Edited version of private ruling

Authorisation Number: 1011584001057

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Ruling

Subject: Rental properties and capital gains tax (CGT)

Issue 1

1. Will the amount paid to you by your sibling, being a percentage of the market rent for their share of ownership, be considered part of your assessable income?

Yes.

2. Are you entitled to claim a deduction for the expenses related to the cost of ownership, according to your ownership percentage, against the rental income you will receive?

Yes.

3. Will the interest expense in relation to your loan for your ownership interest in the property, be deductible in full?

Yes.

Issue 2

Will any capital gain or loss made on the disposal of the dwelling be assessable to you in proportion to your ownership interest?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You plan to purchase a dwelling as tenants in common with your sibling.

You will borrow all funds to finance your share of the purchase.

The dwelling will be occupied by your sibling at commercial rent.

The annual rent is to be ascertained by independent real estate agent and adjusted annually in accordance with market conditions.

Your sibling is to pay a proportion of the market rent to you as rental income for the rent of your share of the dwelling.

You will pay your share of outgoings (ownership costs) such as Council Rates, Water Rates, Land Tax, repairs and maintenance and insurance.

You will service your loan from the rent received.

You do not own any other rental properties.

Assumptions

You will dispose of the dwelling during the period this ruling applies for.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10.

Issue 1

Question 1

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes all ordinary income derived directly or indirectly from all sources.

Rental income is normally regarded as ordinary income and therefore forms part of a taxpayer's assessable income.

Taxation Ruling IT 2167 sets out the Australian Taxation Office's view on the letting of property, in whole or in part, to relatives. The ruling explains that where the arrangements are consistent with normal commercial practices the owner of the property will be treated in the same way for income tax as any other owner in a comparable arms length situation.

In your case, as the rental income you will be receiving from your sibling will be determined by an independent real estate agent, adjusted annually in accordance with market conditions, the arrangement is considered to be consistent with normal practices. Therefore, the rental income will form part of your assessable income.

Question 2

Detailed reasoning

Section 8-1 of the ITAA 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, or relate to the earning of exempt income.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners refers to the division of net income or loss between joint owners of a rental property. The Ruling only examines the taxation position of co-owners whose activities do not amount to the carrying on of a business. Persons who own two or three rental properties would not be considered to be carrying on a rental property business.

As you and your sibling will hold one rental property as co owners you would not be considered to be carrying on a rental property business. Therefore, Taxation Ruling TR 93/32 applies to your situation.

According to Taxation Ruling TR 93/32, the income/loss from the rental property must be shared according to the legal interest of the owners except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

You and your sibling will hold the property as tenants in common. You will need to share the expenses from the property in accordance with your ownership interests. Therefore, according to your ownership interest, you will be able to claim deductions for the expenses incurred when you lodge your income tax return.

Question 3

Detailed reasoning

The deductibility of interest on borrowed funds is determined by the use of the borrowed money. If the borrowed money is used to buy income producing assets then the interest expense is an allowable deduction.

Where the ownership records of the investment asset indicates co-ownership of the investment asset, and one owner has borrowed money, in their name only, to acquire their interest in the investment asset, then the interest expense does not need to be divided between the co-owners.

In your situation, you have a loan to fund your interest in an investment property. The loan is solely in your own name. You are entitled to claim a deduction for the interest expense on the amount of money borrowed to purchase your share in the rental property.

Therefore, the interest expense on the loan for the purchase of your share in the rental property is an allowable deduction.

Issue 2

Question 1

Detailed reasoning

You make a capital gain or capital loss if a CGT event happens. The most common event occurs if you dispose of a CGT asset, such as your home or investment property. This is called CGT event A1.

According to Taxation Ruling TR 93/32, any capital gain or loss should also be apportioned on the same basis as the rental income or loss, that is according to the legal interests of the owners.

Therefore, you will receive a proportion of any capital gain or loss that is made on the disposal of the property in line with your ownership interest in the property.

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