Hypethetical – Leasing house to family

Hi all,

I am wondering whether you guys could offer me some advice.

I am currently living in my first home which I purchased in January of this year. I have let out one of the rooms to a lodger and I have been carrying out some renovation work in my spare time. I have the intention of either selling the place once I am done with it or leasing it out and hopefully getting a good rental income for it since some of the essential parts of the house have been updated.

I was wondering whether it would be possible to lease the house out to my sister (who is currently living with the folks) in January of next year (once my 12 months in the house is up) which would then classify the house as an investment property. I would like to continue living in the house and doing the renovations in my spare time but have all the utility bills, phone etc transferred to her name. I was thinking that this way I would be able to claim back the interest payments made from the time my sister moves in to the end of the financial year.

Would this sort of arrangement be possible or would it raise some sort of red flag at the ATO? I would intend on doing everything legitimatally with signed contracts between me and my sister and charging her the market rate for rent and possibly (but not likely) having a property manager look after the place.

Any feedback woull be greatly appreciated.