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Edited version of your private ruling
Authorisation Number: 1012581034920
Ruling
Subject: Rental income
Question 1
Is the rental income received assessable income?
Answer
Yes.
Question 2
Are you entitled to a deduction for the rent paid?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commenced on
I July 2013
Relevant facts
Entity A ran a business which in recent years has run at a loss.
Entity A wishes to rent a property from a relation. Entity A will pay rent at a rate below the normal market rate.
Entity A will then sub-lease the property to an unrelated third party at the market rate.
Entity A will also reimburse the owner some expenses such as a portion of the rates.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Assessable income
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Rent is regarded as ordinary income and assessable under subsection 6-5(2) of the ITAA 1997.
In this case, entity A will be receiving rental income from a third party. The market rate rental income is assessable income under section 6-5 of the ITAA 1997.
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.
A number of significant court decisions have determined that for an expense to be an allowable deduction:
§ it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478,
§ there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47 (Ronpibon's case) , and
§ it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).
Where an entity pays rent for a property for income producing purposes, such rental expenses are an allowable deduction under section 8-1 of the ITAA 1997. The fact that the rate of rent paid to the owner is below the market rate does not alter the deductibility of the expense. Entity A is allowed a deduction for its rental expenses.