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Ruling

Subject: Rental property income and deductions

Question 1

Is the rent that you receive for subletting bedrooms in your residence considered assessable income?

Answer

Yes.

Question 2

Are you entitled to deductions for rental property expenses in full when you are subletting rooms?

Answer

No.

Question 3

Are your deductions for rental property expenses limited to the rental income that you receive?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are considering renting a large home with multiple bedrooms.

Your intention is to sublet the rooms in the property to people who would not ordinarily qualify for a private rental, for example, women in refuge, the unemployed, and low income earners.

You would like the rent received to cover the costs you will incur, however you predict that this will not be the case.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5(2) and

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

The income you receive from subletting your residence is considered assessable income.

However, as you are entering into the arrangement for both income producing and non-income producing purposes, the expenses incurred in subletting the rooms are not fully deductible. The deduction allowed is limited to the rental income received.

Detailed reasoning

Income

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) includes income according to ordinary concepts, which is called ordinary income, as assessable income. Ordinary income usually has its source in an earning activity such as personal exertion, property or business.

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 2167 considers the consequences of different rental income producing situations including the arms length letting of an identified part of 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, a separate amount 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.

In your case, you plan on subletting individual rooms in a rental property. In applying IT 2167, it is considered that your situation falls within the category of letting of an identified part of a residence, and 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, or relate to the earning of exempt income.

Deductions for rental expenses are claimed under section 8-1 of the ITAA 1997 to the extent to which the expense is related to income production. Apportionment is required in cases where the property is available for rent for only part of the year, only part of the property is used to earn rent, or the property is rented at non-commercial rates.

In cases where a taxpayer is residing in a dwelling and also using part of the dwelling to earn rent, only that portion of an allowable expense which relates to the rental income can be claimed as a deduction. As a general guide, apportionment should be made on a floor-area basis that is, by reference to the floor area of that part of the residence solely occupied by the tenant, together with a reasonable figure for tenant access to the general living areas, including garage and outdoor areas if applicable.

Where the property is rented at non-commercial rates, the amount of deductions that can be claimed may be limited. As a working rule, paragraph 16 of IT 2167 specifies that deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received (that is, deductions claimed cannot exceed the amount of rent received).

In your case, as the income you receive from subletting the property is considered assessable, you are entitled to deductions for your rental property expenses. However, you are not entitled to deduct the full amount of your expenses. You will need to apportion your deductible expenses on a floor area basis.

Also, you have two purposes in entering into the arrangement; one is to earn income and the other is to give access to accommodation to the disadvantaged who would not ordinarily be able to obtain private rental. You do not expect that the income will cover your outgoings. We do not consider that this is a commercial arrangement. As you are entering into the arrangement for both income producing and non-income producing purposes, the expenses incurred in subletting rooms are not fully deductible. In your case, it is considered that after you have apportioned your expenses based on the floor area that is sublet, the deduction allowed is further limited to the amount of rent received.