Private ruling: Rental income
Published: May 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the money you receive from sub-letting two bedrooms in your rented house assessable income? | A1: Yes. | Q2: Are you required to put this income in the rental section of your income tax return? | A2: Yes. | Q3: Are you entitled to claim a deductions for expenses associated with sub-leasing the rooms? | A3: Yes.

Relevant facts and circumstances: You and your spouse rent a property. You are sub-letting two rooms of the property. You have a lease agreement with your tenants. The tenants share household facilities. You are charging commercial rent for the rooms.

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

Reasons for decision: Summary: Income Tax Ruling IT 2167 provides the Commissioner's views on the arm's length letting of an identified part of a taxpayer's residence and notes that ordinarily, where a taxpayer grants a lease of a property, whether wholly or in part, whether at arm's length or otherwise, the amount received as rent is assessable income. This is illustrated by the decision FC of T v. Kowal, 84 ATC 4001; 15 ATR 125. However, if the arrangement is considered to be non-commercial because of its nature, any deductions claimed may only be allowed up to the amount of rental income derived. In your case, you have entered into an arm's length arrangement with a sub-tenant in which you charge a fair market rent. The rent charged by you is considered to be commercial in nature and therefore forms part of your assessable income. Section 161A of the Income Tax Assessment Act 1936 (ITAA 1936) prescribes that the return must be in the approved form prescribed by the Commissioner. For individuals deriving rental income the prescribed form is the tax return for individuals. This return includes a supplementary return that deals with rental income, among other matters, and provides instructions on how to complete the relevant part of the supplementary return. By following the instructions it is clear that you are intending to declare the entire amount of rent received in your return of income. Deductions for rental expenses are claimed under section 8-1 to the extent to which the expense is related to income production. Where a property is used partly for income production purposes, apportionment of the expenses incurred in respect of that property may be required. As a general approach, apportionment may be made on a floor area basis, i.e. by reference to the floor area of the residence to which the tenant lodger has sole occupancy together with a reasonable figure for access to the general living areas including the garage and outdoor areas. The floor area used to produce income is divided by the total area of the building to arrive at the percentage of the costs that can be claimed as a deduction. Paragraph 10 of IT 2167 states that: · If, for example, the tenant/lodger had sole occupation of one room in the residence and shared the general living areas equally with the owner/occupier, it would be appropriate to add one half of the floor area of the general living areas to the floor area of the room of sole occupancy in order to make the necessary apportionment. · If a property is used to produce income for only part of the year of income then apportionment of expenses may also be necessary on a time basis.

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