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Edited version of private ruling
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Ruling
Subject: Rental income-property let to relative
Question 1
Is the income you receive from your relation considered assessable income?
Answer
No.
Question 2
Are you entitled to claim a deduction for rental property expenses incurred on a property let to a relative under a non-commercial arrangement?
Answer
No.
This ruling applies for the following period
Year ending 30 June 2011
Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
The scheme commenced on
1 July 2010
Relevant facts
You and your spouse have a disabled relative.
During 2006 an arrangement was made for your disabled relation to live in another property.
This accommodation was initially provided rent and expenses free.
You and your spouse own the property as joint tenants.
Due to the costs of maintaining this home, you decided that your relation would start paying rent at a lower than commercial rate.
The amount paid covers some of the property's expenses.
The amount paid is less than half of the market rent.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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.
Taxation Ruling IT 2167 discusses the Commissioner's views on non-economic arrangements where property is let to relatives. There are situations where payments that are described as rent will not be assessable income and expenses will not be allowable deductions. This is particularly the case where the arrangement is not conducted at arm's length.
Letting of property to relatives
Where property is let to relatives the essential question is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purpose from any other owner in a comparable arms length situation.
If property is let to relatives at less than commercial rent other considerations arise. In FCT v. Groser, 82 ATC 4478: 13 ATR 445 (Grosers' case), for example, 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 taxpayer's house. The Court held that the weekly amounts of $2 were not assessable income. They were a contribution to the funds out of which the taxpayer proposed to maintain his brother. The arrangements were simply not of a kind which produced a receipt of income as that term is normally understood.
Where arrangements are comparable to those in Grosers' case, the rent would not represent assessable income. The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives.
In your case, you and your spouse use the property to provide your relation with accommodation. There is no indication that the property is an investment property held for the purposes of producing assessable income. Although your relation pays more than $2 weekly rent, your situation is comparable to Grosers' case in that the arrangement is for family and domestic purposes and not commercial.
The amounts paid by your relation are not considered to be assessable income in your hands. Similarly, any costs you incur in relation to this property will not be deductible as they are not incurred in gaining or producing assessable income and are better described as private or domestic in nature.
While we appreciate your situation, there is no discretion available to the Commissioner to allow you to claim a deduction for the expenses you incur in relation to this property where the property is not rented in line with normal commercial practices.