Tax implications of Rental Income?

[Icarium]

To any tax gurus on here, I just want to understand if my understanding of the tax laws around rental income is roughly correct. The scenario is as follows:

My SO and I are in the process of purchasing a house, which as part of the purchase agreement has a condition whereby we will allow the current owners to rent the property for a period of 6 months at a rate somewhat less than the normal occupational rent figure would be (Long story short, we didn't want to meet their asking price and this is part of the compromise).

From my understanding, since we're not married yet we will have to split the rental income between us for tax purposes and declare this as income in the 2015/2016 tax year. We will, however, be able to offset this rental income with the interest portion of the bond repayments and rates/taxes paid during the period that the house will be rented out, which means that we will actually end up with an assessed loss on this source of income for the year and pay no tax on it. Is this correct?

That's the boring part of the question.

What I'm interested in knowing (assuming my above understanding is correct) is this: Since we will be renting the property out for a period of 6 months to a non relative, this income does not fall under the ring fencing provisions when it comes to assessed losses, and adding the assessed loss back to our salaries does not result in either of us falling into the top marginal tax rate. Does this mean that we will be able to offset the resulting losses from our rental against our normal salary income?

Should we go through with this we will obviously seek the services of a tax practitioner for the period under question, but I'm interested in getting a correct view on this now.

 

[cr@zydude]

Your biggest problem is that to be considered to be trading, you must have a profit motive. Your scenario doesn't seem to have it.

 

[Icarium]

Your biggest problem is that to be considered to be trading, you must have a profit motive. Your scenario doesn't seem to have it.

According to the SARS website, you don't need to have a profit motive simply to offset your expenses in producing rental income against said rental income. The trading requirement only seems to come in to effect when determining if any losses are to be ringfenced (ie: cannot be used to offset other income).

From the SARS website:

What if the expenses exceed the rental income?

Should the expenses exceed the rental income, the loss should be available to be off-set against other income earned by the homeowner, provided that losses are not “ring-fenced” in terms of prevailing anti-avoidance provisions. For more information, see our Guide on ring-fencing of assessed losses arising from trade conducted by individuals.

And in the guide on ring fencing it specifically excludes losses on rental income from ring fencing:

the rental of residential accommodation, unless at least 80 per cent of the residential
accommodation is used by persons who are not relatives of that person for at least
half of the year of assessment;

The "profit motive" test is only applied if the rental income does not meet the above exclusion, and in our case it does.