A taxpayer who rented out a property to her estranged husband was not entitled to deduct rental expenses in excess of the rental income she received.
The taxpayer owned a 3-bedroom property in Sydney. In September 2015 she rented the property to her estranged husband (Mr Daouk) for a monthly rent of $1,016, which was the amount Mr Daouk said he could afford at the time. The tenancy was meant to be temporary as the taxpayer was hoping she and Mr Daouk would reconcile.
For the 2016 and 2017 income years, the taxpayer claimed deductions for interest, structural improvements, repairs/maintenance and other expenses. However, during an audit by the ATO, the taxpayer voluntarily withdrew all deductions relating to structural improvements and repairs.
The AAT concluded, on the evidence, that the taxpayer had rented the property to Mr Daouk so that he would have a place to live in close proximity to her which would facilitate their attempt to reconcile their relationship and that the rent paid by Mr Daouk was sufficient to cover only the taxpayer’s loan repayments. Furthermore, the taxpayer had failed to demonstrate that the property was rented to Mr Daouk pursuant to an arm’s length agreement on commercial terms. As a result, the AAT decided that only losses and outgoings up to the amount of the rental income ($12,000 for 2016 and $12,200 for 2017) were deductible and the excess amount was not.
The AAT also decided that the administrative penalties were correctly calculated on the basis of recklessness and that the “safe harbour” exception did not apply. However, in the circumstances, it was appropriate to remit the penalty by 25%. (Rizkallah and Commissioner of Taxation (Taxation)[2022] AATA 3081 (AAT, Kirk SM, 16 September 2022.)
http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/AATA/2022/3081.html
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