Edited version of your written advice

Authorisation Number: 1013000079824

Date of advice: 20 April 2016

Ruling

Subject: Rental property

Question 1

Is the amount you actually receive as rent required to be included in your assessable income when you rent the property at below market rate to a relative?

Answer

Yes.

Question 2

Are you entitled to claim all the rental property expenses when the expenses are greater than the amount of rent received for a property which is rented at below market rate to a relative?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You purchased a property and it was rented at market rates to unrelated tenants until your relatives moved in.

Your relatives were paying the same commercial rate of rent as the previous tenant until they advised that they were struggling financially.

Upon this advice you reduced the rental amount to a level your relatives could afford.

The primary purpose for the purchase of the property was for investment purposes. The secondary purpose was to help your relatives by allowing them to live in the property at less than market rates.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Rental income

Section 6-5 of Income Tax Assessment Act 1997 (ITAA 1997) includes in your assessable income amounts which are ordinary income. The actual amount of rent you receive is considered to be ordinary income. There is no provision in the ITAA 1997 which allows a person to include a notional amount of rental income in a tax return.

Consequently you are assessable only on the amount of rent which is actually charged.

Rental expenses

Section 8-1 of the Income Tax Assessment Act 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.

The Commissioner provides guidance on the issue of letting of property to relatives in Taxation Ruling IT 2167. 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 purpose from any other owner in a comparable arm's length situation.

Where property is let to a 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. 

The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives. For example, in The Commissioner of Taxation v. Kowal 15 ATR 125;(1983) 79 FLR 75;84 ATC 4001, where taxpayers were renting to relatives at below market rate, the Court found that the taxpayer had two purposes or objects 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. Therefore, the Court did not allow the rental property expenses to be claimed in full.

In IT 2167, the Commissioner states that in these types of cases, deductions for expenses incurred in connection with the rental property are only allowable up to the amount of rent actually received

In your case, you are renting your property to a relative at below market rate. The case described above is similar to your circumstances in that by letting the property below market rate you are providing affordable accommodation for your relatives and also retaining the property for investment purposes.

As such, the rental income you receive is assessable income and you are only entitled to claim rental property expenses up to the amount of rental income actually received.