Renting to a relative at below market rental rate?

[datto]

That may be your thoughts but it is not supported by the rental booklet or the tax ruling. FWIW they were my thoughts before investigating it.

I doubt a private ruling will be necessary - it must be a relatively common and well established principal.

I think that paragraphs 14,15 and 16 of IT 2167 are relevant to your sutuation

Para 14 and 15 state that rent collected from a relative would represent assessable income but that not all losses and outgoings would be deductable. It depends upon what the main purpose of the taxpayer in acquiring the property was ie to provide a relative with a good home at a moderate cost or to earn assessable income.


Paragraph 16 gives us a better clue to your answer : "as a working rule, income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received. Whether any additional deduction is to be allowed will depend upon the nature of any further information provided by the taxpayer. "

I think it says claim deductions up to the amount received and have a good reason to claim more. This ruling is old (1985) - pre self assessment, so maybe a private ruling would be better?

 

[Ed Barton]

Bump for Paul@PFi

Recap - house is rented to relative at 25% of market value.

1. Will income be accessed at full market rate?
2. How can deductions be claimed? Limited at rent? Apportioned on % of market rent?

Cheers in advance.

 

[jaypee06]

I have a feeling intention will play a big part. Was your intention to make profit or for a private or domestic purpose or both?

Expenses incurred in the pursuit of rental income will be an allowable deduction to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature.

 

[Terry_w]

Bump for Paul@PFi

Recap - house is rented to relative at 25% of market value.

1. Will income be accessed at full market rate?
2. How can deductions be claimed? Limited at rent? Apportioned on % of market rent?

Cheers in advance.

I would say income is assessed at what you are charging, yet you can only claim 25% of expenses.

 

[Paul@PFI]

I can't think of another area where tax would be payable on what income 'could' be earned rather than what was actually earned.

A pizza shop owner - Assessed on food he eats from business stock of a fixed value per annum. Ditto conveince stores etc.
CGT market value "deeming" provisons. (eg spouse to spouse transfer of shares for nil $)
Centrelink pensions "deeming"
FBT s based on "valuations" rather than the benefit
Stamp Duty - assessed on valuation not consideration.
Earn out clauses - Taxed today of whole value yet $$ may not be received for 3, 5 or more years.

This list could go on. Who said tax had to be based on income banked?

A book could be written on "what is income"... Dull but thick.

 

[Paul@PFI]

Bump for Paul@PFi

Recap - house is rented to relative at 25% of market value.

1. Will income be accessed at full market rate?
2. How can deductions be claimed? Limited at rent? Apportioned on % of market rent?

Cheers in advance.

Hmmm....Self assessment applies you can include what you want in the return. Problem is if its reviewed....So preparation of return should be consistent with appropriate principles or a private ruling that confirms your personal case.
+ ATO might deny all deductions and assess the actual (low) income declared. Impose penalty for recklessness and interest. It has indicators of a scheme intended to obtain a tax benefit.
+ ATO might deny all deductions to the extent a loss in incurred (less probable)
+ Land tax ???
+ Future CGT apportionment ???

This has all the hallmarks IM(P)O of being boarding NOT rental.

ATO views are expressed here and are consistent with the above.

 

[wylie]

Paul, that is all a bit hard to understand this early in the morning .

My friend's husband rents his old family home, which he bought when his parents divorced to allow his other to live there, and I believe she pays only enough rent to cover the rates, insurance etc.

I also understand on their tax, he is deemed to be earning "market rent".

Would that be only because he would be then allowed to claim the loan interest against his tax?

If he didn't borrow to buy the house from his parents, and paid cash, therefore not claiming any interest (nor claiming rates, insurance etc) could he allow his mother to live there rent free and not have to pay tax as if it was rented at market rates?

I know he has a good accountant, and other IPs, but it is possible I've missed something as to why they pay tax on market rent, even though they don't receive market rent.

 

[Paul@PFI]

I have a feeling intention will play a big part. Was your intention to make profit or for a private or domestic purpose or both?

Expenses incurred in the pursuit of rental income will be an allowable deduction to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature.

Not really. If its board paid by kids the intention isnt to profit sure. Non-assessable and no deductions. Its a cost reimbursement more for food than the roof, bed and washing.

The issue of profit or loss plays little part as many investors buy an IP with intention to lose $$$. with expecation of future cap gain. The board may be to asssit to fund interest and prop costs without a profit.

Expenses are NOT deductible to the extent of capital, private or domestic nature !! Expenses are only deductible to the extent they relate to assessable income.

 

[Little Mate]

Hey Ed Barton,
How do you think 'deeming' works?
Also, Stamp Duty (tax by any other name).
You will pay stamp duty on the real value of the transaction no matter what sweetheart deal you come up with.
Insidious and far-reaching indeed.

 

[Ed Barton]

Hmmm....Self assessment applies you can include what you want in the return. Problem is if its reviewed....So preparation of return should be consistent with appropriate principles or a private ruling that confirms your personal case.

I'm well aware of that. It doesn't seem so unusual that a PR would be necessary. The case law in the TR seems consistent with my situation if you read the whole thread.

+ ATO might deny all deductions and assess the actual (low) income declared. Impose penalty for recklessness and interest. It has indicators of a scheme intended to obtain a tax benefit.

I don't see a IVA scheme.

+ ATO might deny all deductions to the extent a loss in incurred (less probable)

Not a problem. Will not charge relative rent at all.

+ Land tax ???

I would expect to pay LT as I do on all my investment properties.

+ Future CGT apportionment ???

What apportionment? I would expect to pay CGT on the property if I disposed of it.


ATO views are This has all the hallmarks IM(P)O of being boarding NOT rental. xpressed here and are consistent with the above.

Holey hell how can my message be too short (extra BS to be able to post)

 

[perthguy]

Id say if you arent charging market rent, then you cant claim any expenses...

Woah! I'm not sure that is true at all. My parents hired a stupid PM that didn't do regular rent reviews and let the rent on their IP fall to more than $100pw below market. Will the ATO now disallow all of their expenses? No. How is the ATO supposed to know what the "market rent" is for the property unless they know what the condition of the house is inside... which they wouldn't know unless you told them.

Case in point. I had a run down house getting $330 per week. Fixed it up and now getting $440 per week. Same house, no structural changes, cosmetic only. "Market rent" is relative.

 

[dexx]

Ed, you can rent to Cyril below market and show the rent as income and claim the expenses as long as the income exceeds the expenses. If the expenses exceed income you are limited to claiming for expenses to an amount equal to the rent.

What does the tax office use to determine what 'market rent' would be for a given property? I doubt it would be advertised rentals as these vary greatly.

 

[Terry_w]

What does the tax office use to determine what 'market rent' would be for a given property? I doubt it would be advertised rentals as these vary greatly.

Self assessment, so they will take what is given initially. If this is queried you would be required to prove your case. They may accept a market appraisal or if it goes further a valuation from a registered valuer.

 

[Paul@PFI]

There appears some confusion here.

Rent can be non-arms length and be perfectly OK. The problem is where the parties and the price and the nature / intention is not on an arms length basis and this is deliberate. An example is renting a IP to your son who lives there with a mate. They pay no rent. Or a token rent. They do some mowing (maybe) and you want to claim all the costs as a loss. You show a rent of $200 a week as income but none is actually paid.

Many landlords rent to relatives. The example of a bad agent allowing rent to fall below market is a great example too. But I would argue an agent is an example of an arms length arrangement since the agent is involved in the arrangement and that the tenant and landlord arent dealing directly with each other.

In fact there are instances where rent WILL be less than market as the owner has a empathy for an older stable good tenant for example. I wouldnt think the ATO could care or bother if rent was lower than the median. "Market" rates have upper and lower ranges. The ATO concern "may" be aroused if the tenant and the owner are not dealing with each other on arms length terms and if rents are substantially below market or a token rent is being "paid".