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Edited version of your private ruling
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Ruling
Subject: Life tenancy
Question and answer
Are you liable as a beneficiary to pay tax on income earned by a life tenant on rental income but not paid to you?
No
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commenced on
1 July 2012
Relevant facts
You are a part beneficiary of a residential unit from a deceased estate.
As part of the will you are required to allow person A life tenancy in the unit without charging rent.
Person A has contested the will as they may need the beneficiaries to allow them to rent the property out.
Person A has stated they will collect all the rent and not pass it on to you.
The will is currently still being contested.
The property is not currently being rented out by person A.
The ruling will not apply unless person A starts earning income from the rent of the property.
Relevant legislative provisions
Section 6-5 Income Tax Assessment Act 1997
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes all the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. This includes rental income and capital gains.
In most cases, legal ownership is determinative of who declares income, who can claim deductions and who owns a CGT asset for income tax purposes.
In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title.
However, it is possible for legal ownership to differ from beneficial ownership. Where beneficial ownership and legal ownership are not the same, there must be evidence that the legal owner holds an asset on trust for the beneficial owner.
The term 'bare trust' usually refers to a trust under which the trustee holds property without any interest therein, other than by reason of holding the title to the property as trustee.
The concept of a bare trust was discussed by Gummow J. in Herdegen & Anor v FC of T 88 ATC 4995; (1988) 84 ALR 271. The concept encompasses a trustee who has no discretion, only nominal legal control of the property, and one duty, namely to convey it on demand.
As per the terms of the will the property was given to person A absolutely until their death at which time the property was to be given in equal shares to you and person B.
As beneficiary of the estate you only hold legal ownership in the property until person A passes away. At that time according to the terms of the will the legal ownership of the property passes to you and person B.
During the period that person A holds an interest in the property absolutely they are considered to be the beneficial owner as you are only holding legal title to the property as trustee until the property passed on to you and person B. Consequently any rental income received or expenses incurred during the rental period are the responsibility of the beneficial owner.
It is considered that person A is the beneficial owner of the property. Therefore you do not have to declare any income or claim any expenses when the property is rented out.
Therefore any income received for the rental of the property will be assessable in the hands of the life tenant.
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