Private ruling: Rental Income and Deductions
Published: October 2014
Ruling period: Income year ended 30 June 2013 | Income year ended 30 June 2014
Date scheme commenced: 1 July 20XX

Ruling: Q1: If the trust does not charge the beneficiaries and their child a commercial rate of rent, does the trust need to include an amount in its assessable income in relation to the benefit provided to the beneficiaries and their child? | A1: No | Q2: If the trust does not charge the beneficiaries and their child a commercial rate of rent, can the trust claim deductions in relation to the mortgage expenses and other rental deductions? | A2: No | Q3: If the trust has previously included a commercial rate of rent in its assessable income in relation to the properties provided to the beneficiaries and their child, but those beneficiaries never actually paid the rent, are there any further tax consequences for the trust? | A3: No | Q4: If the trust has previously included a commercial rate of rent in its assessable income in relation to the properties provided to the beneficiaries and their child, but those beneficiaries never actually paid the rent, is there a tax consequence for the beneficiaries that reside in the property? | A4: No

Relevant facts and circumstances: You are the trustee of a discretionary trust. You are a company controlled by the two beneficiaries of the trust. The trust currently owns two residential properties. Both properties have mortgages under the trust. The beneficiaries of the trust reside in one of the properties. The child of the beneficiaries lives in the other property and is not charged rent. The trust has previously included a commercial/market rate of rent for those properties as assessable income in the trust tax return. However the beneficiaries and their child never paid any rent. You are seriously contemplating no longer charging a market rate of rent to the beneficiaries and their child.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: Generally where a taxpayer rents out their property the amounts received will be assessable as ordinary income under section 6-5 of the ITAA 1997. While expenses incurred in relation to those properties will be deductible under section 8-1 to the extent that they are incurred in producing assessable income and not capital in nature. Taxation Ruling IT 2167 provides the Commissioner's view on the tax consequence of non-traditional rental arrangements between related parties such as family members and beneficiaries of a trust. The note in IT 2167 provides that as held by the Federal Court in the case of FCT v. Janmor Nominees Pty Ltd 87 ATC 4813 (1987) 15 FCR 348 that the Commissioner accepts where a residence is purchased by a family trust and is leased to beneficiaries in the trust at commercial rates, the rent paid by the beneficiaries is assessable income of the trustee and losses and outgoings attributable to the residence are deductible. Further, paragraph 13 of IT 2167 provides that where property is let to relatives the essential question 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 different for income tax purposes from any other owner in a comparable arm's length situation. | Detailed Reasoning - Application to your circumstances: In your circumstances, where the Trust has previously charged a market based rate of rent for the properties and included that amount in its assessable income it can consequently claim deductions. The Commissioner is not concerned whether the amount was actually paid by the beneficiaries or their child, as this is a private matter between the landlord and the tenant. If as proposed, the family trust ceases to charge the beneficiaries and their child an amount of rent, then these arrangements would cease to be commercial in nature and consequently the trust would receive no income and no deductions would be available. In either arrangement, whether the rent is paid or not there is no tax consequence to the beneficiaries as the benefit provided is private and domestic in nature and not taxable.