Edited version of private advice

Authorisation Number: 1051985868841

Date of advice: 9 June 2022

Ruling

Subject: Assessable income - domestic v commercial arrangement

Question

Are the payments you receive from providing accommodation to two students assessable under section 6-5 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Your home is in a suburb in State A. This is your main residence.

Your home is a five bedroom three bathroom property.

You had two students move into your home in Summer 20XX.

Your friend at church was looking for someone who could have the students stay with them. You offered to have the students stay with you in your home where you live with your daughter. You are not related to the students.

The students were originally staying with you until they could move in with a friend. However, the students decided they wanted to stay with you for the academic year. You agreed to this time period.

You have a verbal agreement with the students.

You currently charge each student a fixed amount per week of $XX, which is paid through bank transfer. This payment covers accommodation (1 room each), the use of your full house and yard, cooking utensils and facilities, household equipment, furniture, fridge, electricity, water, internet access, some groceries and 1 meal each week.

The students are to feel at home and can have visitors. Guests can stay overnight with permission.

The students have permission to have a pet bird.

All bills and expenses are in your name and are your responsibility. The students do not pay any amounts additional to the weekly amount. However, you are able to discuss the payment amount with the students if the bills are excessively high.

You have provided an estimate of your expenses in relation to the property.

You do not have a lease or bond.

The students will vacate the rooms in Spring 20XX.

The students will give two weeks' notice on leaving if it is before the agreed date.

Further issues for you to consider

We have limited our ruling to the questions raised in your application. There may be related issues that you should consider including:

•         As you have used your home for income producing purposes, you may only get a partial main residence exemption under subsection 118-190(1) of the Income Tax Assessment Act 1997 and you may be liable for capital gains tax (CGT) when you sell your home.

You may apply for another ruling on these or any other matters.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Payments

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.

Income Tax Ruling IT 2167 provides guidelines about rental properties and discusses when rental income is regarded as assessable income. If 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.

However, 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 such cases, there is generally no gain or benefit to the homeowner. Therefore, it is not reasonably arguable that they had a profit-making intention.

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 assessableincome (FC of T v Kowal 84 ATC 4001).

Application

In your case, you have used your home to provide accommodation for two students. You charge the students $XX each per week. This payment covers accommodation (1 room each), the use of your full house and yard, furniture, fridge, electricity, water, internet access, some groceries and 1 meal each week.

Having regard to your estimated annual expenses in relation to your home, we consider that there is a substantial benefit being conferred to you, the owner of the property. Whilst the amounts you receive from the students do not reflect the market rates for food and utilities, we consider that you make a significant financial gain from the students' payments when compared to your estimated expenses. On the estimated figures you have supplied, the surplus cannot be considered negligible. Therefore, these amounts are assessable under section 6-5 of the ITAA 1997 and should be declared as income by you in your income tax return.

As the amounts you receive from providing accommodation for the students is included in your assessable income, you may be entitled to claim deductions in relation to the letting arrangement.

Claiming Deductions

Paragraph 10 of IT 2167 considers apportionment of expenses where the taxpayer is renting out an identified part of their residence, such as a bedroom, with access to general living areas. Paragraph 12 of IT 2167 states that the approach to be followed in cases such as yours, where there is an arm's length arrangement, has been framed on the basis that the rent charged by the owner represents a normal commercial rent.

Since you are only renting part of your home, you can only claim expenses related to renting out that part of the home. This means you can't claim the total amount of the expenses - you need to apportion the expenses for both private and income-producing use.

As a general guide, apportion your expenses based on the floor-area solely occupied by the renter, and add that to a reasonable amount based on your guest's access to common areas.

You can only claim expenses for the days in a year when the room was rented to a client. When a room in your home is not being rented out, it is treated as being used privately as part of your home.