Edited version of private advice

Authorisation Number: 1052352195532

Date of advice: 11 February 2025

Ruling

Subject: Rental property deductions

Question 1

Are you entitled to claim a deduction for the 80% difference between the market value of rent available for your investment property and the 20% rent you charge the tenant under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No.

Question 2

Do your rental property deductions need to be apportioned and limited to the amount of rental income you receive from the Property during the relevant income years?

Answer 2

Yes.

Question 3

Is the 80% difference between the market value of rent available for your investment property and the rent you charge considered a tax deductible gift for the purposes of Division 30 of the ITAA 1997?

Answer 3

No.

This ruling applies for the following periods:

For the income year ended 30 June 20XX

For the income year ended 30 June 20XX

The scheme commenced on:

XX XXX 20XX

Relevant facts and circumstances

You (X) have owned a property situated at X (The property) since DDMMYYYY.

The Property was used as your main residence after acquisition and you then used the property to earn assessable rental income from DDMMYYYY.

You have held an active Australian Business Number (ABN XX XXX XXX XXX) since DDMMYYYY.

As an individual you are not endorsed as a Deductible Gift Recipient (DGR) pursuant to Item 1 of the table in section 30-15 of the ITAA 1997 for the purposes of receiving deductible gifts or contributions.

In YYYY you entered into an arrangement to provide discounted rent to vulnerable members of the community and signed a Memorandum of Understanding (MOU) with a third party.

The third party is registered as an Australian charity and were endorsed as a DGR from DDMMYYYY.

Since DDMMYYYY they have held Australian Charities and Not-for-profits Commission (ACNC) registration and they are an organisation entitled to receive tax deductible gifts and contributions.

On DDMMYYYY you obtained a formal estimate from a real estate agent as to the market value of rent consistent with the normal commercial rates you could receive in your area.

This was estimated to be AU$X per week, $X per calendar month or $X per annum.

The gross amount of rent you charge under the MOU is discounted by X% to a non-commercial rate.

You receive rent of $X per week, $X per calendar month, or $X per annum which is X% of the market value you could receive on the open market.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 30-15

Income Tax Assessment Act 1997 Division 30

Income Tax Assessment Act 1997 Subdivision 30-AB

Reasons for decision

Ordinary income

Section 6-5 of the ITAA 1997 does not provide specific guidance on the meaning of income according to ordinary concepts (ordinary income), however likely characteristics of ordinary income that have evolved from case law include receipts that:

•                     Are periodical, regular or recurrent

•                     are relied upon by the recipient for their regular expenditure and paid to them for that purpose, and

•                     are amounts that are the product in a real sense of any employment of, or services rendered by, the recipient.

Ultimately, whether or not a particular receipt is ordinary income depends on its character in the hands of the recipient.

In your case, the purpose of the X% rent discount is so you can provide accommodation for vulnerable individuals. None of the usual characteristics of income are present and you receive no consideration in lieu of the rent discount you offer the tenant.

Therefore the rent discount is not considered to be assessable income under section 6-5 of the ITAA 1997.

General deductions

Section 8-1 of the 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 purposes 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; or

(b)           it is a loss or outgoing of a private or domestic nature; or

(c)           it is incurred in relation to gaining or producing you *exempt income or your *non -assessable non-exempt income; or

(d)           a provision of this Act prevents you from deducting it.

In your case you rent out the property at non-commercial rates and receive $X of rental income per week. This is only X% of the commercial rent return that you could receive on the real estate market if you did not participate in this arrangement with the third party entity.

The market value rent for the property was estimated in 2024 to be $X per week, or $X per annum.

Given that the character of the X% rent discount you offer is not assessable income under section 6-5 of the ITAA 1997, it cannot be said that you have incurred a loss or an outgoing against gaining or producing your assessable income under section 8-1 of the ITAA 1997. There is also no outgoing being incurred in the course of carrying on a rental property business.

Therefore you are not entitled to claim a deduction under section 8-1 of the ITAA 1997 for the X% rent discount you offer the tenant.

Apportionment of deductions

Where a property, or part of a property, is rented at less than normal commercial rates, other considerations arise and there may be a limit on the deductions that can be claimed up to the amount of rent received. This view is contained in Taxation Ruling IT 2167 Income tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases.

In your case, the income you receive is $X ($X by 12 months) per annum. As you rent your property at less than normal commercial rates, your total rental property deductions for each relevant income year is limited to the amount of rental income you receive which is $X per annum.

The difference on your tax return means you will break even and the net rental loss will be Nil.

Gifts or donations

Division 30 of the ITAA 1997 provides that the types of non-testamentary gifts (to the value of $2 or more) to a DGR that can be deductible include:

•                     money;

•                     property (including trading stock) purchased during the 12 months before the gift was made;

•                     property valued by the Commissioner at more than $5,000;

•                     an item of trading stock disposed of outside the ordinary course of business;

•                     property under the Cultural Gifts Program; or

•                     gifts of places listed in the Register of the National Estate.

Paragraphs 12-14 of Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift describes a gift as having the following characteristics and features:

•                     there is a transfer of the beneficial interest in property;

•                     the transfer is made voluntarily;

•                     the transfer arises by way of benefaction; and

•                     no material benefit or advantage is received by the giver by way of return.

In doing so, the courts have recognised that the criteria may not be absolute and may involve a matter of degree.

Item 1 of the table in section 30-15 of the ITAA 1997 provides a deduction for gifts and contributions to endorsed DGR's if the gift or contribution satisfies the requirements in that section.

As discussed, the X% rent discount you offer means that the tenant only pays $X per week or X% of the market value of rent. The discount you are offering under this arrangement is not considered to be a monetary gift in lieu of a donation to a DGR. You as an individual are not endorsed as a DGR. The nature of the rent discount you offer is also not a gift of property, nor an item of trading stock disposed of outside the ordinary course of business, property under the Cultural Gifts Program, or a gift of places listed in the Register of the National Estate.

Therefore the X% discount is not considered to be a gift or donation that meets the definition of return under the requirements of Division 30 of the ITAA 1997. You as an individual are also not endorsed by the Commissioner as a DGR under the requirements of Subdivision 30-AB of the ITAA 1997, as you are not an entity that is, or operates, a fund, authority or institution as per the definition in the ITAA 1997.

A gift can only be tax deductible when made to a recipient that is endorsed, as registered under the entity's ABN in the ABR.