Reduced Rent - Enemy Of The Taxman?

Hi guys, got a quick one - After 8 years, a wedding and a grandbaby on the way, I've managed to convince the inlaws that I'm a nice guy and now they love me. To prove this, they've decided that they'd like to purchase an IP and have us live there on reduced rent - it's a brand new place so the depreciation is great, and after 12 months I insist on paying market rent anyway. The reason they're doing this is because they're fairly well off themselves and would like to help us along on our own property journey!

Their question is - if we pay them $200pw rent on a property for which they may be able to get $300-$320 (or even higher) market value, will the tax man care? They seem to think that they'd need us to pay the full rent, and then they could deposit the difference back into our bank account every month.

This seems a bit odd to me, as I don't see what business the taxman has if they choose to rent out the place for lower rent - in fact, I'm fairly sure that there's even tax benefits to suppying housing at below market rent, although I won't pretend I'm a genius about elegibility for it!

Thoughts kids?
-Adam
 
Your in-laws are correct, the tax man wants to see market rent in their tax returns if it's a non arms length transaction. You don't physically have to hand over market rent and them refund the difference though. They just need to declare market rent in their tax returns. You can physically pay them $0 if that's what they wish to do.

It IS the tax man's business if your in-laws are collecting 60% of the rent but claiming 100% of the tax deductions... :rolleyes:
 
So we think that it's probably a good idea to do it that way? Never knew it could be a pain to help the kids, haha!

Also rolf - do you live on here? I've asked a bunch of questions and you've been the first to respond on most of them! Pure gold mate!
 
Your in-laws are correct, the tax man wants to see market rent in their tax returns if it's a non arms length transaction. You don't physically have to hand over market rent and them refund the difference though. They just need to declare market rent in their tax returns. You can physically pay them $0 if that's what they wish to do.

It IS the tax man's business if your in-laws are collecting 60% of the rent but claiming 100% of the tax deductions... :rolleyes:

The safe thing to do is to pay the full rent and as Rolf mentioned, gift back. If no money changes hands that's one more point for the ATO to argue that the arrangement is not commercial. Last thing you want is for retrospective denial of negative gearing benefits if the in-laws were to be audited.
 
The issue as far as the ATO is concerned and for your inlaws is:

a. pay rent $200, market rent $300, expenses and depreciation $400, ATO will only let $200 be claimed as deductions against the income, so inlaws $200 pw out of pocket and no negative gearing

b. pay rent $300, market rent $300, expenses and depreciation $400, inlaws claim $400 against income, so net loss of $100

NB your inlaws could reduce the rent by the amount an agent would charge to manage and would still be regarded by ATO as being entitled to negative gearing
 
who's to determine market rent? at who's discretion?

Best way to establish it is to get some property managers around and get an appraisal in writing.

Never know Tramampoleen might be able to get a property manager appraisal for $200 or a bit more. I've seen stranger things happen with appraisals.
 
Here's a thought.....

Not sure how this would fare with the ATO but what if....

Your in-laws didn't make any claims against the property?

You live there rent-free on the proviso that you cover all the rates (both council and water), land taxes, insurances etc?

Wonder if that is feasible (and above all legal) in the eyes of the tax-man. :rolleyes: Hmm....must look into that.
 
You live there rent-free on the proviso that you cover all the rates (both council and water), land taxes, insurances etc?


Section 48 of our RTA expressly forbids the Landlord from passing the rates and taxes onto the Tenant.

http://www.austlii.edu.au/au/legis/wa/consol_act/rta1987207/s48.html


You cannot write in the Lease that the Tenant picks up the outgoings for the property, as that goes expressly what is written in the RTA. Your 'proviso' would not stand up. Section 82 sub-clause (1) (a) and (b) prohibit this.

http://www.austlii.edu.au/au/legis/wa/consol_act/rta1987207/s82.html


Interestingly, section 82 sub-clause (3), then allows the Landlord to modify or exclude section 48, along with a bunch of other sections.....so the lawyers have induced a lovely little legal circle of contradiction, whereby you could tie yourself in knots for years arguing which contradiction takes precedent. Bewdiful.
 
What's the point of gaining a law degree ?? I find most lawyers work their ring off for bugger all pay.


I'd much rather hire solly's to do my bidding, and force my Tenant's to pick up the tab to argue with themselves. I find they usually stop arguing fairly quickly when they have to pay for both their and my lawyer's bill.


Naturally, dealing with contracts all the time, whether they be sales or leasing, one has to know a little about the controlling Acts one works under. You don't need a degree in law to read and understand contracts and Acts.


I find the delegation, by most investors to their solicitors, of their ability to read and understand legal documents, is a very short sighted and limiting practice.
 
Their question is - if we pay them $200pw rent on a property for which they may be able to get $300-$320 (or even higher) market value, will the tax man care? They seem to think that they'd need us to pay the full rent, and then they could deposit the difference back into our bank account every month.
As bene313 pointed out, you have to be very careful that it looks like a property investment. If they're doing this to help you out, they're not technically entitled to any tax deduction, so Biggles' suggestion that no cash has to change hands is extremely dubious, IMHO.

I even think that if they deposit the $100 difference to your bank account only for the time period that you're living in their IP, then their negative gearing benefits could be denied if this came to light, as it would obviously be an effective rent deduction and could be deemed as such. It would be much better if they were already gifting you money well before you lived in their IP, or if the money they give you as a gift was irregular in time and/or amount.

If there's any suggestion that the property is rented to you to "help you out" rather than being a completely business transaction, then no negative gearing benefits are available. So you have to do everything that you can to reinforce the position that it's strictly business.
Section 48 of our RTA expressly forbids the Landlord from passing the rates and taxes onto the Tenant.
You can have a private family arrangement that falls outside the RTA's jurisdiction, though. Neither party would have the responsibilities or rights of the RTA legislation, and obviously no negative gearing benefits could be claimed. It would be the same as kids paying board to live at home, etc.

If you wanted to have a formal lease in place, and have both parties covered by the RTA's rights and responsibilities, you could have a non-arms-length lease for an amount deemed sufficient to cover these expenses, but again, no negative gearing benefits could be claimed on any shortfall.
 
Section 48 of our RTA expressly forbids the Landlord from passing the rates and taxes onto the Tenant.

http://www.austlii.edu.au/au/legis/wa/consol_act/rta1987207/s48.html


You cannot write in the Lease that the Tenant picks up the outgoings for the property, as that goes expressly what is written in the RTA. Your 'proviso' would not stand up. Section 82 sub-clause (1) (a) and (b) prohibit this.

http://www.austlii.edu.au/au/legis/wa/consol_act/rta1987207/s82.html


Interestingly, section 82 sub-clause (3), then allows the Landlord to modify or exclude section 48, along with a bunch of other sections.....so the lawyers have induced a lovely little legal circle of contradiction, whereby you could tie yourself in knots for years arguing which contradiction takes precedent. Bewdiful.
Who said anything about transferring the costs to the family members as tenants, or them even being deemed "tenants" in the first place?! :rolleyes:
I was being facetious....guess I should have added a :confused: or :p to avoid any unnecessary confusion and saving you the trouble of looking up "da rulz" but hey (for those who weren't aware) thanks Dazzer!

Of course the tax-man wouldn't like it; there's nothing it in for him :(

If someone wants to buy an investment property and keep it empty (although why would you bother?) they are quite within their rights to have it sit there doing (and here's the kicker for Mr T) and earning absolutely nothing (other than growing in capital value which is of course another matter entirely); similiar owning a block of land. As long as you're not making ANY claims against a non-revenue generating investment, no laws are being broken.

P.S. Sorry, there is a section on this too somewhere but I can't be bothered looking it up, maybe someone else could be kind enough to dig it out and post it up, that'd be great (and thanks in advance) :D
 
What's the point of gaining a law degree ?? I find most lawyers work their ring off for bugger all pay.

Agreed but it does have its moments


I'd much rather hire solly's to do my bidding, and force my Tenant's to pick up the tab to argue with themselves. I find they usually stop arguing fairly quickly when they have to pay for both their and my lawyer's bill.

[I]The cheapest outcome for a tenant then would be to go to to court and either win or lose. If winyou wopuld bear the party and party costs even if the lease says otherwise (assuming tenant has half decent representation)[/I]

Naturally, dealing with contracts all the time, whether they be sales or leasing, one has to know a little about the controlling Acts one works under. You don't need a degree in law to read and understand contracts and Acts.

Agrees again. But I suspect it is easier to delegate and sue the insured lawyer if all turns to misery
I find the delegation, by most investors to their solicitors, of their ability to read and understand legal documents, is a very short sighted and limiting practice.
Agreed that you shouldn't delegate the fundamentals, but you need to have some idea so that if your solicitor is no good you will be able to realize it

No such thing as a bullet proof lease. Anyone who tells you otherwise should be shot:D

Best use of lawyers is in the negotiation process I think.
 
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