Edited version of private ruling

Authorisation Number: 1011882286792

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Ruling

Subject: Income from a boarder

Question 1

Is your share of the income received for board assessable?
Answer

Yes.

Question 2

Are you entitled to a deduction a portion of your home occupancy and home running costs?
Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2010
The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have rented out a room in your house at market value. The rent covers boarding and utilities, that is, water, gas and electricity usage.

The tenant is not related and is allowed exclusive use of a room and car bay in the double garage and use of the mutual areas in the premises.

The rental amount was based on average rate charged for similar accommodation in the neighbourhood.

The tenant was selected by emails, phone conversations and word of mouth referral.

You have a written agreement with the tenant specifying the weekly/monthly rent remittance amount to the designated bank account.

The initial stay was for six months and has now been extended. The arrangement is reviewed every six months.

If the tenant is away on holidays, they will continue to pay board, however this has not occurred as yet.

You incur expenses in relation to the ownership and maintenance of your house.

Relevant legislative provisions

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

Reasons for decision

Board

Under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), your assessable income includes ordinary income. Ordinary income has generally been held to include income from rendering personal services, income from property and income from carrying on a business.

Income Tax Ruling IT 2167 provides guidelines about rental properties and discusses when rental income is regarded as assessable income. Where you rent out your property or part of your property, the rental income is normally regarded as ordinary income and therefore part of your assessable income.

However, as highlighted in paragraph 17 of IT 2167, where there is a non-commercial arrangement and where a payment is received for board only or for lodging only or for both then the income is considered to be a domestic arrangement not giving rise to assessable income. It follows that the question of income tax deductions for losses and outgoings does not arise.

When using your home for boarders, the essential question is whether the arrangements are consistent with normal commercial practices. If an amount of board only is paid and the amount is not a commercial arrangement, then the payments for board are not regarded as assessable income.

In determining whether a particular receipt is income, consideration needs to be given as to whether the intention of providing the accommodation is to make a profit or a genuine commercial relationship exists between the parties. Where these factors exist it can be argued that such receipts are in the character of assessable income (FC of T v Kowal 84 ATC 4001). However, the receipts will not be considered assessable if they merely defray the cost in looking after the boarders (FC of T v Groser 82 ATC 4478). In such cases, there is generally no gain or benefit to the home owner. Therefore, it is not reasonably arguable that they had a profit making intention.

In your case, you have one tenant staying with you and your family. The tenant is not related to you. You will receive an amount for board which will cover their accommodation and utility expenses. The amount is based on the local market rate. It is considered that the payments and arrangement are commercial in nature. Therefore, the payments are considered to be assessable income. 

As you and your spouse jointly own the property, your assessable income includes the portion that relates to your ownership of the property. For example, where your ownership is as joint tenants, 50% of the rental income received is assessable to you.

Allowable 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, or relate to the earning of exempt income, or a provision prevents you from deducting it.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478 (Lunneys case)), 

there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

TR 93/30 examines the deductibility of home office expenses and in particular, highlights the difference between the home as a place of business and an office or study at home. Although your home is not regarded as a place of business or home office, the principles in this ruling are applicable in your case.

A deduction is generally not allowable for the costs associated with a person's home as they are private in nature. However, a taxpayer who carries on part of their income earning activities at home may be entitled to a deduction for part of the outgoings on the home.

TR 93/30 states that home office expenses can be divided into two broad categories - occupancy and running expenses. Occupancy expenses relate to the ownership of a home such as rent, rates and insurance. Running expenses relate to the use of the facilities within the home such as electricity.

As a portion of your home is used for income producing purposes, a deduction is allowed for the associated portion of your home occupancy and running expenses.

An apportionment of the occupancy expenses incurred on a floor area basis is an appropriate way to calculate the allowable portion that relates to the income producing use of the room and car bay. You are also entitled to a reasonable portion of the general living areas used by the tenant.

The amount of home running expenses that you are entitled to claim is the difference between what was actually paid for electricity and other running costs and what you would have paid had you not used your home for income producing purposes.

An apportionment based on floor area is not generally appropriate in calculating deductible running expenses. Different parts of a house require different amounts of electricity and are used for differing amounts of time. As stated above it is only the additional costs in using the room and car bay at home for income producing purposes that is allowed as a deduction.

Please note as you jointly own the property with your spouse, you are only entitled to your share of the deductable portion of the above expenses.