body corporate and mortgage expenses.

The amount being charged is lower than the commercial rate being asked for similar units in the area.

Relevant legislative provisions

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

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes all ordinary income derived directly or indirectly from all sources.

Rental income is regarded as income according to ordinary concepts and it should be included in the assessable income for the landlord.

Taxation Ruling IT 2167 states that ordinarily, where a taxpayer lets others use his/her property, whether wholly or in part, whether at arms length or otherwise, the amount received in return is assessable income.

It is only in limited circumstances where the amounts received would not be considered income. An example of such a situation occurred in the case FC of T v. Groser 13 ATR 445: (1982) 65 FLR 121;82 ATC 4478. In that case the taxpayer permitted his invalid brother to live in a house which the taxpayer owned. The taxpayer arranged to receive his brother's invalid pension so that he could use the moneys to provide for the brother's maintenance. It was arranged that $2 per week would be deducted for rent of the taxpayers' house. The Supreme Court viewed the money received by the taxpayer as not being received by way of income, but rather to provide a fund to ensure the proper care of the taxpayer's brother.

IT 2167 considers the consequences of different rental income producing situations including the arms length letting of an identified part of a residence, for example, a bedroom, with access to general living areas. In this type of arrangement the rent payable may cover variable or running costs such as electricity and heating or the tenant may be required to pay, in addition to rent, separate amounts towards variable or running costs. This type of arrangement would also cover situations where board and lodging is provided.

The ruling states that in these types of arrangements, the rent or amount for board and lodging received is assessable income. Also, where the tenant lodger is required to make a separate contribution to specific variable or running costs such as heating or electricity, this amount is also considered to be assessable income. This is because the separate contribution represents part of the reward of the owner letting out part of his/her residence. If the arrangements are such that the separate contribution is made on a precise sharing of costs basis the assessable income will be offset by allowable deductions. If the separate contribution is a fixed amount income tax deductions will be allowed for the part of the variable or running costs attributable to the tenant/lodger's use of the relevant facilities.

Paragraph 18 of IT 2167 states that where the owner of a residence permits persons to share the residence on the basis that all occupants, including the owner, bear an appropriate proportion of the household costs actually incurred, such as food and electricity, these arrangements are not considered to confer any benefit on the owner and are not considered to be assessable income.

Household costs are generally considered as being running expenses for maintaining or keeping a house such as electricity, gas, food, water, telephone and cleaning.

In your case, paragraph 18 does not apply as your friend will not bear an appropriate proportion of the household costs actually incurred. Your friend will pay you a weekly rent, part of which represents a contribution to household running costs.

The amount charged will be a contribution to your costs that includes your mortgage interest, body corporate, council rates and running costs.

It is considered that your situation will fall within the category of 'an arms length letting of an identified part of a residence'. Accordingly, the amounts received by you are assessable income.

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.

Deductions for rental expenses are claimed under section 8-1 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.

For costs such as electricity, gas and water, the actual use should be estimated and apportioned reasonably.

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

In cases arising under 'an arms length letting of an identified part of a residence', the approach has been framed on the basis that the rent charged by the owner represents a normal commercial rent.

Where property is let to relatives/ friends and arrangements are consistent with normal commercial practices, the owner of the property would be treated no differently for income tax purposes from any other owner in a comparable arms length situation.

If property is let at less than commercial rent other considerations arise. In these circumstances, as a working rule, income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received.

In your case there will be no formal agreement in place. Your friend will pay you an amount that he can afford and that is less than the normal commercial rate. Whilst the amount you will receive will contribute to your mortgage interest and other costs, this arrangement is not consistent with normal commercial practices in a comparable arms length situation.

Therefore, you are only entitled to a deduction for rental expenses up to the amount of rent received under section 8-1 of the ITAA 1997.