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Ruling

Subject: Entitlement to partnership losses

Question 1

Are you entitled to 100% of the deductions on a rental property from the date you were granted full ownership rights under the Family Law Act 1975 where the legal title remains in the two names?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You and the other owner purchased a rental property and rented it out.

You and the other owner own equal portions (50/50) of the property.

Even though the title to the property is in both names you initially paid for the property and you have paid all on-going expenses in relation to the property and the other owner has not contributed to any on-going expenses.

You and the other owner signed a Financial Agreement.

As part of the Financial Agreement the other owner agreed to transfer to you all their right, title and interest in the property and you agreed to refinance the joint loan to discharge the liability of the other owner and indemnify them in respect of the new loan.

The transfer of the title from joint names into your name has not occurred.

A loss was made on the rental property in the X financial year.

A loss was made on the rental property in the Y financial year, which was distributed in equal portions to you and the other owner.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts, which is called ordinary income.

Section 8-1 of the ITAA 1997 provides that in order for a loss or outgoing to be deductible, there must be a connection between the expense and the gaining or producing of assessable income. However, you cannot deduct a loss or outgoing that is of a private, capital or domestic nature.

A deduction under this 'general deductions' provision is only allowable if the expense is actually incurred, has the relevant connection with income and meets the substantiation rules.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or losses between co-owners refers to the division of the net income or loss between joint owners of a rental property. TR 93/32 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 normally be considered to be carrying on a rental property business.

Paragraphs 38 to 41 of TR 93/32 address the legal and equitable interests issue confirming at paragraph 41 that there are extremely limited circumstances where the Tax Office will accept that the equitable interest is different from the legal title. Where the taxpayers are related the Tax Office will assume that the equitable right is exactly the same as the legal title. Therefore, as you were related to the other owner, it is assumed that your legal and equitable interests are in parallel unless you can show that they were different.

You have provided a copy of the Financial Agreement which includes the terms of settlement under the Family Law Act 1975 which sets out how the joint assets of you and the other owner are to be divided. The Agreement was signed by you and the other owner.

The Agreement provided that within 30 days of the date of making of the Financial Agreement that:

The property will remain in joint ownership until such time as the above conditions are met and then the legal title of the property will be transferred to you.

Consequently, the Agreement under the Family Law Act 1975 effectively confirms your 100% equitable interest in the investment property even though, on the date the Agreement was made, you and the other owner were the equal registered owners.

Accordingly, it is accepted that your equitable interest is different from your legal interest from the date of the Agreement under the Family Law Act 1975. Therefore, from the date you signed the Agreement on the property is considered to be yours and, if the property is rented or available for rent, you are entitled to claim interest and other rental property expenses you incurred in relation to the investment property.

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