Private ruling: Rental deductions
Published: September 2014
Ruling period: Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Can you claim 50% of the occupancy expenses of your residence where you rent out one bedroom? | A1: Yes | Q2: Can you claim 50% of the capital work deductions for renovations to you residence where you rent out one bedroom? | A2: Yes

Relevant facts and circumstances: You had a property with X bedrooms and 1 bathroom. You had previously rented this property. You decided to renovate the property. You retained the front bedrooms. The rest of the house was demolished to create an open plan living floor space that is conductive to inner city modern living. The renovation costing approximately $x covered all the demolition, new layout, bathroom, kitchen, roof and courtyard. After the renovation, you decided to live in the property and rent out one of the bedrooms. The tenant has access to common areas, such as the bathroom, living room and kitchen. However, the tenant does not have access to the taxpayer's room. The rental agreement is an arm's length transaction between unrelated parties and the rent is charged at a commercial or market value rate.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 25-10 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 Division 43

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 in nature, or relate to the earning of exempt income. Accordingly, to be able to claim expenses that relate to the property you must have held the property for the purpose of gaining or producing assessable income, and those expenses must not be of a private or domestic nature. Division 43 of the ITAA 1997 provides a deduction for capital works. Capital works includes buildings and structural improvements, and also extensions, alterations or improvements to buildings and structural improvements where a residential property is used for income producing purposes. Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (depreciation) of a depreciating asset you hold, to the extent the asset is used for a taxable purpose. Section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the cost of repairs to premises used for income producing purposes, to the extent that the expenditure is not capital in nature. Taxation Ruling IT 2167 refers to issues relating to rental properties including arm's length letting of an identified part of a residence. The ruling provides that in situation where you your rent out a bedroom in your residence any rental deductions must be apportioned. At paragraph 10 of IT 2167 the Commissioner provides: …. As a general approach apportionment should be made on a floor area basis, i.e. by reference to the follow are of the residence to which the tenant/lodger has sole occupancy together with a reasonable figure for access to the general living areas including garage and outdoor areas. IF, for example, the tenant/lodger has 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 on behalf of the floor area of the general living areas to the floor are of the room of sole occupancy in order to make the necessary apportionment. It is considered your circumstances are on point with the above example in IT 2167 and that 50% of floor space will be the correct apportionment of any deductions in relation to the property.