Issue
Is the taxpayer entitled to deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred in earning rental income from the lease of a car park which is attached to their private residence?
Decision
Yes. The taxpayer is entitled to deductions under section 8-1 of the ITAA 1997 for expenses to the extent that they are incurred in earning rental income from the lease of a car park which is attached to their private residence.
Facts
The taxpayer owns an apartment which is their private residence.
The apartment includes an attached car park. The taxpayer incurs a proportion of their mortgage interest expenses, body corporate fees and council rates in relation to this car park.
The taxpayer rents the car park out to a third party, at a commercial rate, in an arms length transaction
The taxpayer derives assessable rental income from leasing their car park.
The lessee will have sole use of the car park for the duration of the lease agreement. The taxpayer will not be using the car park in any manner at any time whilst the lease arrangement is in place.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
The taxpayer earns assessable rental income from the lease of their car park. Expenses incurred in earning rental income may be deductible under section 8-1 of the ITAA 1997.
The taxpayer incurs interest expenses, body corporate fees and council rates in relation to their main residence. Generally these sort of expenses satisfy the requirements of section 8-1 of the ITAA 1997 if they are incurred with regard to a rental property.
However an apportionment is appropriate where the property is used only partly for income producing purposes. Where only part of a property is rented out or is available for rent the deductions will be limited to that proportion that equates to the proportion of the rental property rented out or available for rent.
Income Tax Ruling IT 2167 deals with, amongst other things, the apportionment of losses and outgoings where there is an arms length letting of an identified part of a residence. IT 2167 provides that where a taxpayer lets an identified part of their residence to a tenant on an arm's length basis (i.e. the rent charged by the owner represents a normal commercial rent), a deduction for losses and outgoings should be apportioned on a floor area basis, such as, by reference to the floor area of the residence to which the tenant has sole occupancy.
As the car park is the only part of the taxpayer's property which is rented out the deduction available to the taxpayer will be limited to that proportion attributable to the car park. As discussed in IT 2167, the apportionment of the expenses should be determined on a floor area basis.
Accordingly, the taxpayer is entitled to deductions under section 8-1 of the ITAA 1997 for the expenses they incur in earning assessable income from the lease of the car park.