Renting to your Spouse

Hello,

I am curious if anyone knows or has any ideas about the following scenario, likely issues, consequences, experiences etc.

Someone renting their property to their partner (husband/wife/gf/bf) at a fair rental price and putting it on their tax return as an investment property.

- Would it make a difference if the property is positive or negatively geared for tax purposes? I would imagine if negatively geared the ATO may have an issue with this being a scheme to avoid tax in some circumstances.

- Would it make a difference if the owner then lives in the house (ie is given free rent by their partner)?

- I believe six year CGT rule would start counting and if it went for over 6 years you maybe suffer from CGT.

- Possible land tax issues (but would this apply if the owner was actually living their)?

Cheers

 

1. tax position would change. If you were living there no tax deductions.
2. yes, you cannot rent from yourself
3. only if you are absent.
4. If you are living there it would be owner occupied.

 

You need an alias or a "friend" to rent it to

 

Would multiple personalities count?

 

That's always fun

Isn't that why wives don't take their husbands name for the tax rorts and get passed the PM's

 

Just ask Joe Hockey.
Apparently it's all above board.

 

A guide from the ATO on the same issue

IT 2167 - Income Tax: rental properties - non-economic rental, holiday home, share of residence, etc. cases, family trust cases (As at 4 July 1985)

 

Thanks for all your responses.
I would have thought the ATO would have little interest in a positively geared rental property no matter who you are renting it to unless you are understating income or overstating expences.
If you aren't trying to claim negative gearing benefit whether its technically within the rules or not would they likely have an issue?

Cheers

 

If you were living there and renting to your wife you wouldn't be able to claim any expenses because it is a loss of a private of domestic nature s8-1(2)(b) ITAA97.

Even if you could pass this section the ATO could deny the deductions under Part IVA ITAA36.

If the property is positively geared then what would be the point of doing this anyway as you would be paying tax on what otherwise would be exempt. Your property would also be subject to CGT if it is earning income.

 

as stated in the ruling

"
14. If property is let to relatives at less than commercial rent other considerations arise. Unless the arrangements are comparable to those in FCT v Groser referred to earlier, the rent would represent assessable income. It would not necessarily follow, however, that losses and outgoings in relation to the property would be wholly deductible. The ultimate resolution of the matter would depend upon the purposes of the taxpayer in acquiring the property and in letting out to relatives.

15. In the Kowal case, for example, the Court found that the taxpayer had two purposes or objects in mind in acquiring the relevant property. One was to provide his mother with a good home at moderate cost. The other was to earn assessable income. The Court further found that the second purpose or object was the predominant one and, in the result, allowed income deductions for 80% of the losses and outgoings falling within sub-sections 51(1) and 67(1). In the Groser case, on the other hand, the Court expressed the view that, if the weekly rental had been assessable income, it would have allowed no more than $104 by way of deduction under sub-section 51(1) - the reason for this being that private or domestic purposes for the expenditure predominated over the purpose of producing assessable income.

16. As has been said earlier, decisions in these cases will ultimately depend upon the facts of each case. As a matter of experience it is unlikely that there will be sufficient information provided in return forms to enable a final decision to be made. In these circumstances, and as a working rule, income tax deductions for losses and outgoings incurred in connection with the rented property may be allowed up to the amount of rent received. Whether any additional deduction is to be allowed will depend upon the nature of any further information provided by the taxpayer. "

 

Thanks for all of your replies.

If a property is positively geared is the ATO going to try to say your expenses cant be claimed in this case? I would think they would be happy you are voluntarily paying more tax

 

In my opinion yes. If you are living in the property.

if you are not then it may be ok.

 

someone wanting to do this may have to move out then

 

So why are you volunteering to pay more tax?
Marg

 

Not something i am doing just hypothetical but i can think of a number of reasons to do this. Employers may pay a subsidy towards someones rent or someone can salary sacrifice their rent are the first two that spring to mind. These are fairly common in remote and regional areas. Generally if one partner owns a house and the other partner has a job with either or both of these perks its either look at something like this or both move into another rental property or 'waste' a lot of subsidy and/or tax benefits.

 

I seem to recall when I lookedatthis several yearsago that remote housing benefit exemption from FBT did not work if you as the employee were leasing from a spouse. So you originally started with what seemed like an income tax question but have now brought in fringe benefits, so yes if you were positively gearing a rental house with your spouse from an income tax aspect the ATO might not be concerned, but if the purpose is to take advantage of fringe benefits there is another question.

So your original question should give all the facts eg I propose to rent a house from my spouse and either (a)reduce my taxable income by using the remote fringe benefit tax allowance; or (b) have my employer pay the rent, what are the taxation consequences.

 

The first thing that comes to my mind, is why not rent somewhere for yourself, and rent out your IP to the market, anything else sounds like trying to cheat the system ..... to me.

 

Not something im doing or planning to do just interest on the way things work and why. I am also curious how politicians manage to get paid travel allowance to stay at houses owned by the spouses in Canberra? I presume the spouses also stay with them some if not most/all of the time?
If a couple lived in another town/city could one partner own an investment property and rent it to their partner who is claiming TA while frequently working away (say FIFO)

 

Pollies get a TA under government rules that compensates them uniformly to avoid costly hotels where security would be compromised. They OR their spouse or a third party may own it as long is its approved. The rules encourage them to get a per diem rate which appears generous but when you look at the nightly charge by the Hyatt Canberra its not as much. Typically its around $270 a night for a front bencher etc.

Read about the Travelling Allowance here

Provided its not their main residence then there is no issue with claiming operating cost deductions where an allowance is received. (there are different issues in reality). You can also do this if you travel and are away from your main residence for work too. The ATO even have a concessional treatment.

FIFO etc is a fringe benefit issue with the employer. Very different. You probably cant buy land in the Pilbara on a mining lease

 

What happens when you have your company owning a property and you rent it out to yourself/others?

I'm debating either doing this or buying an apartment joint with my kid and the guy I live with, but am a bit concerned about the implications of being partially and jointly responsible for a mortgage in the latter case. That or the thing where he gets the loan and I'm on the title.

He's young and has no other debts but he has a proper job so banks would probably throw money at him. Me, I have to scrape together 20% every time I buy anything.

Edit: won't be a main residence for me. I mostly work from home and my main residence will be elsewhere. He works in the CBD.