Rental and other rental related income represents the complete amount of rent and related payment that is received by a person or they become entitled to when the property is made available for rent. A taxpayer is required to include while filing their tax return the portion of the earnings from rent earned by taxpayer for taxation purpose. The rent is treated as the payment that is received by one party in exchange for the using the property of the other person within the agreed time period. The receipt of rental income is regarded as the ordinary income under “section 6-5 of the ITAA 1997” based on the concept of flow and the rent flows from the investment property (Sadiq et al., 2013). Furthermore, if the rental income is received as the lump sum then the amount received would still be treated as the ordinary income.
Correspondingly, the general provision of “section 8-1 of the ITAA 1997” provides that there are certain deductions for which the taxpayer is allowed to claim deductions associated to the rental property when the property is made accessible for rent. Nevertheless, a taxpayer is prohibited from claiming deductions from the rental property when the expenses are capital or private in character. A taxpayer however may be allowed to claim capital works deductions for the certain capital expenses or can include the capital costs in the cost base of the property for the purpose of capital gains tax.
Assessable income is liable for income tax since it is included into the assessable income. Ordinary income is treated as the income in accordance with the ordinary concepts and it is taxable under the “section 6-5 of the ITAA 1997” (Coleman et al., 2013). Income as per the ordinary concepts need the characterisation of gain in order to ascertain whether the gain has the nature of income. In “CT v Scott (1935)” the court interpreted income in agreement with use of mankind and ordinary perceptions. A receipt is not held as income if result in actual gain to the taxpayer.
Equally, while filing the income tax return the taxpayer is required to include in their income the receipts from the rental income because they are treated as the ordinary earnings under the ordinary meaning of “section 6-5 of the ITAA 1997” (Coleman et al., 2013). On receiving any letting fee or the booking fee for the rental income the taxpayer should then include those receipts in their tax return for assessment purpose. Referring to the decision in “FC of T Adelaide Fruit and Produce Exchange Co Ltd (1932)” any amount received or paid for using the property of another person then such receipts are held as rental receipts.
On receiving any reimbursement or the recoupment sum for the purpose of deductions then the taxpayer is under obligation of treating the amount as income (Braverman et al., 2015). As an illustration, the taxpayer might receive the sum from the tenant for covering the damage expenses up to a certain extent of the rental property and the taxpayer here can obtain the permissible deductions for repair expense. Nevertheless, the taxpayer should include the sum of income while filing tax return.
Similarly, an individual taxpayer is entitled to a permissible deduction for the specific expenses relating to the rental property when the same is sub-let or available for rent. Nevertheless, it is worth mentioning that the taxpayer is prohibited from obtaining deduction from the expenses that are private or capital in type. Referring to “section 8-1 of the ITAA 1997” the positive limbs permits the taxpayer to obtain deductions (Sadiq, 2018). Under the “section 8-1 of the ITAA 1997” when there is an outgoing incurred in deriving the assessable income then such outgoings will be treated as the permissible deductions. Furthermore, a taxpayer is also permitted to obtain the allowable deduction when the expenses are necessarily occurred in the derivation of taxable earnings.
The negative limbs of “section 8-1 (2)” explains that the taxpayer is not entitled to allowable deduction relating to the outlays and loss that are domestic or private in character. Additionally, the taxpayer is further prohibited from obtaining allowable deductions for the outgoings that are having capital character (Pinto et al., 2015). There are specific forms of rental outgoings relating to which the taxpayer is not entitled for deduction. This comprises of the claim relating to the immediate deduction for outgoings occurred in the income year. A taxpayer is not allowed for obtaining the deduction relating to the acquisition or disposal cost of property. This refers to the property expenditure which is not occurred by the property holder namely the electricity charges or water rates which is shoulder by the tenants.
Expenses such as council rates, water charges, interest on loans, sewerage charges, land tax or any emergency outgoings that is imposed on the land bought by the taxpayer in building the rental property that is occurred in renovating the property and when the taxpayer aims to rent out the property (Woellner et al., 2016). On the other hand, the taxpayers are not allowed for deductions from the time when there is a change in intention.
The expenses of rental property are allowed for deductions till the amount that these expenses are incurred with the aim of obtaining the rental income. Expenses will be permitted for deductions up to the period when the property is not let out for rental purpose given that rental property is accessible for rent (Robin, 2017). These expenses the advertisement expenses of the property in way that it results in greater exposure to the likely tenants and has considered each situation where the tenants are practically probable to rent. The non-existence of such factors generally provides reflection that the owner does not holds the intention of making deriving income from the investment property.
Consistently, there are certain aspects which portrays the rental property is not available in genuine way. This comprises that the property is advertised in a way that it restricts the exposure of the probable tenants such that the investment property is advertised at the workplace of the taxpayer and through the word of mouth (Burton, 2017). Expenses which is wholly related to the renting of investment property is fully considered for deductions. Contrary to the provision no expense is allowed for deductions for the period when the property is not rented out.
Most arguably, interest paid by the taxpayer for using the rental property at the time of making investment in the assets are generally considered deductible for taxation purpose till the amount that the expenses are occurred in producing the assessable income. It is noteworthy for the taxpayer to understand that the interest must have the necessary relation with the earnings that is obtained. The decision made in “FC of T v Steele (1999)” stated that the deduction for interest expenses is ascertained critically for taxation purpose relating the amount that is borrowed and the use of funds that is employed in it (Fleurbaey & Maniquet, 2018). Most commonly, the objective of borrowings is to determine the use of borrowed funds for which it is used.
The decision that is held in the case of “Kidston Goldmines Ltd v FC of T” provides the purpose of the borrowed funds and the subjective purpose is regarded as meaningful in ascertaining the deductibility of the interest expenditure (Keen & Mullins, 2017). Furthermore, reference can be made to the decision made in “FC of T v JD Roberts” that the legal issue was whether the expenditure incurred on interest at the time of generating income were occurred under the second limb of “subsection 8-1 of the ITAA 1997”. An assessment of use for which the money is borrowed is put under and individual objective during the normal circumstances would lead to identical assumption.
Interest expenditure would not have held as deductible expenses if it is noticed that the purpose of the borrowings has been ceased in the derivation of assessable income. It is believed that the expenses can satisfy the positive limbs of “section 8-1” despite the fact that they are incurred before the expected revenue (Oats et al., 2017). An expenditure might be treated too soon depending upon the sense that there was noteworthy delay in the incurrence of the expenses and the anticipated receipt of rent may be considered appropriate in determining whether the expenses would be held deductible. Similarly, the outgoings might be soon based on the circumstances that the advantage conferred by outgoing is necessary but not under the normal activities of deriving income.
Debatably, it is not easy to determine when the business starts. However, it is regarded as critical question in determining the deductibility of the interest expense that may not be held permissible under the general provision of “section 8-1 of the ITAA 1997” if the outgoings are occurred at a point very soon with no with the activities that are designed in the derivation of assessable income (Sikka, 2017). On the contrary the expense would not be treated as the deductible expenditure if the expenses are occurred at a point very soon or they are preliminary in the lead up.
The argument can be supported by referring to the decision in “Softwood Pulp and Paper Ltd v FC of T (1976)” where the expenses incurred by the taxpayer in setting up the paper producing industry were not treated as permissible deductions (Bamford, 2018). The primary for treating the expenses non-deductible because the expenses were preliminary and incurred in understanding the feasibility of setting up the revenue producing activities.
As a matter of fact, to obtain the allowable deduction for the rental property, it is necessary that the rental property should produce the taxable income or it is let out for deriving the assessable income within the ordinary conceptions of “section 6-5 of the ITAA 1997”. A taxpayer is denied deduction under the two positive limbs of “section 8-1 of the ITAA 1997” when the rental property is not producing any taxable income (Burton, 2017). The outgoings must have appropriate relation with the income generating activities and must be directed in the deriving the taxable earnings.
Conclusion:
On arriving at the conclusion the essay evidently lays down that the taxpayer can claim for deductions relating to the expenses that is incurred by them when the property is rented out or made open for rent. To treat the expenses as the permissible deduction it is necessary that the expenses occurred are directed towards the derivation of assessable income. The expenses should also be incidental and relevant in producing the income.
Alternatively, in order to classify the expenditure inside the initial part of subsection it is vital that the outgoings are both sufficient and necessary in the derivation of the assessable income. Clearly, the outgoings in the form of expenses and the interest during the first four months of the rental property will not be allowed as deductible expenses because the property was not let out for producing any taxable income.
References:
Bamford, D. (2018). Arguing for a New Form of Taxation: Lifetime Hourly Averaging. Journal of Applied Philosophy, 35(2), 280-299.
Braverman, D., Marsden, S., & Sadiq, K. (2015). Assessing Taxpayer Response to Legislative Changes: A Case Study of In-House Fringe Benefits Rules. J. Austl. Tax’n, 17, 1.
Burton, M. (2017). A Review of Judicial References to the Dictum of Jordan CJ, Expressed in Scott v. Commissioner of Taxation, in Elaborating the Meaning of Income for the Purposes of the Australian Income Tax. J. Austl. Tax’n, 19, 50.
Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., McLaren, J., … & Sadiq, K. (2013). Principles of taxation law. THE AUSTRALIAN TAFE TEACHER.
Coleman, C., Hart, G., Bondfield, B., McLaren, J., Sadiq, K., & Ting, A. (2013). Australian Tax Analysis. Thomson Reuters.
Fleurbaey, M., & Maniquet, F. (2018). Optimal income taxation theory and principles of fairness. Journal of Economic Literature, 56(3), 1029-79.
Keen, M., & Mullins, P. (2017). International corporate taxation and the extractive industries: principles, practice, problems. International Taxation and the Extractive Industries, New York and London: Routledge.
Oats, L., Miller, A., & Mulligan, E. (2017). Principles of International Taxation.
Pinto, D., Kendall, K., & Sadiq, K. (2015). Fundamental Tax Legislation. Thomson Reuters.
Robin, H. (2017). Australian Taxation Law 2017. Oxford University Press.
Sadiq, K. (2018). Australian Tax Law Cases 2018.
Sadiq, K., Coleman, C., Hanegbi, R., Hart, G., Jogarajan, S., Krever, R., … & Ting, A. (2013). Principles of taxation law 2013. Thomson Reuters.
Sikka, P. (2017, December). Accounting and taxation: Conjoined twins or separate siblings?. In Accounting forum(Vol. 41, No. 4, pp. 390-405). Elsevier.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C., & Pinto, D. (2016). Australian Taxation Law 2016. OUP Catalogue.
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