Private ruling: Rental property
Published: January 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: I July 2013

Ruling: Q1: Is the rental income assessable income? | A1: Yes. | Q2: Are you entitled to a deduction for the property expenses incurred up to the amount of rental income derived from the property? | A2: Yes. | Q3: Are the reimbursed amounts for rates regarded as an assessable recoupment? | A3: Yes.


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 20-20 | Income Tax Assessment Act 1997 Section 20-25 | Income Tax Assessment Act 1997 Section 20-30

Reasons for decision: Summary: Assessable income Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Rent is regarded as ordinary income and assessable under subsection 6-5(2) of the ITAA 1997. In your case, although the rental income will be below the market rate, it is still regarded as assessable income. Therefore any rental income received is assessable income under section 6-5 of the ITAA 1997. Allowable deductions Taxation Ruling IT 2167 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 arms length, an apportionment of losses and outgoings incurred is generally required. The test that should be considered to show whether the arrangement is at arms 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 arms length arrangement. Whether parties are at arm's length in relation to a rental property is a question of fact. The rental amount to be paid by the tenant who is a related party should be indicative of parties acting at arm's length and reflect the commercial and economic standing of the parties. It is questionable in this case whether you would enter such an arrangement with an unrelated party. As you will only receive rent below the normal market rate, this does not reflect a normal commercial arrangement. The fact that a written agreement may be prepared, does not change the arrangement to being commercially realistic. Taxation Ruling TR 95/33 considers the deductibility and apportionment of losses and outgoings where expenses are incurred for dual purposes. TR 95/33 states that if an outgoing produces an amount of assessable income greater than the amount of the outgoing, there would normally be no need to examine the taxpayer's motives and intentions when determining the deductibility of the expenditure. However, if the outgoing produces no assessable income, or the amount of assessable income is less than the amount of the outgoing, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoing is wholly deductible. This may, depending on the circumstances of the particular case, include an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing. If it is concluded that the disproportion between the outgoing and the relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective (for example, to derive exempt income or derive income for another entity or the obtaining of a tax deduction), then the outgoing must be apportioned between the pursuit of assessable income and the other objective: see Fletcher & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613 ( Fletcher 's c ase ). In Ure v Federal Commissioner of Taxation 81 ATC 4100 ( Ure's case ) the derivation of assessable income was not the sole purpose of the loan, and a deduction was only allowed up to the amount of assessable income. In Case 26/94 94 ATC 258, a director, who borrowed money to on-lend to his family company that had no capacity to borrow in its own name, was denied a deduction for interest as the purpose of the loan was to assist the company in avoiding liquidation. The connection between the lending and the derivation of future income by the director was too remote. Although the above circumstances are different to your circumstances, the principles are relevant. In your case, the amount of assessable rental income to be derived from the property is below the market rate. It is considered that there are two purposes in entering into the current arrangement - one to derive rental income and another being private, that is, to help your relation. The purpose of such an arrangement cannot be seen as characterising the expenditure as incurred solely in gaining or producing assessable income. As such, any deduction for the associated expenses incurred will need to be apportioned. When it is necessary to apportion a loss or outgoing, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both 'fair and reasonable' in all the circumstances ( Ronpibon Tin NL v. FC of T , (1949) 78 CLR 47). In Fletcher 's c ase , it was 'fair and reasonable' to limit the amount of the deduction to the amount of the assessable income actually received in that year. As in Ure's case and Fletcher's case , it is considered fair and reasonable in your circumstances to allow a deduction up to the amount of assessable income derived in any income year. Assessable recoupment Under Subdivision 20-A of the ITAA 1997, certain amounts received by way of insurance, indemnity or other recoupment are assessable income if the amounts are not income under ordinary concepts or otherwise assessable. Other assessable recoupments as defined in subsection 20-20(3) of the ITAA 1997 includes an amount you have received as recoupment of a loss or outgoing if: a) you can deduct an amount for the loss or outgoing for the current year, or b) you have deducted or can deduct an amount for the loss or outgoing for an earlier income year under a provision listed in section 20-30. Section 8-1 of the ITAA 1997, so far as it allows you to deduct rates or taxes is listed in section 20-30 of the ITAA 1997. Subsection 20-25(2) of the ITAA 1997also states that if some other entity pays an amount for you in respect of a loss or outgoing that you incur, you are taken to receive the amount as recoupment of the loss or outgoing. The rates relating to your property is an allowable deduction for you under section 8-1 of the ITAA 1997. Therefore any amount received as a recoupment or reimbursement from the entity controlled by your relation for rates is regarded as an assessable recoupment. Such a payment is added to your other rental income and declared as part of your gross rent income on your tax return.

Relevant facts: You own a rental property. You currently receive no rental income from the property. | You wish to help your relation. | You wish to rent the property to an entity controlled by your relation at a below market rental. | As owner, you will pay all the outgoings on the property. | Some expenses such as rates will be reimbursed by the entity controlled by your relation.