Sharing your property space – The “boarding” difference
There are various situations for which you might want to share your space; property space I mean not personal ~ who would ever want to do that! And with the rise of the sharing economy, it seems a main theme with advisors is the recommendation that clients rent out a bit of their space to generate a passive income stream. And why not! You can use this extra cash to pay down your mortgage, invest for your retirement or simply go on more holidays. Winning!
Ordinarily, from a tax perspective, when you grant a lease or licence (wholly or in part) to another person for the use of your property/space, it represents assessable income. This means that you will need to report this income in your tax return and pay tax at the appropriate rate. To add insult to injury, you would also need to consider the capital gains tax consequences on subsequent disposal if you were renting out a space in your home.
But did you know not all arrangements where you receive a fee in return for the grant or use of your space is considered ‘rent’? And it is possible that you can have your cake and eat it too ~ meaning you receive a consistent cash flow of funds without the need to pay tax on this income or Capital Gains Tax on subsequent sale.
Board and lodging arrangements
A semi tax haven you can get to in Australia, at least from a property letting perspective, is something called board and lodging arrangements. Board and lodging situations are generally where you let someone (normally a relative) live and share meals in return for payment for the shared use of space (electricity, furniture, heating, etc.).
To help you understand the tax consequences of boarding arrangements, it is important that we take a trip through history to the case of Federal Commissioner of Taxation V Groser in the year 1982 (Groser Case).
In this case, the Taxpayer Groser, permitted his invalid brother to live in a house that he owned. The arrangement was that Groser was to receive his brother’s pension so he could use the money to provide for the brother’s maintenance. But it was also agreed that $2 per week would be deducted for rent of Groser’s house.
Now the pertinent question here is whether the $2 payment received from his brother for rent was subject to tax; because ‘rent’ has all the characteristics of income in the sense that the payment benefitted Groser and exhibits recurrence and regularity (like an income stream). At least this was certainly the ATO’s argument in this case. However, the Court held that these weekly amounts were not assessable income, but rather contribution of funds to which Groser proposed to maintain his brother and not the kind which generates income (as least in an ordinary sense).
Finally, a win for the little guys! So contrary to popular belief of what the ATO may tell you at times, not all circumstances where you lease your property to a related party is subject to income tax.
Capital gains tax (CGT) & deductions on boarding arrangements
What is also great about these boarding arrangements is that they don’t also trigger an unnecessary CGT consequence. This is because it is inherently a private arrangement. So it follows that because you are not using your home to produce assessable income (either through renting or carrying on a business) it does not trigger the CGT regime. In this regard, you still get to preserve the ‘full’ main residence exemption instead of only a partial exemption; normally calculated by proportion of space and duration of the using the property for rental/business purposes.
In addition, these boarding arrangements don’t require you to apply the ‘first used to produce assessable income’ rule. This rule applies when you repurpose your home to an investment purpose or when you use your home for business. What happens, is that there is a deemed disposal of your property to yourself, for which you then reacquire it at its market value ~ yeah I know, tax is a funny system.
So all in all, it honestly sounds too good to be true doesn’t it! But there is one final aspect that we need to consider and this is whether expenses associated boarding arrangements are deductible?
And unfortunately the answer to that is no. Deductions generally follow income. There is a cause and effect sort of relationship with it. It is ‘all in’ or ‘all out’.
For normal leasing arrangements for rent, you need to report the amounts received as assessable income, but you can then claim deductions relating to your property, both running and occupancy costs such as rates, water, interest, etc.
For board and lodge arrangements, you do not report amount received as assessable income, but you won’t be able to claim deductions for running or occupancy costs.
A final word
As a final word, it is interesting to note that because this Groser case is quite old, not a lot of your accountants these days are still familiar with it or have simply forgotten it. So taking the concepts and learnings from this case and applying it to the 21st Century, I still believe it is very relevant and can be quite common to have these arrangements, for example where:
• You receive lodging from a relative or friend looking to share accommodation to help them save to purchase a home;
• You accept boarding from your children to assist with the contribution to household expenditure; or
• You build and lease out a granny flat/apartment close to your home to your parents so you can take care of them instead of putting them in a nursing home.
It is understandable that a majority of people do not fit into these categories. But for people who have the space, are socialites and are willing to help out a personal friend or relative with their living arrangements, it definitely can be a way to knock off your mortgage quicker or generate another income stream.
So whether this blog hits home or you are savvy individual looking to implement a related leasing arrangement, call Empire Accountants today on 07 3124 0244 to share your space with confidence!
Leonard Jiang | CA, CTA, DFP
Property Tax Specialist
T 07 3124 0244 | E firstname.lastname@example.org