LEASEBACK RESIDENCE TO EMPLOYER - HOSUING/DEDUCTION
27 January 2005
It has become practice in some employment relationships for schemes to be entered into that aim to allow employees to claim income tax deductions for mortgage interest on private residences.
Under this type of arrangement, an employee ('A') leases his private residence to his employer ('B') for a market rent. B immediately grants a sublease of the residence back to A. A agrees to sacrifice an amount of salary equal to the market rent in return for a housing benefit from B, being the right to occupy or use the residence under the sublease. However, A's income from B is not reduced because it is made up by the market rent A receives from B under the head lease.
The ATO's view on these arrangements is that the essential character of all of the expenditure incurred by A in relation to the property is determined by the fact that it is paid to secure and maintain A's private residence, his occupation of which continues undisturbed by the arrangement. In these circumstances, the expenditure constitutes outgoings of a private or domestic character and is not deductible to A.
In the alternative, and to the extent (if any) that expenses relating to the property are deductible to A, the artificial and contrived nature of this arrangement (a scheme for the purposes of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)) will require an examination of the dominant purpose of the parties involved for entering into and carrying out the scheme.
In the ATO's view, the manner in which the scheme is entered into and carried out, the contrast between its form and substance and the fact that A receives the same amount of income from B strongly suggest that Part IVA of the ITAA 1936 will be applicable.