KP Brady Ch
JE Stewart M
No. 2 Board of Review
K.P. Brady (Chairman) and J.E. Stewart (Member)
The question to be determined in these references is whether the taxpayer is entitled to claim the full amount of losses incurred in renting a residence which he and his wife own as joint tenants.
2. In giving his evidence, the taxpayer advised that he and his wife purchased the house in question, which was situated in one of the outer suburbs of Perth, in July 1975. The required funds came from their savings, and from a building society loan secured by a first mortgage over the property. At the time of purchase, the couple were living in rented accommodation in a provincial city where the taxpayer was carrying out country duties associated with his employment. That assignment lasted for some four years. Upon its completion, the couple moved back to Perth and took up residence in what was, for them, their new home.
3. During the years that they were away from their home city, i.e. 1975 to 1979, they rented out the house almost continuously, and incurred losses, which situation was almost inevitable as the interest charge alone was greater than the rental income.
4. In compiling his taxation returns for the above years, the taxpayer claimed the full amount of the annual loss as a deduction from his salary income. In issuing the relevant assessments, however, the Commissioner considered that a partnership relationship existed between the couple because of the extended definition of ``partnership'' detailed in sec. 6 of the Income Tax Assessment Act; furthermore, he considered that the taxpayer's interest in the partnership losses should be no greater than one-half. (For reasons that need not concern us here, the taxpayer did not contest the Commissioner's disallowance of one-half of his claim for the year of income ended 30 June 1977.)
5. We should add that the amount of total loss for the year ended 30 June 1979 was reduced by consent at the hearing through ascertainment of errors in the taxpayer's original calculation, and the deductions in issue as suitably amended were:
1975/76 1977/78 1978/79 $876 $617 $374
6. In giving his evidence, the taxpayer informed us that the rentals from the house were collected by a real estate agent and paid over to his wife and himself as joint payees of each settlement cheque, and paid into a bank account in their joint names. Expenses relating to the property, such as repairs, insurances and rates, were paid out of that joint account. Normally the accounts for such charges would be issued in their joint names. However, funds in the joint account were also used to meet expenditures having nothing to do with the rented property.
7. The taxpayer submitted that he should obtain deduction for the whole of the losses in lieu of half, because he was the only income earner in the family, and thus all the losses associated with the property had to be met from his income. He went on to state that, whilst there was no formal agreement between his wife and himself that he should lay claim to deduction of all the losses, they both shared the view that if losses were to be incurred in renting out the house the effect of those losses should at least be minimised by having him claim them in full as a tax deduction. We have no reason to doubt that that was in fact the arrangement which the taxpayer had with his wife.
8. Unfortunately for the taxpayer, the legal consequences which flow from owning the residence jointly with his wife are not affected by their private arrangement for claiming deduction of its operating losses. Each of them is as much entitled to any part of the house property as the other. Neither of them can point to any part of the property as his or her own to the exclusion of the other. Similarly, either one of them cannot take the whole of the profits (or losses) to the exclusion of the other. (See Megarry and Wade, The Law of Real Property 2nd ed., pp. 392 and 393.) In the instant case we have seen that the couple owned their residence jointly and thus they were in receipt of the rental income jointly. The taxpayer did not seek to contend that his wife in any way alienated her right to receive her share of the income from the property.
9. Under sec. 6 of the Act a partnership is stated to mean:
``... an association of persons carrying on business as partners or in receipt of income jointly, but does not include a company;.''
Thus the definition extends the normal statutory definition of partnership and results in the taxpayer and his wife becoming partners as regards their assessability to income tax. No evidence was adduced by the taxpayer as to providing a basis for dividing profits and losses other than in equal shares, and therefore the action of the Commissioner in granting to the taxpayer deduction of 50% only of the partnership's losses is, we consider, eminently reasonable.
10. Accordingly, we are of the view that the decisions of the Commissioner on the objections should be upheld and the amended assessments confirmed.