Edited version of your private ruling

Authorisation Number: 1012520595048

Ruling

Subject: Income from property

Question 1

Is income received from the people residing in your property assessable?

Answer

Yes.

Question 2

Are you entitled to a deduction for a portion of the associated expenses of your property up to the amount of income received?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

The scheme has commenced

Relevant facts

You are the sole owner of a home.

You have people staying in the property.

The people contacted you and asked if they could stay.

They pay money each week for their board. The money is transferred into your bank account.

The amount paid is below the market rent.

The people pay for their own food.

The people are not related to you.

You do not have a lease agreement or contract with the people and they may vacate when they find other accommodation.

You paid for the electricity for some months but now the electricity is not in your name.

You pay for additional water usage and council rates.

The people have provided some of their own furniture and some furniture belongs to you.

You do not currently stay overnight at the property, however you are there regularly. Sometimes your friends stay overnight in the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Assessable income

Under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), your assessable income includes ordinary income. Ordinary income has generally been held to include income from rendering personal services, income from property and income from carrying on a business.

Income Tax Ruling IT 2167 provides guidelines about rental properties and discusses when rental income is regarded as assessable income. Where you rent out your property or part of your property, the rental income is normally regarded as ordinary income and therefore part of your assessable income.

However, as highlighted in paragraph 17 of IT 2167, where there is a non-commercial arrangement and where a payment is received from family members for board only or for lodging only or for both then the income is considered to be a domestic arrangement not giving rise to assessable income. It follows that the question of income tax deductions for losses and outgoings does not arise.

Similarly, where an owner of a residence permits persons to share the residence on the basis that they also share the costs actually incurred on food and electricity, then such income is not generally regarded as assessable income.

Where property is let to people for low rental, 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 generally deductible in full. 

The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting it out to people. For example, in The Commissioner of Taxation v. Kowal 15 ATR 125;(1983) 79 FLR 75;84 ATC 4001, 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. Therefore, the Court did not allow the rental property expenses to be claimed in full.

In IT 2167, the Commissioner states that in these types of cases, deductions for expenses incurred in connection with the rental property are only allowable up to the amount of rent actually received

In your case, you are letting people stay in your property at below market rate. The people are not regarded as boarders who share the electricity and food costs. However, your situation is also not a genuine commercial rental arrangement. The case described above can be compared to your circumstances in that by letting the property below market rate you are providing affordable accommodation for the people and also retaining the property for personal purposes. The weekly payment received is regarded as assessable income. 

Allowable deductions

Section 8-1 of the 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, or relate to the earning of exempt income, or a provision prevents you from deducting it.

A deduction is generally not allowable for the costs associated with a person's home as they are private in nature. However, a taxpayer who derives assessable income from letting out part of their home may be entitled to a deduction for part of the outgoings on the home.

In your case, as your home is available for private purposes and it is also used for income producing purposes, a portion of your home expenses are an allowable deduction. As highlighted in IT 2167, a deduction for expenses incurred in connection with the property is allowed up to the amount of rent received.

For further details in relation to allowable deductions, please refer to Rental properties 2013 guide which is available on the Australian Taxation Office website, www.ato.gov.au.