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Edited version of your private ruling
Authorisation Number: 1012178356611
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Ruling
Subject: Rental expenses
Question: 1
Is the rent you receive from the co-owner of your property while you both live in the property assessable income?
Answer:
No.
Question: 2
Are you entitled to a deduction for any expenses incurred in relation to the property?
Answer:
No.
This ruling applies for the following periods
Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commenced on
1 July 2011
Relevant facts
You purchased a share of a property in which you live with the other co-owner.
You both wish to charge each other rent at market value, and so treat the property as a rental property for inclusion in your respective tax returns.
You and the co-owner both intend to live in the property for the foreseeable future.
You and the co-owner have other investment properties, and you each pay half the expenses for these as well as the property that you both live in.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1 and
Income Tax Assessment Act 1997 Subsection 6-5(1).
Reasons for decision
Assessable income
Under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997), assessable income includes income according to ordinary concepts.
Rent derived by the owner of property which is let to a tenant is generally income according to ordinary concepts and forms part of the owner's assessable income.
It is necessary to consider whether the payments that are made by your co-owner while they are occupying part of the property that you both own are in the nature of rent.
Co-ownership of property
Taxation Ruling TR 93/32 discusses the division of the net income or loss from rental property between co-owners, and provides the following explanation of co-ownership:
Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. Generally a legal interest in land is achieved by the owner being the registered proprietor of the legal title to the land. Where there is more than one person with a concurrent legal interest in the same land, those persons are co-owners of the land.
Co-owners of rental property will generally hold the property as joint tenants or tenants in common. These tenancies are a further classification of the co-owners' interests.
A co-owner of a property has a common law right to occupy that property and, subject to the similar rights of the other co-owner(s), is under no obligation to pay an occupation rent to any other co-owner in relation to that right. Subject to the discussion that follows, any payments made by a co-owner to another co-owner in relation to that occupancy are not in the nature of rent (Luke v Luke (1936) 36 SR (NSW) 310 (Luke's Case)) and are not income according to ordinary concepts.
However, circumstances may arise where a co-owner seeks occupancy of the property to the exclusion of the other co-owner. In such a case the excluded co-owner is entitled to an occupancy rent from the occupier (Luke's Case and Scapinello v Scapinello [1968] SASR 316). As rent, any such payment is income according to ordinary concepts.
The issue of one co-owner paying rent to the other co-owner for exclusive use of the property was considered in Case P76 82 ATC 362; 26 CTBR (NS) Case 8 and Case R16 84 ATC 179; 27 CTBR (NS) Case 67.
In Case P76; Case 8 it was held that one tenant in common can lease premises from the other co-tenant in common for exclusive possession of the premises, but that a lease agreement to achieve this result must be properly established.
In Case R16; Case 67, the taxpayer and B owned a cottage as tenants in common in equal shares. B occupied the cottage and made monthly payments of $108 to the taxpayer, pursuant to an oral agreement. The agreement was that because they owned the property in equal shares, B would pay the taxpayer an amount equal to half an acceptable rent (the rent that would be acceptable for renting the whole property). The monthly payment figure of $108 was arrived at by taking half of the figure $216 (which was within $5 of the monthly rental being paid through an estate agent for a similar property). Pursuant to the oral agreement, in return for the designated payments the taxpayer yielded to B exclusive possession of the property.
It was held in the above case that:
1.One tenant in common can lease premises from his co-tenant in common (so as to have exclusive possession) and be liable to pay the amount reserved by that lease - such payments by way of rent being income according to ordinary concepts and assessable income in the hands of the recipient.
However, as discussed above, where the tenant is a co-owner of the property payments made to the other co-owner will not necessarily be classified as rent. The question at issue in your case, therefore, is whether the payments made by your co-owner constitute assessable income in your hands. If not, the expenses you have incurred in relation to the property will not be deductible.
Your case
You and your co-owner are both the registered owners and hold legal title to the property.
You and your co-owner wish to charge each other rent at market value while you both live in it.
As can be seen from the cases discussed above, a co-owner can rent premises from the other co-owner for exclusive possession of the premises. However, under the arrangement between you and your co-owner, you both occupy the property that you co-own. Neither of you will have exclusive occupation of the property.
As a co-owner of the property your co-owner has a common law right to occupy the property and is under no obligation to pay an occupation rent to you (the other co-owner) in relation to that right. Your co-owner does not occupy the property to the exclusion of you. Therefore, you have no entitlement to an occupancy rent from your co-owner.
Consequently, the payments that your co-owner makes to you in relation to their occupancy are not in the nature of rent and are not income according to ordinary concepts. The payments are not assessable income in your hands, and so the expenses that you have incurred in relation to the property are not deductible.
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