The ATO has issued a formal guideline that where two taxpayers jointly own a property (on say a 50/50 basis), and one pays rent to the other to occupy the entire property, that “lessor” is entitled to claim their share of rental property expenses against the rental income they receive from their co-owner who lives in the property.

Example

A taxpayer owns a property as tenant in common with another person, with a 50% legal interest. The taxpayer’s co-owner lives in the property, but the taxpayer does not live in the property. The taxpayer’s co-owner pays $70 per week to the taxpayer to live in the property (commercial rent in the area is $140 per week).

In such a case, the rent (reflecting an arm’s-length agreement) would be assessable income in the hands of the recipient, so the taxpayer may deduct any losses or outgoings incurred in gaining or producing the rental income.