The way that rental income and expenses are divided between co-owners varies depending on whether the co-owners are joint tenants or tenants in common or there is a partnership carrying on a rental property business.
Dividing income and expenses according to legal interest
Co-owners who are not carrying on a rental property business must divide the income and expenses for the rental property in line with their legal interest in the property. If they own the property as:
- joint tenants, they each hold an equal interest in the property
- tenants in common, they may hold unequal interests in the property, for example, one may hold a 20% interest and the other an 80% interest.
Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners, either oral or in writing, stating otherwise.
Interest on money borrowed by only one of the co-owners which is exclusively used to acquire that person’s interest in the rental property does not need to be divided between all of the co-owners.
If you don’t know whether you hold your legal interest as a joint tenant or a tenant in common, read the title deed for the rental property. If you are unsure whether your activities constitute a rental property business, see Partners carrying on a rental property business below.
Co-owners of an investment property (not in business)
A person who simply co-owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business, either alone or with the other co-owners. This is because of the limited scope of the rental property activities and the limited degree to which a co-owner actively participates in rental property activities.
Most rental activities are a form of investment and do not amount to carrying on a business. However, where you are carrying on a rental property business in partnership with others, you must divide the net rental income or loss according to the partnership agreement. You must do this whether or not the legal interests in the rental properties are different to the partners’ entitlements to profits and losses under the partnership agreement. If you do not have a partnership agreement, you should divide your net rental income or loss between the partners equally.
For more information about dividing net rental income or losses between co-owners, see Taxation Ruling TR 93/32 Income tax: rental property – division of net income or loss between co-owners.
For more information about determining whether a rental property business is being carried on, determining whether it is being carried on in partnership, and the distribution of partnership profits and losses, see:
- Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production?
- Paragraph 13 of Taxation Ruling TR 97/11 lists eight indicators to determine whether a business is being carried on. Although this ruling refers to the business of primary production, these indicators apply equally to activities of a non-primary production nature.
- Taxation Ruling TR 94/8 Income tax: whether a business is carried on in partnership (including ‘husband and wife’ partnerships)
- Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business – permanent establishment – deduction for interest
- Taxation Ruling IT 2316 Income tax: distribution of partnership profits and losses.
You should keep records of both income and expenses relating to your rental property.
Records of rental expenses must be in English, or be readily translatable into English, and include the:
- name of the supplier
- amount of the expense
- nature of the goods or services
- date the expense was incurred
- date of the document.
If a document does not show the payment date you can use independent evidence, such as a bank statement, to show the date the expense was incurred.
You must keep records of your rental income and expenses for five years from 31 October or, if you lodge later, for five years from the date you lodge your tax return. If at the end of this period you are in a dispute with us that relates to your rental property, you must keep the relevant records until the dispute is resolved.
Do not send these records to the ATO. Keep them in case we ask to see them.
The following list provides some examples of records you should keep to make it easier to complete your tax return:
- loan documents
- receipts for expenses, including repairs, maintenance, insurance and purchases of depreciable assets
- land tax assessments
- credit card records
- tenant leases
- bank statements
- rent records from managing agents.