The Tax Office has formed views about disclosing income and claiming deductions where non-economic rental arrangements — that is, “mates rates” — occur involving the use of holiday homes. A similar approach is adopted for arrangements you may make with family members involving residential property. The following is a summary of the Tax Office’s view for these types of arrangements.
Letting of property to relatives
Where the property is let to relatives on a commercial basis (that is, consistent with normal commercial practice) the owner of the property would return assessable income and be entitled to claim deductions no different to if it were an arms’ length situation.
If the property is let at less than commercial rent, the Tax Office’s general rule is that income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received.
Claims beyond that limit would depend upon individual circumstances and would need to be assessed on an individual basis. In some instances, costs can be apportioned based on the amount of floor space used in deriving the rental income.
Board and lodging
Adult children living at home and making token payments to their parents would typically constitute board and lodging.
Arrangements of this nature are considered by the Tax Office to be of a domestic nature and there should be no income tax consequences. The income received is not assessable and the owner is not entitled to claim any deductions.
Occupancy on basis of sharing household costs
As a general rule, such arrangements (where the owner is one of the “sharers”) are not considered to be a benefit to the owner and there should be no income tax consequences. The income received is not assessable and the owner is not entitled to claim any deductions.
Holiday home let for part year
The rent received from letting the property, at a commercial rental, is assessable income. Where friends or relatives of an owner occupy a property for holidays at zero or minimal cost, or the property is either occupied by the owner for short periods or remains unoccupied, then the token amounts received in these cases would not be considered assessable income.
Deductions in respect of the property are only available for those periods where the property is available for letting (that is, where active and bona fide efforts to let the property at a commercial rental have been made).
In one court case, the owners of a property for an income year had let the property for 16 days, occupied it for 107 days, and kept the property vacant for the balance of the year. The Taxation Board of Review apportioned the losses and outgoings attributable to the property on a time basis, and allowed a deduction for the proportion of the year that the property was let (in this case, 4.4%).
Travelling expenses incurred by the owner of a property in inspecting and maintaining the property are typically allowable deductions. The cost of travel undertaken to prepare the property for incoming tenants, or to inspect the property at the conclusion of the tenancy, should also be deductible. Again, apportionment may be necessary to the extent that the property is not fully available for rent for the entire year.
Purchase of a residence by a family trust
Where a family’s residence is owned by their family trust, and rent is paid for the right to occupy the property, it often follows that the trust will incur a net loss from the arrangement.
Taxpayers should be careful when implementing such arrangements. The Tax Office may deny the losses incurred by the trust on the basis that the arrangement is a private or domestic arrangement. Alternatively, the Tax Office may also deny any losses on the basis that the arrangement had been entered for the dominant purpose of obtaining a tax benefit (that is, to generate losses) unless there is a compelling alternative reason. The need to protect assets from creditors, amongst others, may be one such reason.
Short-term accommodation and small business CGT concessions
In certain circumstances, the disposal of a holiday apartment may be eligible for the small business concessions if it has been used in the course of carrying on a business. There are a number of conditions that must be met in order to access the concessions, and among these is that the asset being disposed must satisfy the definition of an “active asset” under tax law.
The active asset test specifically excludes a property deriving passive income (that is, rent) from being eligible for the CGT concessions. One exception however is that the main use for deriving rent was only temporary.
Whether a rental arrangement exists, or alternatively the activities give rise to business income, will depend on the particular circumstances.
The issues that indicate whether a rental arrangement exists include:
- the tenant’s right to exclusive possession
- the degree of control retained by the owner, and
- the extent of the services provided by the owner.
In broad terms, “exclusive possession” is a contractual arrangement whereby the premises are leased to a tenant and the landlord is prohibited from entering the property unless permission has been sought. Short-term accommodation generally provides the guest with a temporary licence to occupy the premises and do not necessarily provide the tenant with exclusive possession.
The following example from the Tax Office illustrates on such situation:
Jenny owns a holiday apartment complex with 10 suites. The apartments are advertised collectively and are booked for periods ranging from one to two weeks. The majority of bookings are from one to seven nights. Jenny, as the owner-manager, is responsible for bookings, checking guests in and out and cleaning the apartments. She also provides clean linen and meal facilities to guests.
The arrangements indicate that the guests do not have exclusive possession but rather only the right to occupy the apartment. The guests stay for a relatively short-term and the services and facilities provided by Jenny are significant. These facts indicate that the income derived is not rent but rather business income, and therefore the property will be considered an active asset.
Whether a property-owner is carrying on a business will depend on the particular activities involved. Factors such as size and scale provide a good indication. Activities such as financing the property, appointing a property agent, attending to body corporate matters, undertaking periodic repairs and maintenance, and maintenance of accounting and tax records have not been considered commercial activities by the Tax Office in the past, but rather no more than any real property investor would carry out in monitoring and maintaining an income producing investment.