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Edited version of private ruling

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Ruling

Subject: deductions for co-owners of property

Questions:

Are co-owners of an investment property required to apportion the property's net income or losses according to their legal interest in the property?

Answer:

Yes.

Are you entitled to claim a deduction for 50% of the interest expenses incurred on the loan taken out in your spouse's name only where you hold a 50% interest in the legal title of the investment property?

Answer:

Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

Your future spouse intends to transfer the legal title of her investment property into joint names giving you a 50% interest.

The home loan on the property is in her name only and she does not intend to transfer the loan into both names.

You will enter into an agreement with your spouse to repay her 50% of the loan amount including interest.

All loan repayments and property expenses will be paid from a joint bank account.

Reasons for decision

Taxation Ruling TR 93/32 discusses the division of income or losses incurred on a rental property between co-owners. According to TR 93/32, net income or loss from a rental property must be shared according to the legal interest of the owners, except in very limited circumstances. Legal interest is determined by the legal title to a property.

Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration - for example, A and B, who each own an identical 50% share in a property are, provided the other requisite features are present, joint tenants of that property.

On the other hand, the legal interest of tenants in common need not be identical. That is, the extent, nature and duration of each co-owner's interest need not be the same - for example, C owns a 30% share of a property while D owns a 70% share of the property. C and D are, provided the other requisite features are present, tenants in common.

An important feature of both a joint tenancy and a tenancy in common is the legal interest of the tenant. It is this legal interest which ultimately determines, among co-owners of property, the division of the net income or loss from the property.

In your case, your future spouse intends to transfer the legal title of her investment property into joint names, with you. As joint tenants, you will each hold an identical 50% interest in the property and will, therefore, need to include 50% of any net income or losses in your tax returns.

Interest deductions

Section 8-1 of the Income Tax Assessment Act 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

Taxation Ruling TR 95/25 considers the deductibility of interest. Whether interest has been incurred in the course of producing assessable income generally depends on the use to which the borrowed funds have been put. Where borrowed funds are used to acquire an income producing asset (for example, a rental property), the interest on the borrowed moneys is considered to be incurred in gaining or producing assessable income.

In a loan arrangement between you and your spouse, you will agree to pay your spouse for the 50% of the loan used to acquire your portion of the property including any interest payable on that portion of the loan. You will be entitled to claim a deduction for the interest incurred on your 50% of the loan against your share of the rental income as the funds were essentially used to purchase your share of the investment property.