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Q: Several years ago, I bought a property for my parents to reside in. They had found themselves in hard financial times and lost their house, so they are now renting this home from me, although they treat it as their own home. They have been renting it for eight years and I’ve barely increased the rent during that period (it’s gone up $20 in total). It would probably rent for an additional $100–$150 if listed on the open market now, but I feel it’s worth giving them a discount for the care they take in looking after the home. They truly treat it as their own, even renovating, painting and upgrading broken appliances when needed. Could this discounted rent get me in any trouble with the ATO?
A: For any expenses to be allowable as income tax deductions, one of the key issues is whether the losses and outgoings were incurred in connection with gaining or producing assessable income.
With rent-producing properties, there may be circumstances in which a property is rented to a relative, and according to ATO Taxation Ruling IT 2167 par. 13, “the essential question for decision is whether the arrangements are consistent with normal commercial practices in this area”.
If the rent is at market Grouprate, the investment property is treated no differently than any other investment property that is let out at arm’s length commercial rates – and all eligible expenses incurred on the property would be allowable as income tax deductions.
"If you’re renting to relatives at market rates, all eligible tax deductions are allowed"
If the property is rented out to relatives at less than commercial rent, the general rule of thumb and view of the ATO is that rental deductions will only be available up to the extent of assessable income earned. That is to say, no negative gearing would be possible on the property.
It is important to note, though, that there have also been recent Tribunal decisions that have been favourable to the taxpayer. In the case of Bocaz v FC of T the taxpayer rented out one of their properties to a related party at less than commercial rates but had an agreement in place that the tenant would undertake all repairs and renovations where necessary. The property was dated and the tenant did undertake restorations on the property.
This additional arrangement in effect raised the rent being received by the taxpayer to an acceptable commercial level, and the taxpayer was successful at Tribunal in having the expenses incurred on that property during the period specified as allowable income tax deductions (the total amount of expenses being greater than the income received).
As the above Tribunal case illustrates, the unique facts of each case always have to be considered and will impact on the final outcome. This advice is intended to be general in nature and we recommend that you always obtain appropriate independent advice based on your circumstances.
- If a property is rented to relatives at market rates, all eligible expenses are allowed as tax deductions.
- If the property is rented to relatives at less than commercial rent, deductions will only be available up to the extent of assessable income earned.
- The unique facts of each case always have to be considered and will impact on the final outcome.
David Shaw
is CEO of WSC Group and has over 25 years’ business experience and extensive knowledge of commerce, industry and public practice accounting.
While due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
