Edited version of private ruling

Authorisation Number: 1011831268659

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Ruling

Subject: rental property income and expenses

Question 1

Where part of your co-owned property is rented out at a market rate, will 50% of the rental payments and the tenant's contributions to the running costs of the property (for example, electricity) form part of your assessable income?

Answer: Yes.

Question 2

Where part of your co-owned property is rented out at a market rate, will you be entitled to claim 50% of the rental deductions available after apportionment for the area rented out and period of time during the year the property is rented out?

Answer: Yes.

This ruling applies for the following period

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are an Australian resident.

You are looking to purchase an investment property jointly with your parents.

You would structure the ownership as 50% owned by yourself and 50% owned jointly by your parents.

Your intention is to reside in the property.

There is to be a written agreement in place to sell the property after a minimum term of 5 years on the condition that each person breaks even from a capital perspective.

In addition to you living in the property, you may rent a room to a tenant. The tenant would pay market value rent, plus a share of the living expenses (for example, electricity).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Summary

The net rental income/loss from a rental property must be shared according to the legal interest of the owners, unless the equitable interest is different from the legal title. In your case, there is no evidence that the equitable interest is different to the legal interest. Therefore, if part of the property is rented out at a market rate, you would be required to declare 50% of the net rental income/loss from the property as you own 50% of the property. This conclusion is not altered by the fact that you also reside at the property.

Detailed reasoning

Division of net income or losses between co-owners of rental properties

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

Rental income is generally assessable as ordinary income.

Taxation Ruling TR 93/32 states that that the net income or loss from a 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.

A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation.

Co-owners of rental property are often family members, owning property jointly as joint tenants or tenants in common. Any agreement made by the co-owners, whether orally or in writing, to vary the proportion of net income claimable by each co-owner has no effect for taxation purposes. Such agreements are merely domestic in nature, and cannot override the taxation legislation in relation to the division of income or losses in relation to co-owners of rental properties.

In your case, you and your parents would like to jointly purchase a dwelling. You will hold 50% ownership, with the remaining 50% being held by your parents.

The dwelling will be your main residence. In the future you may have tenants in the dwelling, with the tenants paying a market rate of rent per week, plus a share of the living expenses.

Taxation Ruling IT 2167 discusses whether a tenant's contribution to variable or running expenses is included in assessable income. It states:

Where the tenant/lodger, in addition to paying rent, or an amount for board and lodging, is required to make a separate contribution to specific variable or running costs such as electricity, heating, etc., the question arises whether the separate contribution is assessable income. On the basis that the separate contribution represents part of the reward of the owner of letting part of his residence, the amounts are considered to be assessable income. If the arrangements are such that the separate contribution is made on a precise sharing of costs basis the assessable income will be offset by allowable deductions. If the separate contribution is a fixed amount income tax deductions will be allowed for the part of the variable or running costs attributable to the tenant/lodger's use of the relevant facilities.

You will have a 50% ownership interest in the dwelling and have not provided any evidence to support that the equitable interest in the dwelling is different from the legal interest. Therefore, you must include 50% of any rental income from the tenant/s (including their contribution to running expenses) in your income tax return.

Note: The fact that the dwelling is your main residence is not relevant in this situation. You are still a co-owner of a dwelling which is being rented out to produce assessable income. Therefore, the taxation principle applicable to the division of income and loss between co-owners of a rental dwelling will apply in your situation.

Deduction for expenses incurred in relation to the rental of part of a dwelling

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.

Where a property is used partly for income production purposes, apportionment of the expenses incurred in respect of that property may be required.

As a general approach, apportionment should be made on a floor area basis, that is, by reference to the floor area of the residence to which the tenant has sole occupancy together with a reasonable figure for access to the general living areas including the garage and outdoor areas. The floor area used to produce income is divided by the total area of the building to arrive at the percentage of the costs that can be claimed as a deduction

Paragraph 10 of IT 2167 states that:

If, for example, the tenant/lodger had sole occupation of one room in the residence and shared the general living areas equally with the owner/occupier, it would be appropriate to add one half of the floor area of the general living areas to the floor area of the room of sole occupancy in order to make the necessary apportionment.

If a property is used to produce income for only part of the year of income then apportionment of expenses may also be necessary on a time basis.

It is your intention that any tenant will pay a market value rent and their share of living expenses.

As you will own 50% of the property with your parents owning the other 50%, any available rental deductions must be divided in this proportion between you and your parents.

As discussed previously, to determine the total available rental deductions in relation to the property, you must first apportion the property expenses in relation to the area, and time, the dwelling has been used to produce assessable income. You will then be entitled to a deduction of 50% of this amount.

Other information - Capital gains tax

You may make a capital gain or capital loss when a capital gains tax (CGT) event occurs to a CGT asset. The most common CGT event is CGT event A1, which occurs when a CGT asset is disposed of. The disposal of the dwelling will be a CGT event A1.

Generally, you can ignore a capital gain or loss you make on the disposal of a dwelling that was your main residence when the dwelling was your main residence for the whole of your ownership period, the dwelling is situated on less than 2 hectares and it has not been used to produce assessable income.

Where a dwelling is used to produce assessable income during your ownership period, you will not be entitled to a full main residence exemption. You would however be eligible for a partial exemption from CGT.

If you dispose of the dwelling, the taxable portion of your capital gain will be based on the percentage of floor area you have set aside to produce income and the period that your dwelling is used to produce income.

If you start using your main residence to produce income for the first time after 20 August 1996, a special rule affects the way you calculate your capital gain or capital loss. In this case, you are taken to have acquired your home at its market value at the time it is first used to produce income if all of the following apply:

· you acquired your dwelling on or after 20 September 1985

· you first used the dwelling to produce income after 20 August 1996

· when a CGT event occurs, you would only obtain a part exemption because your dwelling was used to produce assessable income during the period you owned it; and

· you would be entitled to a full exemption if the CGT event happened to your dwelling immediately before you first used it to produce income.

In your case, you intend to rent out part of the dwelling, which is your main residence. You intend disposing of the dwelling in the future.

As you will have used part of your dwelling to earn assessable income during your ownership period, you will not be eligible for a full main residence exemption. However, you will be entitled to a partial exemption on any capital gain or capital loss made on the disposal of your share in the dwelling.

When you dispose of your dwelling, the taxable portion of your capital gain will need to be calculated based on your share of the portion of the dwelling that was rented out, and the period of time rented in comparison to the total ownership period.

For the purpose of the ruling, you will have established the dwelling as your main residence prior to renting out the rooms. On the date you start renting out the rooms, you will have been eligible for a full main residence exemption on your share of the dwelling, and will meet the conditions listed above for the home first used to produce income exemption. Therefore you will be viewed as having acquired your share in the dwelling at its market value on the date it was first used to produce assessable income. This amount will be used to work out your capital gain or capital loss when the dwelling is disposed of in the future

Years ruled on

It is noted that you asked for the private ruling to apply for the 2012 income year and onwards until the scheme ceases. The Commissioner does not rule for indefinite or extended periods as there may be changes to the facts of the arrangement or the law in question. Also, a public ruling may issue which affects the private ruling. Therefore, we have only ruled for the 2012 to 2015 income years.

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