Private ruling: Rental property expenses
Published: September 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 June 2012

Ruling: Q1: If your rental property expenses exceed income, are you entitled to a deduction for the expenses in full when the property is rented at less than market rate? | A1: No. | Q2: Are you entitled to a deduction for your rental property expenses up to the amount of rental income you receive when the property is rented at less than market rate? | A2: Yes.

Relevant facts and circumstances: You own a rental property which you inherited. You are currently renting out the property for $X per week. This is the maximum rent you are able to get for the property. You plan to allow your relative to live in the property for less than $X per week. There is no mortgage over the property.

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

Reasons for decision: Summary: Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) includes income according to ordinary concepts, which is called ordinary income, as assessable income. Ordinary income usually has its source in an earning activity such as personal exertion, property or business. The Commissioner provides guidance on the issue of letting of property to relatives in Taxation Ruling IT 2167. Where property is let to relatives the essential question for decision 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 differently for income tax purpose from any other owner in a comparable arms length situation. Where property is let to a relative for low rental, the rental is generally still considered to be assessable for income tax purposes. However, the losses and outgoings in relation to the property are not necessarily deductible in full. The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives. For example, in The Commissioner of Taxation v. Kowal 15 ATR 125;(1983) 79 FLR 75;84 ATC 4001, where taxpayers were renting to relatives at below market rate, the Court found that the taxpayer had two purposes or objects in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. Therefore, the Court did not allow the rental property expenses to be claimed in full. In IT 2167, the Commissioner states that in these types of cases, deductions for expenses incurred in connection with the rental property are only allowable up to the amount of rent actually received. In your case, you are renting your property to a relative at below market rate. The case described above is similar to your circumstances in that by letting the property below market rate you are providing affordable accommodation to your relatives and also retaining the property for personal purposes. As such, you are only entitled to claim rental property expenses up to the amount of rental income actually received.

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