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Edited version of private advice
Authorisation Number: 1012685620344
Ruling
Subject: Assessable income
Question
Is the income received from your relation assessable?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
The scheme commenced on
The scheme has commenced
Relevant facts
Your relation is considering moving in with you to stay in your home.
You are thinking of charging your relation an amount to stay with you.
This amount would cover accommodation as well as all expenses including food and utilities - water, electricity, gas, phone and internet.
There will be no contract or tenancy agreement signed between you and your relation. All dealings will be cash in hand/money bank transfer and done in good faith with no third party.
The amount charged is more than the weekly market rate for renting a room in your home.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
Under subsection 6-5(1) of the Income Tax Assessment Act 1997, your assessable income includes ordinary income. Ordinary income has generally been held to include income from rendering personal services, income from property and income from carrying on a business.
Income Tax Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases provides guidelines about rental properties and discusses when rental income is regarded as assessable income. Where you rent out your property or part of your property, the rental income is normally regarded as ordinary income and therefore part of your assessable income.
IT 2167 examines the situation where a property is let to relatives. The essential question in relation to arrangements with family members is whether the arrangements are consistent with normal commercial practices. If the arrangement is commercial, the owner of the property would be treated no differently for income tax purpose from any other owner in a comparable arms-length situation. However, if an amount received from a relation is not a commercial arrangement, then the payments are not regarded as assessable income.
The test that should be considered to show whether the arrangement is commercial and at arms-length, is whether a reasonable person with no relationship to either party would enter into this arrangement using exactly the same terms and conditions. If the answer is yes, then it would be an arms-length and commercial arrangement.
Whether parties are at arms-length in relation to a rental property is a question of fact. As highlighted in paragraph 17 of IT 2167, where there is a non-commercial arrangement and where a payment is received for board only or for lodging only or for both then the income is considered to be a domestic arrangement not giving rise to assessable income. It follows that the question of income tax deductions for losses and outgoings does not arise.
In determining whether a particular receipt is income, consideration needs to be given as to whether the intention of providing the accommodation is to make a profit or a genuine commercial relationship exists between the parties. Where these factors exist it can be argued that such receipts are in the character of assessable income (FC of T v Kowal 84 ATC 4001). However, the receipts will not be considered assessable if they merely defray the cost in looking after the relative (FC of T v Groser 82 ATC 4478). In such cases, there is generally no monetary gain or benefit to the home owner. Therefore, it is not reasonably arguable that they had a profit making intention.
In your case, you wish to have your relation stay with you. You will receive an amount which will cover accommodation, food, utilities and all expenses.
Although the amount received is more than the market rate to rent out a room of your house, it is not considered that the amount to cover accommodation and all expenses is a commercial rate. This rate is regarded as a contribution to the cost of accommodating your relation in your home.
It is questionable whether you would enter such an arrangement with an unrelated party. After considering your specific circumstances, it is considered that the payments and arrangement are not commercial in nature. Therefore, the payments are not considered to be assessable income. It follows that no deduction is allowed for any of the associated costs.