Claiming interest -

Hi all, I am considering renting out one or 2 bedrooms in our PPOR to student(s).

I assume one can then claim part of the interest on loan ? If so how does one go about calculating this ?

Many thanks.
 
Hi all, I am considering renting out one or 2 bedrooms in our PPOR to student(s). I assume one can then claim part of the interest on loan ?
Yes, if part of the home is income producing then the interest on that part of the home would be tax deductable.


If so how does one go about calculating this ?
Typically, on floor m2 basis.

I'm not an accountant, but this is what mine tells me and how we handle it in our own returns.
 
LM,

This might help a bit, it's the best resource I can find in a few minutes of searching ...

from: http://www.news.com.au/dailytelegraph/money/story/0,26860,23951235-5015795,00.html
Stressed homeowners who are thinking about taking in lodgers need to be aware of the tax implications. Check with a financial expert about how taking in a lodger will affect your tax status. There can be a fine line between who the Australian Tax Office deems a boarder or lodger, and who they see as a tenant.

For a lodger, you have to be able to convince the tax office that any money you receive is going towards household expenses – otherwise it will be classified as rental income. This means you could lose a portion of your capital tax gains exemption as you’ll be seen to be running a business from your home. Get professional advice.

There's also an SS thread here: http://www.somersoft.com/forums/archive/index.php/t-41535.html

but the general view seems to be "get a good accountant to think it through before proceeding".
 
There also comes so other things to think about.

You might end up with 1/3 of the property being rented so therefore 1/3 of the intereste being tax deductible. You will also be hit with 1/3 of CGT if/when you sell.


****Edit*** You beat me by a minute Murtagh
 
You'd probably end up making a profit and have to pay income tax and/or CGT and in any case, it complicates your tax returns. Personally, I'd treat their payments to you as "contributions to the running of the household" rather than rent, and don't declare either income or expenses. This is acceptable to the ATO.
 
You'd probably end up making a profit and have to pay income tax and/or CGT and in any case, it complicates your tax returns. Personally, I'd treat their payments to you as "contributions to the running of the household" rather than rent, and don't declare either income or expenses. This is acceptable to the ATO.


So in other words, keep it hush?
 
So in other words, keep it hush?
Exactly. But not in the "nudge nudge, wink wink" sense - it's perfectly legitimate to accept contributions to household expenses and not declare them, provided 1) you're not doing it primarily for profit (eg if this was your primary source of income), and 2) you don't claim the expenses they're helping pay, such as mortgage interest. The contributions are not income; it's just that you pay all the household expenses, and then get your fellow householders to contribute a share to you.
 
Exactly. But not in the "nudge nudge, wink wink" sense - it's perfectly legitimate to accept contributions to household expenses and not declare them, provided 1) you're not doing it primarily for profit (eg if this was your primary source of income), and 2) you don't claim the expenses they're helping pay, such as mortgage interest. The contributions are not income; it's just that you pay all the household expenses, and then get your fellow householders to contribute a share to you.

Makes sense... but in all honesty the ATo and the government are scummy for wanting to tax lodger's rental contributions. Every little cent that you get, they want a piece of it. Really boils my blood.
 
Ummm... I thought I just explained that they don't want to tax lodger's rental contributions. :confused:

Im just saying you can never be too careful esp with ATO. They can change the rules someday and if you have been declaring that you have a lodger they can turn around slam the capital gains tax. Just not wroth mentionign anything IMO.

Queit cash in hand rent is the best way to go, none of ATOs business who lives under your roof. :)
 
Let me be even clearer, then: cash in hand contributions with no declaration of income or expenses, or the fact that you have a lodger, is exactly how the ATO would want you to deal with this situation. :)
 
@ Ozperp
You talk about renting out to people in a ppor not for profit as a business, but to share the expenses? And that the ATO dont want to know about this.
And then no rental expenses are claimed either (e.g. interest, depreciation, rates etc).

Lets say you rent a room in a ppor for $120 (seems about average for a city). What expenses are you sharing? That would have to be more than just electricity and water?

I guess I am taking that as meaning that the expense of the mortgage is being shared too.

I am just not sure I understand the conceptual difference. I can understand your point about whether it is the primary source of someones income. But it is still income isnt it?

I thought whether or not you have to pay tax on rental income in a ppor was whether you provided food or not which classed someone then as a 'boarder'

From the daily telegraph article it seems someone is a boarder or lodger and therefore not income vs a tenant who is income.

I am a bit confused
 
The ATO is not interested in non-commercial private and domestic relationships.

This can happen where somebody takes in a lodger to help share *running expenses*.

However, charging the "going rate" for exclusive use of part of your premises could appear more like an intention to make what you can from your premises ??

The line is not clear, but the ATO sure does not what you to declare rental income for palty amounts where deductions far exceed this !!

Cheers,

Rob
 
Lets say you rent a room in a ppor for $120 (seems about average for a city). What expenses are you sharing? That would have to be more than just electricity and water?
It can cover whatever you negotiate. If it's your PPOR, as you've suggested, they're helping cover the expense of the right to occupy the property, whether that's via rent or mortgage interest. It need not include anything else, ie it could be $120 is their contribution to household expenses in return for occupying a room, and all utilities are shared on top of that, it doesn't matter, provided your intent is not to make a profit, ie you're not in the accommodation business. The fact that $120 might be a generous contribution, eg it's for one of three bedrooms in an apartment on which you only pay $250 per week, isn't really relevant.
Gatoblanco said:
I am just not sure I understand the conceptual difference. I can understand your point about whether it is the primary source of someones income. But it is still income isnt it?

I thought whether or not you have to pay tax on rental income in a ppor was whether you provided food or not which classed someone then as a 'boarder'

From the daily telegraph article it seems someone is a boarder or lodger and therefore not income vs a tenant who is income.
Nah, that's nothing to do with it. It's all about your intent, and that is subjective, so if you're trying to come to a black-and-white understanding, that's probably not going to happen. :) The world is complex and has shades of grey.

The poles are:

1) You are a single person and buy a 6-bedroomed home with the purpose of renting out the other 5 rooms and make your living by cleaning the rooms, cooking meals, etc, and having the income from those 5 rooms cover all expenses and have enough left over for you to live off. You used to do a job cleaning houses, but figure you can give that up because the income from (effectively) running a boarding house will substitute.

This is an accommodation business, and income and expenses must be declared. (And you need to get Council approval etc, but only considering ATO issues for the purposes of this thread.)

2) You have lived in a 4-bedroom home for the past 20 years with your growing family. The kids are now grown and have left home, and you find the house is too large for just "Darby and Joan", so you rent out one of the spare bedrooms to a uni student for $150 per week (which is about market rate for renting a room locally).

Even though the mortgage may be paid off, and thus there may be little to no "expense" directly associated with this person moving in, that's because of how much capital you have invested in the property! If you had this money invested elsewhere, it could be earning money, so there is an opportunity cost associated with having capital invested in that "extra bedroom". (OK, you can't slice off the bedroom you don't need, but work with me here!)

So it does "cost" you something to have that bedroom not available for your own usage (even if it's an opportunity cost - where's BayView??? ;)), and the $150 per week is simply compensating you for the loss of enjoyment of use of that bedroom, and the loss of privacy associated with having a stranger living in your home.

Maybe this analogy will help clarify... Let's say you buy a wedding gift on behalf of a group of 11 friends who are all going to a wedding, and the gift costs $836, or $76 per person. They each just say "here's $80", because it's a round figure, and because you've done the running around. You don't have to declare the $40 extra ($4 per person x 10 people who give you $80) as income. It's not something that you did to make a profit; it's a private arrangement between friends, with a view to sharing cost.

If the ATO insisted that every cost-sharing had to exactly match the associated expense, then we'd all have to declare it every time we split a bill with friends for dinner, paid a friend for a phone call, or whatever. To simplify, the ATO says that private arrangements made for sharing costs are not something that they're interested in.

If, on the other hand, you set up a business where you buy gifts on behalf of groups of friends and make a profit by charging, say, $100 per person for the gift that cost you $76 per person, you're in a gift-buying business and the ATO is interested.

It's also analogous to the ATO's distinction between hobbies and businesses. So many people were claiming expenses for "businesses" which were never going to make a profit (typically network marketing or hobby farms, where many set up a business primarily because they think that all of a sudden all their expenses become tax deductible, without caring whether or not they ever make a profit :rolleyes:), and it was costing the ATO a lot. So there was a ruling - about 10 years ago, I think - that if you're going to claim business expenses, you must demonstrate that the business either makes a profit, or that you have a reasonable expectation that it will make a profit, otherwise it's classified as a hobby and outside the ATO's sphere.

The by-product of this ruling is that some profitable hobbies are not taxed. So if you buy artwork in your own name, and display it in your own home, the fact that it goes up in value is your good luck, and generally not subject to any taxes, if your purpose in buying it was to enjoy looking at it. If you keep the art locked up in secured storage, buy it in your super fund etc, then arguably the purpose was for investment, and profits would be taxable.

It doesn't mean that if you own a business called "ozperp's hobby shop" and work in it as your primary source of income, that it wouldn't be taxed, but it does mean that if in the course of engaging in a hobby, you happen to make a profit, it's not taxable, nor are the expenses of the hobby claimable. For example, if you have a "hobby farm" that you go for weekends away, and you go for years with it costing you money which you don't claim, but then one year it has a bumper crop of avocados (or something) and the income from those avocados is more than your holding costs for that year, that's your good luck. The avocado income isn't taxable.

Hope this helps. :)
 
private arrangements made for sharing costs are not something ATO interested in

"To simplify, the ATO says that private arrangements made for sharing costs are not something that they're interested in."

That is interesting. Do you know where they say that?

I am not trying take a counter view point I am quite interested in this matter as it applies to me.

Thanks

Jesse
 
"To simplify, the ATO says that private arrangements made for sharing costs are not something that they're interested in."

That is interesting. Do you know where they say that?
The ATO website is one of the least user-friendly, hardest-to-search websites in existence, but I'd say this page is getting close to what I'm talking about.
 
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