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Ruling

Subject: Renting to a relative

Question 1

Is the rent received assessable income?

Answer: Yes.

Question 2

Are the rental deductions allowed limited to the amount of rent received?

Answer: Yes.

This ruling applies for the following periods

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

For a period you rented out a part of your house to a relative to assist them after they had to leave their previous residence.

You researched a real estate website and determined the commercial rate of rent for a similar arrangement in your area.

You decided to charge your relative significantly less than the commercial rate of rent.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Subsection 6-5(2).

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.  Ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997 includes rental income.

Deductions may be claimed under section 8-1 of the ITAA 1997 for expenses relevant and incidental to the production of rental income derived by a landlord/lessor.

Where a part of a property is rented out, a portion of the property expenses (such as, interest on the mortgage and rates) is ordinarily deductible. 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.

Further apportionment is also required if a property is only rented out for part of the income year.

Taxation Ruling IT 2167 outlines the Commissioner of Taxation's views of the taxation implications where investment properties are rented to relatives.

IT 2167 states that where a property is let to a relative at less than commercial rates, the rent would generally be considered assessable income but the losses and outgoings in relation to the property would not be wholly deductible.

In such circumstances, income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received.

In your case, you rented out a part of your property to your relative for significantly less than the commercial rate of rent. It is considered that the approach set out in IT 2167 is appropriate in your circumstances.

Therefore, the rent received is assessable income. Also, you are entitled to claim a deduction under section 8-1 of the ITAA 1997 for the expenses incurred in renting out the part of the property to your relative but the amount allowable will be limited to the amount of rent received.