When is it considered rental income ?

[hwd007]

When is it considered rental income ?

EXAMPLE 1

If a relative buys a house and another relative lives in that house and pays it off for the person who's name it's in, is the payment considered to be rental income and thus taxable, i.e. if no formal or any other rental agreement exists ? or would this then be considered a gift and thus treated as income ? and thus still taxable ?

I know it might sound a little silly, but I'm wondering how this is viewed for taxation purposes. My feeling is that it would be deemed as income one way or another. i.e. as soon as the loan repayment ( made by the person living in the house ) hits the loan account of the person who owns the property.

I cant see the sense in doing this, as you are then denying tax benefits also, but perhaps some people might think of it as a way to buy property without it being an investment property in the classic sense.

What's your take on this ?

 

[Rixter]

All income needs to be declared to the ATO and as such subject to possible income tax.

 

[hwd007]

Yes thanks I'm aware of that. The question is would this be deemed income ? I'm thinking it might, but I'm not certain, hence the question.

 

[Rixter]

Yes thanks I'm aware of that. The question is would this be deemed income ? I'm thinking it might, but I'm not certain, hence the question.

Well Im 1000% sure the ATO arent going to view it as an expense. I cant answer it any more clearer than that!

 

[hwd007]

Fair enough, but let me phrase it another way. Is it declarable as income ? I'm at this stage guessing you might say yes.

 

[Rixter]

Fair enough, but let me phrase it another way. Is it declarable as income ? I'm at this stage guessing you might say yes.

All formsof income needs to be declared to the ATO and as such subject to possible income tax.

 

[hwd007]

All income needs to be declared to the ATO and as such subject to income tax.

Yes thanks, well aware of that. What's not clear to me with absolute certainty, is whether this is deemed income ? I can only speculate that it might be at this stage, but I'm not certain.

 

[Rixter]

Yes thanks, well aware of that. What's not clear to me with absolute certainty, is whether this is deemed income ? I can only speculate that it might be at this stage, but I'm not certain.

If its accepted, then its income.- just ask the ATO and get it straight from the horse mouth.

 

[hwd007]

If its accepted, then its income.- just ask the ATO and get it straight from the horse mouth.

Ah, I see. Yes ATO confirmation a good idea.

I can see the extended logic there. i.e. if you receive anything of value, i.e. money, property, gifts other assets, etc... it might all be considered income. Unless of course one can prove it to be a liability. Somewhat difficult to prove with material goods, unless you can prove that its worthless and costs you money to possess and yields no benefit. Getting a bit philosophical here.

 

[Rixter]

Very deep dude - peace brother.

 

[Rob G.]

If a relative buys a house and another relative lives in that house and pays it off for the person who's name it's in, is the payment considered to be rental income and thus taxable, i.e. if no formal or any other rental agreement exists ? or would this then be considered a gift and thus treated as income ? and thus still taxable ?

Sounds like a private and domestic family dealing.

In the absence of any other facts such as documentation to declare it an arm's length arrangement.

One relative provides a house for use of another. One relative meets expenses of occupying and even ownership (if mortgage payments include principle).

Note you could get into sticky arguments of ownership if the "renter" could somehow show it was not a family arrangement for use of a house and argue the house was gifted to them. After all they are occupying and "paying the mortgage" unless you could show this was merely a set-off of other costs.

Better get some advice on possible unintended consequences if parties fall out.

Cheers,

Rob

 

[Perp]

I don't totally agree with Rixter; there are many forms of cash that one can receive that the ATO doesn't tax.

For example, if you are also living in the house, and the person is not "paying rent", but instead "making a contribution to household expenses", that is not deemed to be taxable income, even if you make a profit on their contribution, and even if that amount is fixed rather than related to particular bills.

If you wish to treat the mortgage payments as a gift from the relative, my understanding of this ATO page is that the payments wouldn't be taxable, but it may be complicated by the fact that your relative is receiving something in return (ie accommodation). If you are able to treat the mortgage payments as a gift, then you obviously couldn't claim any expenses with regard to the property if you took this route, so you'd have to decide whether you might be better off declaring the income and deducting the expenses, as at least in the early years, you'd probably make a taxable loss and reduce your taxable income. If the arrangement is likely to continue for a long period of time, you could end up worse off when the property begins making a taxable profit.

I couldn't find it written anywhere, but my common sense tells me - just in case you were wondering - that you wouldn't be able to treat it as an IP in the early years, and as a "family arrangement" later when it begins making a profit. That's just having your cake and eating it, too, and the ATO doesn't usually allow that.

 

[Perp]

PS I hadn't updated my browser for a couple of hours, so hadn't seen Rob G's response. Listen to him - he's the professional.

Rob raises a good point that there may be legal implications that you haven't considered, such as the person living in the property later claiming that the intention was for it always to be "their" home, and "proving" that they have an equitable claim for at least partial ownership due to their having paid the mortgage.

 

[BV]

If you wish to treat the mortgage payments as a gift from the relative, my understanding of this ATO page is that the payments wouldn't be taxable, but it may be complicated by the fact that your relative is receiving something in return (ie accommodation).

That's my understanding as well,
also contributions to household expenses as far as I know are not taxable but you'll probably need to live in the property to qualify