Private ruling: apportion expenses of rental property
Published: November 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to apportion your share of the expenses for your rental property based on the number of days the property was let? | A1: Yes.

Relevant facts and circumstances: You are the part owner of a caravan and freehold site at an isolated caravan park. You purchased the site several years ago. The site was purchased for personal use, to generate income, and possible capital appreciation. The caravan is rented fully furnished. Bookings are managed by residents at the park. The resident managers charge a cleaning fee and monitor damage. The rates are set by the manager, and based on the current commercial rate for this type of accommodation. The tenants for the period that the caravan was rented in the tax year were not known to you, and it was rented at arm's length. The advertising undertaken by you is limited to word of mouth, a noticeboard at the local shop, and on some third party websites. You and your family use the caravan during some school holidays if the site is not previously booked.

Relevant legislative provisions: Income Tax Assesment 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, relate to the earning of exempt income or are excluded by another provision of the taxation legislation. Income Tax Ruling IT 2167 provides the ATO view on letting out a privately owned holiday home. The ruling explains that an apportionment of the expenses incurred in holding or maintaining the property is required where a holiday home is made available for rental. Paragraphs 23 and 24 of the ruling explains that the general rule on the letting of holiday homes is to apportion the expenses in relation to the number of days that the property is actually let and not in relation to the number of days the property is available for rental. However, paragraph 25 of the ruling allows that there may be situations where the expenses of rental of a holiday home are permitted to be apportioned to take into account the whole period of time the property was available for commercial rental rather than the period of actual rental occupancy. A period of time during which a property is available for commercial rental should only be taken into account where it is established that active and bona fide efforts to let a property were made during the relevant period. There are several decisions of the Administrative Appeals Tribunal which endorse the Commissioner's interpretation of the law in this area. In Case P116, 82 ATC 590 a property was acquired with the purpose that it would be a future retirement home and available for immediate private use 50% of the time and for rental for the remaining 50% of the time. The taxpayer occupied the flat for 107 days it was let for 16 days and remained unoccupied for 243 days. Accordingly, the taxpayer claimed 70% of the rental property expenses as outgoings against the income received. It was however decided that the property was a leisure facility and that there was no evidence to support the submission that the property was available for rental for one half of the income year. This was because the lettings were through word of mouth and not through a letting agent and in most cases, it was let to persons whom the taxpayer either knew well or were known to them. Hence only 4.4% of the deductions were allowed which was the proportion of the year the unit was let that is 16 days out of 366 days. In Inglis & Anor v Federal Commissioner of Taxation (1987) 87 ATC 2,037 ( Inglis' case ) the Tribunal considered claims relating to a holiday house which was let only to people from Canberra, was not placed with an agent and which was advertised in the Canberra Times no more than 20 times each year. The Commissioner's apportionment of the claimed deductions, based on the number of days of actual letting, was upheld. In your case, whilst we acknowledge that you have let the property at arm's length when it was rented, the Commissioner considers, given the views of the courts noted above and those noted in IT 2167, that your circumstances are similar to those in Case P116 and Inglis' case and consequently, any deduction claim in relation to letting of the property should be to be apportioned on a time basis as noted at paragraphs 23 and 24 in IT 2167.