Edited version of your written advice

Authorisation Number: 1012730366364

Ruling

Subject: Rental property income and expenses

Question 1

Is the rent you receive from your child assessable?

Answer

Yes.

Question 2

Are you entitled to a deduction up to the amount of rental income received?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commenced on

1 July 20XX

Relevant facts

You planned to purchase an investment property.

Your child and their spouse's marriage broke down and your child needed to sell the family home to pay out the spouse.

You purchased the property from your child.

You have rented to property to your child at approximately one third of the estimated market rate.

You will be undertaking improvements to the property over an extended period of time and you will require regular access to the property.

You will undertake the work when you have the funds to do so.

You intend increasing the rent toward market value as the renovations progress.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

It is considered that your arrangement is not consistent with normal commercial practices. The rent you receive from your child is assessable income. However, you must restrict your deductions to the level of the rent received.

Detailed reasoning

In general, a landlord is assessable on rental income received under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) but may claim deductions under section 8-1 of the ITAA 1997 for losses and outgoings incurred in gaining that income. 

The Commissioner provides guidance on the issue of letting of property to friends and relatives in Taxation Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases.  Where property is let to relatives the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purposes from any other owner in a comparable arms-length situation.

Where property is let to a friend or relative for low rental, the rental is generally still considered to be assessable for income tax purposes.  However, the losses and outgoings in relation to the property are not necessarily deductible in full. 

This issue of non-economic rent was considered in Madigan v FC of T 96 ATC 4640; FC of T v Kowal 84 ATC 4001. The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and letting the property to relatives.   For example, in The Commissioner of Taxation v. Kowal 15 ATR 125; (1983) 79 FLR 75; 84 ATC 4001 (Kowal's case), where taxpayers were renting to relatives at below market rate, the Court found that the taxpayer had two purposes or objectives in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. As such, deductible expenditure was restricted to the level of income derived.  

In Madigan v FC of T 96 ATC 4640, the taxpayer was a beneficiary of a trust. By notice of amended assessment, the Commissioner included in the taxpayer's assessable income a share of the tax law income of the trust. The amount included was greater than the amount the taxpayer had originally returned. The taxpayer's objections to the amended assessment were disallowed and he appealed.

At issue was whether the trustee of the trust could deduct certain outgoings in full or in part. The outgoings related to a property which the trustee had leased to the taxpayer's father at approximately 25% of its market rental. The outgoings were for such things as accountancy fees, insurance, land tax, rates, repairs and maintenance, interest, cleaning and gardening. The Commissioner allowed 25% of the outgoings in question, but disallowed the balance.

In your case, it is not considered that your arrangement is consistent with normal commercial practices as:

• You are renting to your child at a rate much lower than the market rate;

• You are undertaking renovations while your child is renting the property. These are to be carried out by yourselves when you have the time and funds to do so which is different to a property investor who would complete the renovations in a timely manner to be able to attract a tenant.

Your purposes for purchasing the property were to assist your child at a difficult time, acquire an investment property and to provide your child with affordable rent.

As with the cases listed above, you are entitled to a deduction for expenses for the property. However, the amount you can claim must be restricted to the level of income derived.