Commercial property: how is rental income taxed?

Rental income from property is usually taxed as ordinary income unless a taxpayer is carrying on a business for taxation purposes.

Where a person owns one or more properties, whether alone or with others, they are usually regarded as investors. This applies also to other entities such as a trust or company.

However, if substantial rental property interests are owned by the taxpayer, it is possible that the Australian Tax Office will accept that there is a rental business being carried on.

It would be unwise for a taxpayer to treat their rental activity as being a business without receiving suitable professional advice first or a private binding ruling from the Tax Office.

If you’re not considered to be carrying on a rental business, rental income is assessed on a cash basis. This means that the rental income actually received by either the landlord or the agent during the month is assessable to the landlord in that month. Where rent is received in arrears, it remains assessable in the month of receipt, not in the month the payment was actually due.

If the property is owned by more than one person, rental income and expenses must be split between each co-owner according to their legal ownership interest in the property.

For example, taxpayers generally own properties as:

•  joint tenants, where they each hold an equal interest in the property, or

• tenants-in-common, where they may hold unequal interests in the property – for example, one may hold a 20% interest and the other an 80% interest.

If the property is held as joint tenants, then the net income, or loss, will be split equally according to the number of owners.

This is typically referred to as a tax law partnership, and in these circumstances the owners cannot agree to an apportionment of income on a basis different to that of the ownership interests.