Private ruling: Rental Income
Date of advice: 26 February 2016
Published: April 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Questions and Answers | 1. Are you assessable on the payments you receive from your relatives who live in properties you own? Yes. | 2. Are you entitled to claim a deduction for all the rental expenses incurred? No. | 3. Are you entitled to claim a deduction up to the amount of rental income you received? Yes.

Relevant facts and circumstances: You have a property which you rented to your family members for a period of time. You charged your family members rent at a rate lower than the market value. You own the property fully and rented to your family members to receive some income whilst providing them a home at a modest cost.

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

Reasons for decision: Summary: According to subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) your assessable income includes the income you receive according to ordinary concepts, which is called ordinary income. Ordinarily, rent derived by the owner of property which is let to a tenant is income according to ordinary concepts and forms part of assessable income. In your case, you received rental income from your family members for your rental property. Although your family members payed below market value this amount is still considered to be assessable income. Section 8-1 of the 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. Taxation Ruling IT 2167 refers to issues relating to rental properties. When a property is let to relatives the question arises as to whether the arrangements are consistent with normal commercial practices in this area. If they are, the owner of the property is treated the same for income tax purposes as any other owner in a similar arm's length situation. If a property is let to relatives at less than commercial rent other considerations arise. In Federal Commissioner of Taxation v Groser 13 ATR 445; (1982) 65 FLR 121; 82 ATC 4478 ( Groser's Case ), the taxpayer permitted his invalid brother to live in a house which the taxpayer owned. The taxpayer arranged to receive his brother's invalid pension so that he could use the moneys to provide for the brothers maintenance. It was arranged that $2 per week would be deducted for rent of the taxpayer's house. The Court held that the weekly amounts of $2 were not assessable income. They were a contribution to the funds out of which the taxpayer proposed to maintain his brother. The Court expressed the view that, if the weekly rental had been assessable income, it would have allowed no more than $104 by way of deduction ($2x 52 weeks) - the reason for this being that private or domestic purposes for the expenditure predominated over the purpose of producing assessable income. Conversely, in Federal Commissioner of Taxation v Kowal 15 ATR125; (1983) 79 FLR 75; 84 ATC 4001; ( Kowal's Case ), the taxpayer purchased a house which he rented to his mother under a formal agreement for tenancy. The rent payable was less than the normal commercial rates. 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. The Court further found that the second purpose or object was the predominant one and, in the result, allowed income deductions for 80% of the losses and outgoings. Unless the arrangements are comparable to those in Groser's Case , the rent would represent assessable income. It would not necessarily follow, however, that losses and outgoings in relation to the property would be wholly deductible. The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives. In your case, you rented out your property to your family members for less than commercial rates. Based upon these facts it is considered that your property is not rented on an arms-length basis as these arrangements are not consistent with normal commercial practices. Therefore, in line with the observations made in Groser's Case you are entitled to claim a deduction for the rental expenses incurred but the amount allowable will be limited to the amount of rent included in your assessable income.