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Ruling

Subject: Assessable Income - rental property (homestay) income

Question 1

Is it essential that people being accommodated by host families/individuals (home owners) under an arrangement similar to a 'homestay' arrangement be engaged in full time education?

Answer

No

Question 2

Is the income derived by the home owner assessable income in terms of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 3

Is it possible for the income derived by the home owner to be considered assessable income in terms of section 6-5 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

1 July 2011 to 30 June 2012

The scheme commenced on:

1 July 2011

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.

A non profit statutory body which is an educational institution and a registered training organisation wants to set up a homestay program specifically to assist single clients to find affordable, stable accommodation. They have developed a business plan and approached a number of homestay companies who will source and match the homeowners and the clients.

The organisation will pay these companies for each match that they make.

In the proposed homestay model the hosts will board one or two students at any time. Under a homestay arrangement, the clients will live with the host family in their home. They will be provided with their own room and have access to other household facilities. The payments the host will receive are designed to cover the costs to the host family of supplying food, utilities, and other minor expenses of the client/student (tenant).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5.

Reasons for decision

Question 1

Summary

It is not essential that people being accommodated by home owners under an arrangement similar to a 'homestay' arrangement be engaged in full time education.

Detailed reasoning

As discussed in Taxation Ruling IT 2167 (IT 2167) there are a number of arrangements where the rental of property is considered in the light of being a non-economic arrangement. The decisive factor for the determination of whether the income received from the tenant is assessable is the concise nature of the arrangement. The status of the tenant being a student is not considered significant to determining the nature of the arrangement.

Question 2

Summary

Generally the income derived by the home owner is not assessable income in terms of section 6-5 of the ITAA 1997 in a rental arrangement similar to a 'homestay' arrangement.

Detailed reasoning

In accordance with section 6-5 of the ITAA 1997 assessable income for Australian residents includes the ordinary income derived directly or indirectly from all sources during the income year.

Where a property or part of a property is rented out, the rental income is normally regarded as ordinary income and is therefore part of the taxpayer's assessable income. However, where there is a non-commercial or domestic arrangement, amounts paid for board or lodging does not give rise to the derivation of assessable income as found by the Supreme Court of Victoria in FC of T v. Groser 82 ATC 4478; 13 ATR 445.

Where there is a non-commercial arrangement and payments are received for board only (direct reimbursement) the income is considered to be a domestic arrangement not giving rise to assessable income.

IT 2167 provides the Commissioner's guidelines in determining what constitutes a rental situation and the treatment of rental income and deductions. Paragraph 18 of IT 2167 states:

Occupancy of part of a residence on the basis of the occupants' sharing household costs such as food, electricity and cleaning, etc.

What will be decisive in cases of this nature will be the characterisation of the arrangements, i.e., do they produce assessable income. Situations arise where the owner of a residence permits persons to share the residence on the basis that all the occupants, including the owner, bear an appropriate proportion of the costs actually incurred on food, electricity, etc. Arrangements of this nature are not considered to confer any benefit on the owner. There is no assessable income and the question of allowable deductions does not arise.

In a 'homestay' style situation the tenants live with the home owner in their home. They are provided with their own room, (which is suitably furnished), bathroom facilities and also main meals. They may also get laundry and ironing done, and occasional transport provided. They may be required to help out with household chores and keep their room clean.

The typical situation is where a home owner has one or two tenants lodging with the family, and charges them an amount set by the housing officers at educational institutions. These amounts should be regarded as contributions to the costs of accommodating the tenants in the home. The amounts are set having regards to the normal cost of supplying food and other utilities and overheads for the student. These rates are not regarded as true commercial rates with a built in reward component to the home owner for the use of parts of the house. While there might be some profit on occasions to the home owner, these amounts will generally be small having regards to the expenditure incurred.

In the vast majority of cases the homestay provider will not be carrying on a business and homestay arrangements will usually not create tenancy. There is an essential difference between those people that advertise for lodgers and provide board and lodging in an establishment on an arms length basis and homestay arrangements. Homestay arrangements where a family takes one or two tenants into their home and the arrangement is similar to the type of arrangement outlined in paragraph 18 of IT 2167 are ordinarily not commercial in nature.

From the information provided regarding the proposed homestay model there is no genuine commercial arrangement involving a profit making purpose, therefore the income is not assessable and no deduction for expenses is allowable.

Question 3

Summary

Where the nature of the arrangement does not, or ceases to, comply with the homestay model (as described) it is possible for the relationship to become more commercial in nature and therefore the income derived by the host may be assessable income in terms of section 6-5 of the ITAA 1997.

Detailed reasoning

In characterising 'homestay' payments received by the home owner the most significant factor is whether they result from a genuine commercial relationship involving a profit making purpose or otherwise.

For example as discussed in paragraph 19 in IT 2167 the home owner may require the tenant to make a fixed contribution to household costs as well as subsequently contributing separately to utility expenses. Another example of a variation to the arrangement which could make the income derived assessable income would be the removal of the property owner from the arrangement.

A further situation in which the income derived may be assessable to the home owners could be homeowner granting a lease or licence of property, whether wholly or in part, whether at arms length or otherwise. The amount received as rent or in respect of the licence could be assessable income. This situation was demonstrated by the decision in FCT v Kowal 84 ATC 4001; 15 ATR 125 where the taxpayers purchased the parent's property and leased it back to the parent at a low rental. The motive for purchasing the property was a profit motive and this predominant motive meant that the income derived was considered assessable.

The rental arrangement between the tenant and home owner defines the relationship as being non-economic or commercial and that association dictates whether the income received is assessable in terms of section 6-5 of the ITAA 1997.