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Edited version of private ruling
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Ruling
Subject: Rental property expenses
Question and answer
Are you entitled to claim rental property expenses under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) against rental income received from a relative who lives in the property?
Yes
This ruling applies for the following period
Year ended 30 June 2012
The scheme commences on
1 July 2011
Relevant facts
Your relative currently owns her home.
You are considering purchasing an ownership interest of your relative's house at current market value.
You will establish the current market value of the house using an independent valuation.
Your relative will continue to live in the property as a tenant and pay you rent equal to your ownership interest of the normal commercial market rate.
All expenses relating to the property will be shared according to you and your relative's interests.
You will not live in the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Rental income and rental 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.
ATO ID 2010/193 Rental property expenses: co-owner rents the property states that a taxpayer's share of expenses can be claimed under section 8-1 of the ITAA 1997 against rental income received from their co-owner who lives in the property, when an amount of rent reflects an arm's length agreement.
A person is said to be dealing at arm's length with someone if each party acts independently and neither party exercises influence of control over the other in connection with the transaction.
In your case, you are purchasing a share of your relative's house at current market value and your relative will retain the remaining interest and continue to live in the property. You will charge your relative rent at current commercial rates in accordance with your share in the property, as if it were an arm's length agreement. Therefore, the rent received is assessable income under section 6-5 of the ITAA 1997.
Accordingly, you may deduct under section 8-1 of the ITAA 1997 any losses or outgoings incurred in gaining or producing the rental income - that is, where relevant, your share of such losses or outgoings in relation to the property - provided the losses or outgoings are not capital or of a capital, domestic or private nature.