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Ruling

Subject: Deduction - lease

Question

Are you entitled to claim a deduction for the rent that you will pay to your former spouse, and the outgoings that you will pay in relation to the lease granted to you by your former spouse?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You and your spouse have separated.

You and your spouse negotiated the terms of a binding financial settlement.

You and your spouse finalised the terms of settlement and put these into effect by way of court orders.

You and your spouse originally purchased the property in which you conduct your business as joint tenants.

Under the settlement agreement, you transferred your half interest in the property to your spouse.

You have entered into a commercial lease with your spouse where you lease the property under a Life Lease.

You have subleased the property on ordinary commercial terms and at a commercial rate of rent to the family business and other parts of the property to unrelated third party tenants also on commercial terms.

You will pay rental to your spouse in an amount representing a percentage of the net rental income earned by yourself from subleasing the property.

You are responsible for payment of repairs and maintenance of the property and for all rates and taxes charged on the land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or 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.

Section 6-5 of the ITAA 1997 states that an Australian resident taxpayer is assessable on income derived from all sources, whether in our out of Australia, during the income year. Rental income is considered ordinary income and is therefore included in your assessable income.

You have sub-leased the property to the family business and to third parties. Any income you receive from the sub-lease is assessable under section 6-5 of the ITAA 1997. You state that you have sub-leased the property under ordinary commercial terms and at a commercial rate of rent. Expenses that are incurred in gaining this assessable income except where the outgoings are of a capital nature are wholly deductible. If the sub-lease is not considered to be at a commercial rate then all deductions will be reduced to an amount equal with rent received.

You will be using the property for income producing purposes and therefore you will be entitled to deductions under section 8-1 of the ITAA 1997 for the rent you pay to your former spouse. Other deductions are allowable if they directly relate to the rental of the property and are not of a capital nature, such as premiums to secure a lease or payments described as rent which actually relate to the acquisition of premises.