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Ruling
Subject: Property deductions
Question
Are you entitled to a deduction for expenditure incurred in relation to your property under an arrangement where your employer leases your property from you and then provides it back to you as accommodation?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2012
Year ending 30 June 2013
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You own a house which has previously been used as a rental property.
You currently have an interest only loan associated with the property.
You are proposing to enter into an arrangement where your employer leases your property from you and then provides it back to you as accommodation.
The rent proposed to be charged is reflective of the current market rent.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Summary
Where you lease a property you own to your employer who then supplies it back to you as accommodation, the expenditure you incur in relation to the property is considered to be private in nature. Therefore, a deduction is not allowable for the expenditure.
Detailed reasoning
In order to be deductible under section 8-1 of the Income Tax Assessment Act 1997, a loss or outgoing must be incurred in gaining or producing your assessable income or in carrying on a business for that purpose. It cannot be private, domestic or capital in nature and cannot be incurred in relation to gaining or producing exempt income.
Taxation Determination TD 2004/26 outlines an arrangement where an employee and his employer lease and leaseback the employee's private residence and some of the employee's remuneration is replaced with income from property.
Under this type of arrangement an employee ('A') leases his private residence to his employer ('B') for a market rent. B immediately grants a sublease of the residence back to A. A agrees to sacrifice an amount of salary equal to the market rent in return for a housing benefit from B, being the right to occupy or use the residence under the sublease. However, A's income from B is not reduced because it is made up by the market rent A receives from B under the head lease.
It is the Commissioner's view, that the essential character of all the expenditure incurred by A in relation to the property is determined by the fact that it is paid to secure and maintain A's private residence, his occupation of which continues undisturbed by the arrangement. In these circumstances, the expenditure constitutes outgoings of a private or domestic character and is not deductible to A.
In the alternative, and to the extent (if any) that expenses relating to the property are deductible to A, the artificial and contrived nature of this arrangement (a scheme for the purposes of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)) will require an examination of the dominant purpose of the parties involved for entering into and carrying out the scheme.
In the Commissioner's view, the manner in which the scheme is entered into and carried out, the contrast between its form and substance and the fact that A receives the same amount of income from B strongly suggest that Part IVA of the ITAA 1936 will be applicable. (Part IVA of the ITAA 1936 contains general anti tax avoidance rules)
Your circumstances
It is considered that the arrangement you propose is similar to that outlined above in that you own the property and will live in the property under the arrangement. As the property will be your principal residence, it is considered that the expenditure you incur in relation to the property is private in nature and therefore not deductible.