A new Tax Office ruling clarifying the criteria for deductions on income earned through specific lease arrangements may limit property investors who incorrectly claim losses on their properties.

The ruling, issued mid-September, sets out parameters for claiming losses on properties that are let at arm’s length or to relatives, or on properties that are used as holiday homes part of the year.

As part of the ruling, holiday homeowners cannot, for instance, treat small payments from friends or relatives who use the home as assessable income.  Any income received from the commercial letting of the home, however, can still be claimed.

The Tax Office ruling lists seven sections – which represent seven rental situations – in which questions commonly arise about “the extent to which losses and outgoings in connection with rent producing properties are allowable as income tax deductions.”  These situations are as follows:

• arm’s length letting of an identified part of a residence, for example a bedroom, with access to general living areas of the residence
• letting of property to relatives
• payment by family members of an amount for board and lodging
• occupancy of part of a residence on the basis of occupants sharing household costs such as food, electricity, heating, etc.
• letting of a holiday home or potential retirement home for part  of a year only
• letting of a residence during a transfer in place of employment
• purchase of a residence by a family trust and the subsequent leasing of it to family beneficiaries in the trust. Read more