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Edited version of private ruling
Authorisation Number: 1011839198216
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Ruling
Subject: Rental income
Question and answer:
Is the money you receive from your friend in return for your friend living in a room in your house assessable income?
No.
This ruling applies for the following periods:
Year ended 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 and circumstances
Your friend moved into your house.
Your friend pays you an amount per month. This is less than market rental value you would charge in an arm's length transaction.
Your friend has their own bedroom and you share the remainder of the house.
You and your friend share living expenses such as electricity.
You do not have a written agreement with your friend.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Rental income is normally regarded as ordinary income and therefore forms part of the taxpayer's assessable income. However, where there is a non-commercial or domestic arrangement, amounts paid for board or lodging do not give rise to the derivation of assessable income (FC of T v. Groser 82 ATC 4478; 13 ATR 445).
Taxation Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases considers the situation where property is let to relatives. The ruling explains that where the arrangements are consistent with normal commercial practices the owner of the property will be treated in the same way for income tax as any other owner in a comparable arm's length situation. Although in your case you are renting to a friend, the same principles apply.
Paragraph 17 of IT 2167 deals with payments by family members of an amount for board and lodging. In this situation, the payments are considered to in the nature of a domestic arrangements and therefore not assessable income to the owner of the property.
In addition, paragraph 18 of IT 2167 states that where the owner of a residence permits a person to share the residence on the basis that all the occupants, including the owner, bear an appropriate proportion of the household costs (such as food and electricity) actually incurred, these arrangements are not considered to confer any benefit on the owner and are not considered to be assessable income.
In your case, your friend is living in a room in your house under an informal verbal agreement between you and your friend, and is paying you a monthly amount in return that is less than the equivalent market rental rate. This is not consistent with normal commercial practices, rather, it is a private and domestic arrangement that you have entered into with your friend.
Therefore, the payments you receive under this arrangement are not assessable income to you and do not need to be included in your income tax return.