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Edited version of your private ruling
Authorisation Number: 1012451382315
Ruling
Subject: Rental property income and expenses, part rented to co-owner and relative
Question 1
Can your share of rental property expenses be claimed against rental income received from a related co-owner who is living in part of the property, if the rent charged is based on commercial rates?
Answer
Yes.
Question 2
Can your share of rental property expenses be claimed against rental income received from a related co-owner who is living in part of the property if the rent charged is not on a commercial basis?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 January 2012
Relevant facts and circumstances
You and a relative brought a property as tenants-in-common.
You each have differing percentages of the title.
The property consists of separate dwellings.
One dwelling is rented out at arms length on a short term basis.
Half of the other dwelling is occupied by your relative, with the other half rented out to arm's length tenants.
You have sought professional advice from two sources, so that you may establish the rent of the two dwellings based on normal commercial rates.
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 and 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.
In Case R16 84 ATC 179; 27 CTBR (NS) Case 67 the Board of Review held that one tenant in common can lease premises from their co-tenant in common (so as to have exclusive possession) and be liable to pay the amount reserved by the lease. Such amount is assessable income in the hands of the recipient, the amount of rent being paid equal to that of a fully arms length transaction.
Where a taxpayer rents property to their co-owner at a commercial rental, the income derived from the rent received will be assessable under section 6-5 of the ITAA 1997. Expenses incurred by the taxpayer in deriving that income will therefore be deductible under section 8-1 of the ITAA 1997.
Taxation Ruling TR 93/32 states in paragraph 6 that the income/loss from a rental property must be shared according to the legal interest of the owners, except in very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.
Consequently, if you were receiving a commercial rate of rent from your relative, the income you receive in respect of your percentage interest in the rental property is assessable income under section 6-5 of the ITAA 1997 and you are entitled to claim the same percentage of the deductible rental property expenses.
Taxation Ruling IT 2167 outlines the Commissioner of Taxation's views of the taxation implications where investment properties are rented to relatives. The Ruling states that where a property is let to relatives under normal commercial practices the owner would be treated no differently for income tax purposes from any other owner.
Therefore where a commercial rate of rent is received for all of the property including that portion rented by your relative you would be required to return a percentage of the rental income and would be entitled to a percentage of the overall deductible expenses for the property according to your percentage ownership.
IT 2167 states that where a property is let to a relative at less than commercial rates, the rent would be 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.
Therefore, in the case where that part of the property that is leased to your relative is at less than commercial rates you would be entitled to claim a deduction under section 8-1 of the ITAA 1997 for the rental expenses incurred for that portion of the property but the amount allowable will be limited to the amount of rent from that portion of the property which has been included in your assessable income.