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Ruling

Subject: Rental property expenses

Question 1

Are you entitled to a deduction for a set percentage of total expenses for a property rented at below market rate to your child?

Answer

No.

Question 2

Are you entitled to a deduction up to the amount of rental income received for total expenses incurred on a property rented at below market rate to your child?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You purchased an investment property in 2003 which has been rented at market rate.

You are now renting the property to your child at approximately half the market rate.

You wish to be able to claim a percentage of the interest and other expenses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

In general, a landlord is assessable on rental income received under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) but may claim deductions under section 8-1 of the ITAA 1997 for losses and outgoings incurred in gaining that income. 

The Commissioner provides guidance on the issue of letting of property to friends and relatives in Taxation Ruling IT 2167.  Where property is let to relatives the essential question for decision 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 purposes from any other owner in a comparable arms length situation.

Where property is let to a friend or relative for low rental, the rental is generally still considered to be assessable for income tax purposes.  However, the losses and outgoings in relation to the property are not necessarily deductible in full. 

The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and letting the property to relatives.   For example, in Commissioner of Taxation v. Kowal 15 ATR 125; (1983) 79 FLR 75; 84 ATC 4001, where the taxpayer was renting to relatives at below market rate, the Court found that the taxpayer had two purposes or objectives in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. As such, deductible expenditure was restricted to the level of income derived.  

The case described above is similar to your circumstances in that, by letting the property below market rate you are providing affordable accommodation for your child and also retaining the property for investment purposes. We consider that the arrangement is not a normal commercial arrangement. As such you are entitled to a deduction for total expenses of the property up to the amount of rental income received.