Private ruling: Rental deductions
Published: October 2013
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Will any amount you receive as rent in relation to a vacant block of land be assessable income? | A1: Yes | Q2: Will a deduction for all the expenses incurred in relation to a vacant block of land which you rent to a friend be allowable? | A2: No | Q3: Will a deduction for expenses incurred in relation to the vacant block of land up to the amount of the income received be allowable? | A3: Yes

Relevant facts and circumstances: You are proposing to purchase a vacant residential block of land. You are proposing to rent the vacant block to a neighbour of an adjoining property. You stated you do not know the current owner of the vacant block of land. You stated the neighbour to whom you intend to rent the vacant block of land is a friend. The amount of rent will be a private arrangement between yourself and your neighbour. You stated that you intended to keep the vacant block of land for at least 10 years and then either sell it to the neighbour or place it on the market. You stated you have no intention of developing the land.

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

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that for an Australian resident, assessable income includes ordinary income derived directly or indirectly from all sources whether in or out of Australia. Ordinary income for the purposes of subsection 6-5 of the ITAA 1997 includes rental income. Taxation Ruling IT 2167 discusses the Commissioner's view on non-commercial arrangements where property is let to relatives and friends. Where property is let to relatives or friends the essential question 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 purposes than any other owner in a comparable arm's length situation. Where a property is let to a relative or friend under a non commercial arrangement the rent would generally be considered assessable income but the losses and outgoings in relation to the property would not be wholly deductible. Generally the Commissioner will allow deductions up to the amount of rent received: ( Fletcher & Ors v. FC of T 91 ATC 4950 [Fletcher's case]). Whether any additional deduction is to be allowed will depend on the facts of each case. However, the method adopted in any particular case must be both 'fair and reasonable' in all circumstances ( Ronpibon Tin NL v. FC of T (1949) 78 CLR 47 at 59). Taxation Ruling TR 95/33, considers the decision of the Full High Court of Australia in Fletcher's case and in particular, considers situations where a taxpayer's subjective purpose, intention or motive is relevant in determining the availability of an income tax deduction. In your case you are considering purchasing a block of vacant land and renting it to your friend. This arrangement is considered to be inconsistent with normal commercial practices and not commercially realistic. It is considered that the renting of the land is not the sole motive for purchasing the land. Part of your motive may be to gain assessable income from the land. However, it is considered that a further motive is to obtain tax deductions over and above the amount of assessable income you will receive under a non-commercial arrangement. Consequently you will be assessable on the income you receive from the friend for the use of the vacant land and you will be entitled to claim any relevant losses or outgoings in relation to the vacant land only up to the amount of the income received.