Edited version of your private ruling

Authorisation Number: 1012501711700

Ruling

Subject: Rental income and deductions

Question 1

Will the payments you receive from your relative to stay at your property be included in your assessable income?

Answer:

Yes

Question 2

Are you entitled to a deduction for expenses such as mortgage interest, council rates and insurance relating to the property up to the amount received from your relative?

Answer:

Yes

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You and your spouse purchased a residential property in the last 12 months to provide adequate accommodation for your relative who has a disability and has difficulty managing their financial affairs and was unable to find a suitable property to rent.

You are unable to afford to fund the expenses of the property entirely on your own incomes and require some assistance with the expenses.

You intend to leave the property to your relative in your will.

The expenses relating to the property include rates, insurance, interest on loan repayments, water rates, repairs and maintenance.

Your relative currently pays you more than the annual expenses relating to the property to stay at the property.

The amount your relative pays you is based on the outgoings of the property.

The amount your relative pays you is less than that for a comparable property in that area and your relative is unable to afford to pay a commercial rent for suitable accommodation.

The funds you receive from your relative are by a periodic direct debit from their bank account to yours. These payments are used to pay the outgoings of the property.

You do not receive all of your relative's income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

In general, a landlord is assessable on rental income received under section 6-5 of the Income Tax Assessment Act 1997 but may claim deductions for losses and outgoings incurred in gaining that income. 

The Commissioner provides guidance on the issue of letting of property to relatives in Taxation Ruling IT 2167.  Where property is let to relatives the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purpose from any other owner in a comparable arms length situation.

Ordinarily, where a taxpayer grants 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 is assessable income. This is illustrated by the decision in FCT v Kowal, 84 ATC 4001: 15 ATR 125 (Kowal).

It is necessary to make the qualification "ordinarily" because some cases may arise, particularly where the arrangements are not at arm's length, where an amount described as or said to be rent is not of income nature and, therefore, not assessable income. In FCT v Groser, 82 ATC 4478: 13 ATR 445 (Groser), for example, the taxpayer permitted his invalid brother to live in a house which the taxpayer owned. The taxpayer arranged to receive his brother's invalid pension so that he could use the moneys to provide for the brother's maintenance. It was arranged that $2 per week would be deducted for rent of the taxpayer's house. The Court held that the weekly amounts of $2 were not assessable income. They were a contribution to the funds out of which the taxpayer proposed to maintain his brother. The arrangements were simply not of a kind which produced a receipt of income as that term is normally understood.

If property is let to relatives at less than commercial rent other considerations arise. Unless the arrangements are comparable to those in Groser, the rent would represent assessable income. It would not necessarily follow, however, that losses and outgoings in relation to the property would be wholly deductible. Where property is let to a relative at a non-commercial rate of rent, the rental is generally still considered to be assessable for income tax purposes.  However, the losses and outgoings in relation to the property are not necessarily deductible in full. 

The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives.   For example, in Kowal's case, where taxpayers were renting to relatives at below market rate, the Court found that the taxpayer had two purposes or objects in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. As such, deductible expenditure was restricted to the level of income derived.  

Your situation is not considered to be comparable to the facts in Groser as the amount you charge your relative is not minor and you do not control all of their funds in order to maintain them.

While it is acknowledged that your intent is to provide adequate accommodation for your relative who cannot afford to pay a commercial rate of rent, a consequence of the fact that you require assistance with the expenses is that this assistance is in the nature of assessable income, so even though it was not your original intent to earn assessable income from the property, this has been the result.

Consequently the amount you receive from your relative will be considered to be assessable as rent but as the rate of rent you charge your relative is less than the commercial rate of rent for the property your claims for rental deductions will be limited to the amount of rent received.