How to Pay $0 Tax on Rental Income: Using the "Mates' Rates" Rule

Sometimes you’d rather have a friend in your property than a stranger. And you’re happy to charge them less than market rent. Done right, this can also mean paying $0 tax on your rental income.

Inland Revenue consistently refers to this scenario as renting at “mates’ rates”. This means renting to friends or acquaintances at a discount.

I like to call it the ‘Mates’ Rates’ Exemption Rule.

The rule is straightforward: if you rent a qualifying property to anyone for less than 80% of its market value rent, the income you receive is automatically treated as exempt income, simplifying your tax obligations.

What is Exempt income?

Exempt income is income you do not have to pay tax on. If you qualify, you can:

Treat your rental income as exempt.
Avoid reporting the income or expenses for that year.

Why this Rule exists

The mixed-use asset rules need a clear way to distinguish between a genuine rental activity and what is essentially a private arrangement.

The 80% rule creates a simple threshold. A small discount might still be commercial, but the law defines a large discount (more than 20%) as “private use”.

Because it is defined as private use, any income received for that use is automatically treated as exempt income

What is “Market Value”?

“Market value” is the rent that a willing tenant would pay to a willing landlord in an open market transaction. It reflects the going rate for similar properties in the same location at that time of year.

The 80% Rule Explained

Crucially, the 80% rule is not intended to capture genuine commercial discounts. The following situations are not considered “mates’ rates” and the income remains taxable:

Renting at a lower price during the off-peak season.
Offering a discount for a long-term booking.
Using introductory low pricing to establish a profile in the market.

In these cases, the lower price is the market rate for those specific circumstances, so the 80% rule does not apply.

Example: The 80% Rule in Action

Arrangement: Sarah owns a bach in the Coromandel which she rents out. The standard market rate during summer is $400 per night. She lets her friend, Tom, use it for a week for $200 per night.
Calculation: The rent charged ($200) is 50% of the market value ($400).
Tax Treatment: Because this is less than 80% of the market rate, the $1,400 Sarah receives from Tom is exempt income. She does not declare it, but she also cannot claim any of the bach’s expenses for that week.

What is the catch?

For this rule to apply, the property must be a “mixed-use asset”. The most common type of mixed-use asset is a holiday home, because the property must be:

● Used partly for deriving income and partly for private use; and

● Unused for 62 days or more in the income year.

What if the property is not a Mixed-Use Asset?

If your property does not meet the mixed-use asset criteria (for example, it is a long-term residential rental), the standard tax rules apply. In that case, if you charge below-market rent, your deductions are generally limited to the income you receive, which can also result in a $0 tax profit.

My Advice: Practical Considerations

1. Formal Agreements: Even with friends, it is highly advisable to have a formal tenancy agreement in place. This clarifies expectations regarding rent, maintenance, and property use, protecting both the relationship and your asset.

2. Keep Good Records: Always maintain clear records of who used the property, for how long, and the rent paid. This is essential for correctly applying the tax rules correctly.

3. Beware the Bright-Line Test: The main home exclusion from the bright-line test only applies if the owner lives in the property. If you rent it out (even to a friend) and do not live there yourself, it will not qualify as your main home, and any gain on sale could be taxable.

The Takeaway: there’s a critical trade-off

This rule works best when you want to help a friend and aren’t aiming to profit, or when you want to keep someone you know in the property without worrying about tax bills.

The trade-off for receiving exempt income is that you cannot claim any deductions for expenses related to that rental period.

This means costs like mortgage interest, rates, insurance, and repairs cannot be claimed against the discounted rental income. The rental activity is effectively removed from your tax return for that period, resulting in a net tax position of zero. Crucially, because you cannot claim the expenses, you cannot generate a loss to carry forward against future profits.