For the rental to be expensed in the Pty Ltd, is it only the bond repayments excluding the interest on the bond which is allowed as an exp in the guest house? Do you think an attorney must draw up a lease agreement between the private person and the guest
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
The agreement between the owners of the property and the company carrying on the guest house trade is a rental. It would be advisable to reduce it to writing. The company will be able to make a deduction of the rental expenses under section 11(a) of the Income Tax Act.
The individuals will declare the rental as income, I am not sure if they own the property jointly or not. They will then be able to make a deduction of all the expenditure incurred to produce the rental income. That can include the interest on the bond (section 24J(2) of the Act), but we would need more information about the purpose of the acquisition of this property to give guidance on that. Certainly, expenses such as municipal rates (the tax part) will qualify as a deduction, as well as the other listed on your document – if incurred by the individuals. Remember that the capital reductions of the amount owing under the bond, will be capital in nature and no deduction can be made by the individuals in respect thereof.