Don’t let any of your friends tell you tax is boring, dear readers. Tax stories are human interest stories.
I was looking for something in the ATO database of private binding rulings (PBRs) and found the following story about someone who had rented part of their home to a refugee family. Concerned about the tax implications, including partial loss of the main residence exemption, the homeowner (I’ll use the pseudonym “the Morrisons”), sought a private ruling from the ATO.
The facts are brief but they recount that the “Morrisons”, motivated by a desire to help a family in need, rented part of their home to a refugee family who they met through friends. The rent was set at an amount that the renters could afford and was intended to cover the costs of their accommodation, such as water, electricity, insurance, repairs and maintenance. It was less than what the Morrisons could have charged on a commercial basis.
The ATO agreed that the rent paid by the refugee family was intended to cover expenses and was not set at a commercial rate. It ruled that the rent was not assessable income under ITAA 1997 s 6-5. As a result, the Morrison’s home was not being used to produce assessable income and they would not lose their entitlement to the main residence exemption. So the Morrisons could keep doing something worthwhile and not get a nasty tax surprise.
The ATO treated the situation as a non-commercial or domestic arrangement with no tax consequences and FC of T v Groser 82 ATC 4478 applied. However, leasing to friends or relatives for an uncommercial rent is a risky area. In other situations, the ATO may treat the rent as assessable but seek to apportion deductions where the arrangement has both business and private elements (see FC of T v Kowal 84 ATC 4001 and Madigan v FC of T 96 ATC 4640).
To find the PBR, its Authorisation Number is: 1012745156827.
Insights from the PBR database
While delving into their website, I learned that the ATO has already pumped out 404 PBRs this year (to 16 February). The ATO started publishing PBRs in 2001 and now there are tens of thousands of them.
I have previously cautioned readers not to rely solely on PBRs in making decisions (ATO private binding rulings – trash or treasure?). Lacking detailed facts, non-binding PBRs can be a general indicator of ATO thinking but practitioners should first take into account the law, public rulings and relevant cases.
However, the PBR database, for all of its shortcomings, is a mine of interesting information. Among other things, it is a kind of barometer of tax issues that are keeping practitioners and their clients up at night. Analysing PBRs reveals definite trends and themes which I will share in future blog posts.
Do you use PBRs?