Private ruling: Deductions - rental property
Published: September 2011
Ruling period: Year ended 30 June 2011 | 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 2010

Ruling: Q1: Is the payment made under the agreement between you and your tenant assessable income? | A1: No | Q2: Are you entitled to a minimum of 50% deduction for expenses in relation to the rental of part of your residence based on the facts and circumstances provided? | A2: No | Q3: Are you entitled to a 100% deduction for the area which has been contractually rented out exclusive to your tenant? | A3: No | Q4: Are you entitled to apportion the shared area by headcount, as such if it is shared between yourself and one tenant, the deductible component is 50% and if it is shared between yourself and two tenants, the deductible component is 66% (2/3), and if it is shared between yourself and three tenants, the deductible component is 75% (3/4)? | A4: No | Q5: For the purposes of calculating the deductible component when preparing your income tax return for the 2011-12 financial year and also for future financial years, can you account the deductible apportionment by first arriving at a "deductible percentage" as calculated using the formula below and apply the same consistent percentage across the different types of associated deductions for the period in which it has the same number of tenants? (that is, for every period in which there has been a change in the number of tenants, the "deductible percentage" is recalculated and documented). Deductible Percentage = { [ (L - H) * V ] + { { [ (R / H) * 100% ] + [ (P / H) * 0%) ] + [ (S / H) * V ] } / H } } / L where:- L = Total area of Land in square meters H = Total area of House in square meters R = Total area Rented Out Exclusively in square meters S = Total area Shared Mutually in square meters where S = H - R - P P = Total area exclusive to myself (Private) in square meters V = Variable Component as such if there are myself and 1 tenant, V = 50%, myself and 2 tenants, V = 66% and myself and 3 tenants, V = 75% | A5: No | Q6: Does the Commissioner accept other administrative shortcut methods such as headcount as potential reasonable option to work out the deductible percentage, such that when there is one tenant, the deductible percentage will be 50%, and if there are two tenants, the deductible percentage will be 66% and when there are three tenants, the deductible percentage will be 75%? | A6: No | Q7: For incidental overnight stays by friends or relatives (which is extremely remote), if your guest is staying in your master bedroom while the tenant's guest is staying in their rented room, and such stay is so incidental and short term, such as one to three nights, will the Commissioner enable you to minimize your cost of compliance by overlooking the incidental periods so that you focus on accounting for changes in the deductible percentage when there is an event which materially and substantially changes the rental profile ( that is, the actual arrival or departure of rent paying tenants)? | A7: 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 are the sole owner of a property. The house to be built on this property will become your main residence. The house will comprise of the rooms in accordance with the plan provided by you. You have provided a Residential Tenancy Agreement dated early 2011 between yourself as landlord and your tenant for the premises which will be your main residence. The agreement commences on a date in late 2011 with rent of a certain amount a month which includes utilities. This equates to a certain amount a week. The agreement states that all rooms, including one-half of the garage, other than your private portion, are exclusive to the tenant only, with the exception that common areas are shared. You have rented the whole house, with the exception of your private portion, to one tenant. This is to avoid the compliance and administrative nightmare associated with the movements of tenants. You have provided an incentive to the tenant to source other suitable tenants. This incentive is a reduction in rent, taking into account the market, facts and circumstances at the time. The agreement also states what furnishings are to be included: · The tenant will provide their own linen. · Food is not included in rent as it is hard to account for. You and the tenant sometimes share food and sometimes you each do your own cooking which changes on a weekly basis, depending on the personal schedule and availability of time of each of you. If you share food, then one will buy the food and each month you will sit down and calculate the shared bills and divide by half for reimbursement. You have determined the rental rate by reviewing two websites. The rental rate has been adjusted to remove real estate agent fees. In calculating the rental, you have also taken into account that it is shared accommodation. In determining the amount of rent to be paid by the tenant, you have factored a certain amount a month for the private portion of the property. You have included your notional private rental amount with the actual rent for the portion leased to the tenant taking into account the shared area and allowed a certain amount for the private portion for utilities. You have arrived at a monthly rental amount of a certain amount. This method gives you assurance that you are charging a rent that is consistent with the market rate. A bond of less than $100 has been paid and you provided a copy of the bond receipt issued by the Department of Justice. You will give an incentive to the tenant if the tenant manages to find other suitable tenants. The tenants will be generally known to you through the religious organisation you attend or friends from the organsiation and you would consider them as friends. You mainly market to students who are not working full time. Your method of marketing includes: · Word of mouth - through your current tenant by providing an incentive if the tenant manages to find a suitable tenant. · Social media portals such as MSN, Yahoo Messenger and Facebook · Word of mouth - through yourself - actively identifying potential tenants in which the profile (needing to save rent money by staying away from the city and happy to share residential accommodation with people with similar backgrounds. Utilities are included in the rent and based on estimation. If the usage is deemed to be more, then the tenant may provide an additional amount. The tenant is liable for their own food, meal preparation and cleaning up. All members of the household share their responsibilities in cleaning the house on weekends. Common areas are shared between yourself and the tenant. There is no relationship between you and this tenant other than landlord and tenant. At all times, you and the tenant act at arms length. The tenant has use of the study to compensate for the loss of space in the bedroom compared to the size of the bedroom in your current house. The existing tenant may sublease their half share of the garage space to any new tenant.

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, or relate to the earning of exempt income. Ordinarily, where a taxpayer grants a lease for property, whether wholly or in part, whether at arms length or otherwise, the amount received as rent is assessable income. This was confirmed by the decision in FCT v. Kowal 84 ATC 4001, 15 ATR 125. Taxation Ruling No. IT 2167 deals with rental property issues in cases such as non-economic rental, holiday homes and the sharing of a residence. There are a number of situations in which questions arise about the extent to which losses and outgoings incurred in connection with rent producing properties are allowable as income tax deductions. One such situation is the arms length letting of an identified part of a residence, for example, a bedroom, with access to general living areas of the residence. | Detailed Reasoning - Arms length letting of an identified part of a residence - a bedroom with access to general living areas: There are a variety of arrangements that occur in these types of situations. The rent payable may cover variable or running costs, such as electricity, gas, or the arrangements may require the tenant to pay, in addition to rent, a separate amount towards the variable or running costs. In these cases, an apportionment of expenses incurred in respect of the residence is required to determine what amounts may be allowed as income tax deductions. However, it first needs to be considered if the rent charged by the owner represents a normal commercial rent and that the arrangements are consistent with normal commercial practices. If the amount charged is significantly less than the normal commercial rate, the reason for the lower charge would need to be taken into consideration in determining the basis of apportionment. The ultimate resolution to the matter would depend on the purposes of the taxpayer in letting out the property. And in some cases the amount of deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received. The ruling also considers the situation of cost sharing at paragraphs 18 and 19 | Detailed Reasoning - Occupancy of part of a residence on the basis of the occupants' sharing household costs such as food, electricity and cleaning, etc.: 18 What will be decisive in cases of this nature will be the characterization of the arrangements, i.e., do they produce assessable income. Situations arise where the owner of a residence permits persons to share the residence on the basis that all the occupants, including the owner, bear an appropriate proportion of the costs actually incurred on food, electricity, etc. Arrangements of this nature are not considered to confer any benefit on the owner. There is no assessable income and the question of allowable deductions does not arise. 19 Care should be taken to ensure, however, that what may be termed ordinary tenancy arrangements are not dressed up in the form represented by the above heading. If the owner were not party to the sharing arrangements or if the occupants made a fixed contribution to the owner for household costs, there would be a presumption that the payments made by the occupants contained an element of reward to the owner for the occupancy of the residence. Enquiries will be necessary in these cases to establish the extent of the benefit to the owner which should be included in his assessable income. Income tax deductions for losses and outgoings attributable to the residence would be determined on the same basis as applies under the heading "arms length letting of an identified part of a residence, e.g. a bedroom, with access to general living areas of the residence". | Detailed Reasoning - Your case: You have provided a copy of a residential tenancy agreement which provides for the tenant to have exclusive use of a number of bedrooms as well as other rooms together with shared access to all common areas. The agreement also states that utilities are included in the monthly rental payment, which equates to a certain amount a week. You as the owner are also providing furnishings and furniture for the house as stated in the agreement. You have advised that the rooms are not considered to be vacant because they have been leased out to the tenant. You also advised that in order to avoid the compliance and administrative nightmare associated with the movement of tenants in or out of the house, you rent all areas with the exception of your private portion, to the tenant. The tenant is then able to source other tenants and as an incentive there will be a reduction in the tenant's rent. In effect, this allows for the tenant to sub-lease the bedrooms rooms not used to other tenants. In seeking tenants, you consider the most appropriate market as students who are not working full time, who need to save rent money and are happy to share residential accommodation with people with similar backgrounds. Methods used in attempting to obtain further tenants include word of mouth by both yourself and your current tenant and social media portals. You consider that it is not good business sense to seek tenants that are totally unknown to yourself. No agent is involved in this process. You have also advised that generally you know the tenants through church or friends from church and therefore would consider them as friends. You have advised that in calculating the monthly rental, you took into account a notional amount for your private portion and an amount for your private portion for utilities each month. This in addition to the tenant's rent gives you assurance that the amount of rent charged is consistent with the market rent. Taking into account that you have allowed a certain amount for your own private portion for utilities for a month, this amount would also be appropriate for the tenant's share for utilities. As utilities is included in the monthly rental amount, it is not considered that the balance of rent for the rental of a number of bedrooms, as well as other rooms is a commercial rental or that the arrangements regarding the rental of the other bedrooms by the tenant are consistent with normal commercial practices. The arrangement you have is a cost sharing arrangement. The payment you are receiving from the other occupant(s) of the property does not have the character of income. There is no commercial intent to the change being made as the occupant is effectively paying the same amount for the number of bedrooms as that which may be a commercial rate for one bedroom and shared facilities. Moreover, the payment is meant to cover the provision of furniture and fittings and the cost of utilities. Therefore, the payment you receive is not assessable income and no expenses related to the property are incurred in earning assessable income. You have provided a copy of a residential tenancy agreement which provides for the tenant to have exclusive use of a number of bedrooms, a study, bathroom, toilet and one-half of the garage together with shared access to all common areas. The agreement also states that utilities such as telephone, internet, electricity, gas, water and fax are included in the rental payment a month, which equates to less then $X a week. You as the owner are also providing furnishings and furniture for the house as stated in the agreement. You have advised that the rooms are not considered to be vacant because they have been leased out to the tenant. You also advised that in order to avoid the compliance and administrative nightmare associated with the movement of tenants in or out of the house, you rent all areas with the exception of your private portion, to the tenant. The tenant is then able to source other tenants and as an incentive there will be a reduction in the tenant's rent. In effect, this allows for the tenant to sub-lease the rooms that he does not use to other tenants. In seeking tenants, you consider the most appropriate market as students who are not working full time, who need to save rent money and are happy to share residential accommodation with people with similar backgrounds. Methods used in attempting to obtain further tenants include word of mouth by both yourself and your current tenant and social media portals. You consider that it is not good business sense to seek tenants that are totally unknown to yourself. No agent is involved in this process. You have also advised that generally you know the tenants through church or friends from church and therefore would consider them as friends. You have advised that in calculating the monthly rental, you took into account a notional amount of approximately $X a week for your private portion and an amount of about $X for your private portion for utilities each month. This in addition to the tenant's rent of about $X gives you assurance that the amount of rent charged is consistent with the market rent. Taking into account that you have allowed an amount of about $X for your own private portion for utilities for a month this amount would also be appropriate for the tenant's share for utilities. As utilities is included in the monthly rental amount of about $X, it is not considered that the balance of rent of less than $X a week, for the rental of three bedrooms, a study, bathroom and toilet is a commercial rental or that the arrangements regarding the rental of the other bedrooms by the tenant are consistent with normal commercial practices. The arrangement you have is a cost sharing arrangement. The payment you are receiving from the other occupant(s) of the property does not have the character of income. There is no commercial intent to the change being made as the occupant is effectively paying the same amount for 3 out of 4 bedrooms as that which may be a commercial rate for one bedroom and shared facilities. Moreover, the payment is meant to cover the provision of furniture and fittings and the cost of utilities. Therefore, the payment you receive is not assessable income and no expenses related to the property are incurred in earning assessable income.

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.