Private ruling: Rental deduction - payment to spouse
Date of advice: 21 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to a deduction for payments made to your spouse? | A1: No.

Relevant facts and circumstances: You own X investment properties. You have a high level full time job which includes travel both within Australia and overseas. You have very little time to manage your own personal investments. You rely on your spouse, as your power of attorney, to fill in this role for you. You wish to pay your spouse for the management of your rental properties and the provision of administration support. Payments will be calculated based on XX% of the net rental income before mortgage interest, not an hourly rate basis. You anticipate your spouse's duties will include • travel to inspect the properties • monitor rental income and expenses • attend to tenant requests • pay bills • attend to phone calls • arrange repairs or capital works You currently have real estate agents looking after each of your properties. Your spouse does not look after other rental properties and does not have previous experience in this area. You intend to have a written agreement with your spouse in relation to the arrangement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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. A number of significant court decisions have determined that for an expense to be an allowable deduction: • it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense ( Lunney v. FC of T ; (1958) 100 CLR 478 ( Lunney's case )), • there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. FC of T , (1949) 78 CLR 47), and • it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v. FC of T , (1956) 95 CLR 344; FC of T v. Hatchett , 71 ATC 4184). Fees paid to a real estate agent for rent collection and other management fees for income producing properties are generally an allowable deduction under section 8-1 of the ITAA 1997 if they relate sufficiently to the gaining or producing of assessable income and are not capital or private in nature. Taxation Ruling IT 2167 Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases examines the situation where a property is let to relatives and non arms length transactions. Where a property is let to relatives, the essential question is whether the arrangements are consistent with normal commercial practices. Where the arrangement is not at arm's length, an apportionment of losses and outgoings incurred is generally required. Although the ruling mainly focuses on rent let at less than commercial rent, the principles are also relevant in your case. The test that should be considered to show whether the arrangement is at arm's length, is whether a reasonable person with no relationship to either party would enter into this arrangement using exactly the same terms and conditions. If the answer is yes, then it would be an arm's length arrangement. Whether parties are at arm's length in relation to a rental property is a question of fact. The amounts to be paid should reflect the commercial and economic standing of the parties. In Brown v FC of T [2010] AATA 829 (Brown), the taxpayer 'employed' his wife to assist with his rental property and claimed deductions for her wages and superannuation contributions. In this case, a real estate agent was engaged to collect rent and deal with the tenants. The taxpayer's wife attended to maintenance requests and any other issues related to the property. She attended the property on a number of occasions to undertake maintenance, cleaning, and gardening and to supervise tradespersons. She collected the mail, paid the bills and kept records of the income and expenses relevant to the rental property. In this case, the Commissioner made the decision that the payments to the taxpayer's wife were of a private or domestic nature and disallowed the expenses as a deduction. The Administrative Appeals Tribunal upheld the Commissioner's decision. In your case, the amount you will pay your spouse is based on a percentage of the rental income you receive and not on the amount of work your spouse is required to undertake. The expense of paying your spouse is considered a voluntary payment and is not directly incurred in the derivation of your rental income. The payment you propose to pay your spouse is well above the average rate paid for property management. Your willingness to pay a higher payment amount than the normal market rate does not reflect a normal commercial arrangement. It is questionable whether you would enter into such an arrangement with an unrelated party. The fact that a written agreement may be prepared does not change the arrangement to being commercially realistic. In your case, the arrangement is not considered to be at arm's length and is not commercially realistic. Due to your busy work commitments, your spouse is helping you by providing support and assistance in relation to your properties. The expenses incurred are not sufficiently connected to the gaining or producing of your assessable income. The arrangement and associated expenses are considered to be inherently private or domestic in nature, therefore you are not entitled to a deduction for expenses in relation to the payments made to your spouse under section 8-1 of the ITAA 1997.