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Edited version of your private ruling
Authorisation Number: 1012578198162
Ruling
Subject: Property income and expenses
Question
Are you assessable on any rent received?
Answer:
Yes.
Question
Can your share of rental property expenses be claimed where a co-owner lives in the property rent free?
Answer:
No.
This ruling applies for the following periods
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
The scheme commenced on
1 July 2013
Relevant facts and circumstances
You, your relative and their spouse owned a unit as tenants in common with a one third share each. Your relative and their spouse and their children lived in the unit. They paid you one third of the market rate of rent to live in the unit.
Following a marriage separation your relative lives in the unit with their children. They now hold two thirds of the unit and you continue to hold the other one third as tenants in common.
Currently you are not receiving any rent from your relative as they are unable to afford to pay rent.
Your relative pays two thirds of the property expenses as well as the full amount of the mortgage each month.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Whether one tenant in common can lease premises to their co-tenant in common was determined in Case R16 84 ATC 179; 27 CTBR (NS) Case 67 where 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 various provisions 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 yourrelative, 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's view on 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 in respect of your one third share rented by your relative you would be required to return these payments as rental income and would be entitled to one third of the overall deductible expenses for the property.
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, where the property is leased to your relative at less than commercial rates you would be entitled to claim a deduction under 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.
As you are not receiving any rental income for your share of the property you are not entitled to claim any deductions in respect of the property.