Edited version of your private ruling

Authorisation Number: 1012593324428

Ruling

Subject: Rental income and expenses

Question 1

Are payments received from a boarder renting a room of your house considered assessable income?

Answer

Yes.

Question 2

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

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You own a three bedroom home which you occupy as your primary residence and let out one room.

You have been renting part of your home for a number of years.

You have your own room with an ensuite and your tenant uses the main bathroom as their own.

You both share the third bedroom as a guest room, all common space equally and the double garage.

The rent payment received per week includes utility bills such as electricity, rates, water and gas.

You both share the cost of household items such as cleaning products but you both buy your own food.

You have based the rent you charge on rental rates within your suburb with similar three bedrooms and garage.

You do not have any written agreement other than a notice if either needs to terminate the living arrangements.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

Income

Rental income paid to you is income according to ordinary concepts and is therefore assessable.

Deductions

You are entitled to a deduction for a portion of rental expenses which are related to income production. For expenses such as interest and rates, the apportionment should be made on a floor area basis, that is, the floor area used to produce income is divided by the total area of the buildings of the property to arrive at the percentage of the costs that can be claimed as a deduction.

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

Detailed reasoning

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 Commissioner's view on different rental income producing situations. 

Paragraphs 9 to 12 of the ruling consider the situations regarding the arms-length letting of an identified part of residence, for example, a bedroom, with access to general living areas. In this type of arrangement the rent payable may cover variable or running costs such as electricity and heating or the tenant may be required to pay, in addition to rent, separate amounts towards variable or running costs. This type of arrangement would also cover situations where board and lodging is provided. Household costs are generally considered as being running expenses for maintaining or keeping a house such as electricity, gas food, water, telephone and cleaning.

The ruling states that in these types of arrangements, the rent or amount for board and lodging received is assessable income.

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.

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

If a property is used to produce income for only part of the year of income then apportionment of expenses is also necessary on a time basis.

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 situation, you have incurred rent and household item expenses in renting out a room of your home. As the rent received from your boarder is assessable, a proportion of the expenses incurred will be deductible under section 8-1 of the ITAA 1997.