Edited version of your private ruling

Authorisation Number: 1012550730322

Ruling

Subject: The assessability of income from boarders

Question 1

Are rental payments received from renting a portion of your house considered assessable income?

Advice/Answers

Yes.

Question 2

Are you entitled to a deduction for a portion of the expenses on a property where you live and also rent rooms to boarders?

Advice/Answers

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You own a house which you occupy as your primary residence and rent the top level generally to students.

A granny flat is also a part of the property but it used for private purposes.

You advertise room vacancies.

You ensure that your accommodation is the cheapest accommodation listed on the various sites to ensure you have limited vacancies.

You enter into tenancy agreements with the tenants to protect yourself and your property.

You do not charge your tenants bond.

You charge each tenant an amount per week, which includes all utility expenses.

You pay a large amount approximately of interest per month on the loan used to purchase the property.

The income you earn is not enough to cover all expenses associated with the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes all ordinary income derived directly or indirectly from all sources. 

Rental income is regarded as income according to ordinary concepts and it should be included in the assessable income for the landlord.

Taxation Ruling IT 2167 considers the Commissioners views on different rental income producing situations. 

Paragraphs 9-12 of the ruling covers the arms length letting of an identified part of a residence, e.g a bedroom. Under these conditions paragraph 12 states that rent charged by the owner represents a normal commercial rent.

Applying the view that is set down in IT 2167, rent paid to you is income according to ordinary concepts and is therefore assessable.

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.

Deductions for rental expenses, such as interest on your mortgage repayments, are claimed under section 8-1 to the extent to which the expense is related to income production.

Apportionment of deductions

Where a property is used partly for income production purposes, apportionment of the expenses incurred in respect of that property may be required. As a general approach, apportionment should be made on a floor area basis, that is, by reference to the floor area of the residence to which the tenant lodger has sole occupancy together with a reasonable figure for access to the general living areas including the garage and outdoor areas. The floor area used to produce income is divided by the total area of the building to arrive at the percentage of the costs that can be claimed as a deduction.

Paragraph 10 of IT 2167 states that:

If, for example, the tenant/lodger had sole occupation of one room in the residence and shared the general living areas equally with the owner/occupier, it would be appropriate  to add one half of the floor area of the general living areas to the floor area of the room of sole occupancy in order to make the necessary apportionment.

In your case, the floor area used to produce income is divided by the total area of the buildings of the property (including the granny flat) to arrive at the percentage of the costs that can be claimed as a deduction.

For costs such as electricity and water, the actual use should be estimated and apportioned reasonably.