Renting An Investment Property To A Relative

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A commonly asked question by clients is around the deductibility of rental property expenses if you rent to a relative. We now have more clarity on the arrangement due to the recent case held in November 2012 at the Administrative Appeals Tribunal Bocaz v FCT.

Background

The ATO released Taxation Ruling IT 2167 in 1985 which discussed the ATO’s position with respect to the letting of a rental property to relatives.

The general view was that if the let of a rental property to relatives was on a normal commercial basis the owner of the rental property would be assessable on rent received, and be entitled to the same deductions that any other person would normally be able to receive.

Alternatively, if the rental property is let to relatives at less than market value the deductions would be limited to the amount of assessable income received (and hence no negative gearing possible).

Bocaz and the Federal Commissioner of Taxation

In the case of Bocas v FC of T the taxpayer co-owned two investment properties with her son as joint tenants. The two properties were:

  1. The first house was rented to her ex-husband, who paid $200 per week in rent plus also agreed to undertake repairs/renovations necessary.
  2. The second property was occupied by the taxpayer’s son. This was a joint tenant and the son paid $165 per week in rent.

Issues decided by the Tribunal

The Tribunal decided that:

  1. The rent earned from the two properties was assessable as income.
  2. The rental arrangements were not non-commercial arrangements. Although the rent was less than market value for property No 1. With husband, the fact he was doing repair work and other restorations effectively lifted the effective rent that was being paid to a commercial level.
  3. The taxpayer paid interest and other costs for the properties and was entitled to a tax deduction.

Further Examples

  • An accountant owned a property in the eastern suburbs of Melbourne and rented it to his sister. The sister paid $300 per week for rent, and the market value for rentals in the area is $400. Deductions would normally be limited to the assessable income earned.
  • The accountant also owned another property in the eastern suburbs of Melbourne and rented it to his son. The rent was $305 per week and market value rent was between $300 - $320. As the rent was market value the accountant will be able to obtain a tax deduction for all expenses incurred.

This case confirms the long-held ATO view that if an investment property is rented to a relative at a commercial rate than a full tax deduction can be claimed against that income, and can if applicable, result in a loss in the property to be offset against other personal income received.

Hillyer Riches is a specialist accounting, business advisory and SMSF firm located in Melbourne. We service areas in the eastern suburbs of Melbourne such as, Caulfield, Camberwell & Malvern. For more information email an accountant at hilric@hillyerriches.com.au or phone us on 03 9571 5333.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified accountant or other suitable professional.

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