Understanding tax deductions on rental properties

There are plenty of grey areas in tax law - this is certainly true when it comes to claiming tax deductions on rental properties.

One issue that can arise is when an investment property is let to relatives.

If the tax office believes the terms aren't commercial, your claim to be able to deduct the costs associated with owning the property - and, therefore, your ability to negatively gear it - may be rejected.

But what is or isn't commercial can be a matter of opinion, a point highlighted by a decision by the Administrative Appeals Tribunal in the case of Bocaz and the Federal Commissioner of Taxation.

In this case the taxpayer owned two rental properties jointly with her son.

During 2007-08 one property was rented to the taxpayer's former husband for $200 a week. He also agreed to carry out repairs and renovations.

The second property was let to the son, as joint owner, for $165 a week.

The taxpayer argued that the rental arrangements were commercial and so the income received was assessable income.

This meant expenses associated with the properties could be deducted, a situation that resulted in them being negatively geared.

In the end the tribunal ruled that, contrary to the initial tax office decision, the rental arrangements were not non-commercial.

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