If you own a rental property or holiday home, work out if your rental arrangements are for an investment or a business.
Common rental arrangements
Common rental arrangements include where you:
rent part of the property (rent out a room)
rent the property for part of the year
have a domestic arrangement with family members (meaning, you receive payment for board and lodging)
rent the property to your family or friends
rent your property consistent with normal commercial practices (arms-length arrangements).
Most owners are investors who are not in the business of letting rental properties, even where there is more than one investment property. This is because they:
have minimal involvement in rental activities (such as, interviewing potential tenants or inspecting the property)
still rely on income from their job.
Carrying on a business of letting rental properties
As the owner of rental properties, some of the factors that show you are carrying on a business of letting rental properties are the:
significant size and scale of the rental property activities
significant number of hours spent on the activities
extensive personal involvement in the activities
business-like manner in which the activities are planned, organised and carried on.
There are eight indicators to determine whether a business is being carried on. These are listed in paragraph 13 of TR 97/11. Although the ruling refers to primary production, these are equally relevant to non-primary production activities.
Where you receive payment from family members in the form of ‘board and lodging’, your arrangement is of a domestic nature. This means you don’t declare the rent as income and you can’t claim expenses.
However, where you rent out your property to relatives or friends, the essential question to work out is whether the arrangements are:
consistent with normal commercial practices in this area
less than commercial rent.
If the arrangement is consistent with normal commercial practices, we treat you the same as any other owner in a comparable arms-length situation. If the property is rented out at less than commercial rent, other considerations arise and your claim for expenses may only be allowed up to the amount of rent you received.
Reproduced with the permission of the Australian Tax Office. This article was originally published on https://www.ato.gov.au/Individuals/Investments-and-assets/Residential-rental-properties/Rental-property-as-investment-or-business/.
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