Taxation Law: Rental Income and Permissible Deductions

Running head: TAXATION LAW
Taxation Law
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1TAXATION LAW
Introduction:
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.
Discussion:
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.

2TAXATION LAW
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