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Edited version of your private ruling
Authorisation Number: 1012552042278
Ruling
Subject: rental property expenses
Question
Are you entitled to a portion of the rates, interest and insurance expenses for your property?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts
You are the sole owner of a property.
On the property is a house.
There is also a machinery shed and stables. You do not use the property for primary production.
Attached to the shed is a unit/flat.
All buildings are one floor only.
You reside in the unit.
The house is rented at a commercial rate.
The tenants live in the house which has a fenced yard. The size of this block is one acre. The tenants do not use the stables, shed or vacant acreage.
The stable and the machinery shed are used for storage.
You have a mortgage over the property. The borrowed funds are in your name only and are used solely for the purchase of the property.
You incur expenses for interest, insurance and rates.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 8-1.
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 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.
Where a property is rented a deduction for the associated rates, insurance and loan interest is generally allowed.
In your case, the property is not being held solely for the purpose of producing assessable income. You also live on the property and the property also contains a shed and stables. Accordingly, only a portion of your expenses relate to the income producing house on the property.
Taxation Ruling TR 95/33 considers the deductibility and apportionment of losses and outgoings where expenses are incurred for dual purposes. TR 95/33 states that if an outgoing produces an amount of assessable income greater than the amount of the outgoing, there would normally be no need to examine the taxpayer's motives and intentions when determining the deductibility of the expenditure.
However, in other circumstances it may be necessary to examine the subjective purpose, motive or intention in making the outgoing. Where there is a dual purpose for an expense, the outgoing must be apportioned between the pursuit of assessable income and the other objective: see Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613 (Fletcher's case).
When it is necessary to apportion a loss or outgoing, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both 'fair and reasonable' in all the circumstances (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47). In Fletcher's case, it was 'fair and reasonable' to limit the amount of the deduction to the amount of the assessable income actually received in that year.
In your case an acceptable method could be to apportion based on the four buildings on the property. A reasonable approach to this would be to claim 25% of the relevant expenses incurred for the rates, insurance and loan interest.