Private ruling: Investment property loan interest
Published: August 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to claim deductions for loan interest payments in relation to your property while relatives live in it rent free? | A1: No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You and relatives purchased an investment property. You took out the investment loan in your own name only. You received rental income from the property after purchasing it. Your relatives now live in the property and do not pay rent. You do not reside at the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2).

Reasons for decision: Summary: Taxation Ruling IT 2167 provides guidelines in determining the authenticity or otherwise of rental arrangements, the assessability of receipts derived from various rental arrangements and the deductibility of expenses incurred in connection with a property where the arrangement is not one that is affected at arms length. The essential question in determining the assessability of monies received and allowable deductions when a home is occupied by the owners family members/relatives is if the arrangement is consistent with normal commercial practices in the area. If it is, the owner of the property would be treated no differently for income tax purposes from any other owner in a comparable arms length situation. However where a property is occupied by family members/relatives of the owner and the consideration for such occupancy is at less than commercial rent, it is necessary to examine the purposes of the taxpayer in letting it out to relatives. In Federal Commissioner of Taxation v. Groser 82 ATC 4478; 13 ATR 445, the taxpayer permitted his invalid brother to live in a house which he owned. The taxpayer arranged to receive his brother's invalid pension so that he could use the money to provide for his brothers maintenance. It was arranged that $2 per week would be deducted for rent of the taxpayers house. The Court held that the weekly amounts of $2 were not assessable income. They were a contribution of the funds out of which the taxpayer proposed to maintain his brother. In your case, you have purchased a property from which you derived rental income for a period of time. Since that time your relatives have resided in the property without paying rent. For the period the property is occupied by your relatives on a rent free basis, the arrangement is essentially private in nature. As the arrangement is private in nature, no deductions are allowable in respect of losses or outgoings incurred in connection with the property. This includes interest paid on the property loan.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.