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Edited version of private advice
Authorisation Number: 1052184830993
Date of advice: 21 February 2024
Ruling
Subject: Deductions - rent expense
Question 1
Are you entitled to a full deduction for the lease payments for the farming property under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
Question 2
Are you entitled to a partial deduction for the lease payments for the farming property under section 8-1 of the ITAA 1997?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 20XX
Year ending 30 June 20XX
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
Person A and Person B run a primary production business as a partnership (you).
Entity X has acquired a farm which has a private residence attached.
You lease the property from Entity X at arm's length and market rates.
You use the property to run your primary production business.
Entity X invoiced you for the Rural rental and farm manager's residence as separate amounts.
Person B and Person C will live in the residence, rent free, in recognition of the duties that they will perform as farm managers.
The residence is less than 2 hectares, the area of the property outside of the residence is completely used within the business operation.
A home office will be used within the residence for business purposes.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Questions 1 and 2
Summary
You can claim a deduction for the rental expenses relating to the rural rental, but not the farm manager's residence.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides:
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income, or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
(2) However, you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital, or of a capital nature
(b) it is a loss or outgoing of a private or domestic nature
(c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income, or
(d) a provision of this Act prevents you from deducting it.
Where an expense is incurred for both business and private reasons the deduction will be apportioned accordingly.
Generally, expenses related to housing are of a private or domestic nature and therefore not deductible, this extends to the provision of housing for farm managers. The partnership is not receiving any assessable income in relation to the provision of the residence to the farm managers. The rent expenses relating to the residence are not deductible expenses of the farming business as they are not necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
The lease expenses relating to the farmland outside the residence are incurred in carrying on a business for the purpose of gaining or producing your assessable income.
You can therefore claim a deduction for the rental expenses relating to the rural rental of the farm, but not the farm manager's residence.