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Peppercorn Rent

Discussion in 'Accounting & Tax' started by Roomer, 28th Dec, 2015.

  1. Roomer

    Roomer Member

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    Anyone know if the ATO accepts the notion of peppercorn rent?
    I have a rental property in my name that I would like to still own but for various reasons not have to deal with leasing out etc ( and no, I don't want to use a property agent, it's also a matter of not wanting the additional taxable income for the foreseeable short term future).
    I was wondering if I would be allowed to let my wife have the use of the property for a peppercorn rent such that she then would have legal entitlement to rent out the property herself and the income would be taxable against her name?
    If not a peppercorn rent, then what amount would be considered reasonable to the ATO ?
     
  2. Scott No Mates

    Scott No Mates Well-Known Member

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    • Is the property subject to land tax?
    • Does your wife have an interest in this property or is it solely in your name?
    • If your wife doesn't have any interest in this property, then you could lease it to her. A long-term lease ie more than 3 years so that you could pass on 'other costs' to her eg: council rates, water services, maintenance etc.
    • Wife could then sub-let the property
    (This is not a legal opinion).
     
  3. Roomer

    Roomer Member

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    - The property is in SA and land tax is by stealth ie Emergency Services Levy
    - Solely in my name

    Thanks Scott N M. Passing on the "other costs" to her was my intention given she's getting it for a peppercorn rent.

    Just wondering though what would constitute a "peppercorn" rent? $100, $500? pa
     
  4. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

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    The ATO could not care less what rent you decide to charge (or not charge in the case of charging a peppercorn rent). What it does care about is if you are claiming rental property expenses against your other income when you are not charging market rent. If you intentionally do not make every effort to charge market rent, then you are not entitled to claim rental property expenses.
     
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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    There are no restrictions on who or how you rent your property out like this. But don't expect to be able to claim any expenses in full if you are renting it out at below market rates.
     
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  6. Roomer

    Roomer Member

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    No the whole idea is for me to only charge the peppercorn rent ( which would be declared as income ) there would be no deductions claimed.
    That's why I am keen on knowing what would be a reasonable peppercorn rent
     
  7. Ed Barton

    Ed Barton Well-Known Member

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    Well in that case two shinny stones should do.
     
  8. Roomer

    Roomer Member

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    Excellent! Thanks Ed. if that's the case I might even make it three...
     
  9. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    sounds like an arrangement that would be subject to Part IVA. Charge peppercorn rent to create a lease agreement to the wife with no taxable income to yourself so wife (lower income earner) can charge commercial rents and be taxed at a lower rate. What is the sole or dominant purpose. Tread carefully.
     
  10. Roomer

    Roomer Member

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    Thanks MLTD, the dominant purpose would be to provide her with her own discretionary income and for her to be responsible for the management of the IP so that it would free me up to concentrate on other investments etc. likely with this arrangement , my taxable income would remain largely unchanged.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Roomer, can u give some rough figures?
     
  12. Roomer

    Roomer Member

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    IP rent ~$15K pa with say $3 - $4 K pa expenses, curious as to why the quantum would matter
     
  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Just trying to work out if there would be a tax advantage.

    This property would give you around $12k in profit.

    Lets assume your spouse is not working. So diverting income to him or her may mean the deductions could no longer be claimed, so the spouse would earn $15k and pay no tax.

    Assuming your average tax rate is 30% that would mean you save 30% x $12k = $3,600 per year in tax.

    If you and your spouse had the same marginal tax rate there would be no tax savings, but if you don't then there would be. Part IVA could therefore possibly apply.
     
  14. Greyghost

    Greyghost Well-Known Member

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    This is easily a part IV A scheme. What other purpose is there in entering the lease other than to obtain a tax advantage?

    It is my assumption that she will have minimal other income so will be taking advantage of the lowest tax bracket thus obtaining a tax benefit.
    No go on this one my friend.
     
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  15. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    There could be some cases eg husband below tax threshold and wife also so there wouldnt be a tax benefit but if that was the case then you would just give the wife the money as a gift or pay her to manage the property to take away some of the pressure. I couldnt see any benefit in having lease agreements drawn up otherwise if it was just to throw some cash her way.

    But if there was any tax benefit at all then part iva would pretty well destroy it. So cant see any benefit but maybe im missing something.
     
  16. Roomer

    Roomer Member

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    Thanks all, interesting the contrast in replies from yeah at the beginning to nay just now. I think that my wife earning by effort ie her doing the work and having her own income is a more of a self worth than just being gifted money and thus defendable particularly if my income remained at $x pa before and after this proposal. But I see where people are coming from if the purpose of it was to just to reduce your own tax
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It is possible to do what you describe, but there are various tax consequences.
     
  18. Roomer

    Roomer Member

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    Yes thanks Terry, I now see that there possibly would be ( pity I didn't buy it via a trust all those years back and it would never be seen as an issue)
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    perhaps you could consider the costs of selling half to your spouse and see how long the savings would take to exceed the cost of transfer.
     
  20. Roomer

    Roomer Member

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    Thanks Terry, it would have to be in small increments to offset the imbedded CGT obligations