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Edited version of your private ruling
Authorisation Number: 1012495992511
Ruling
Subject: Rental property expenses
Question
Can you return the total income and claim the total deductions for your rental property where the legal and equitable interest in the property is shared?
Answer
No.
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You and your ex-spouse are joint owners of a property you have been renting out since you separated.
The property is currently rented out at a loss.
You both have agreed that you will keep the house; the title is in both names.
You are in the process of getting the title changed, but prefer to keep it in both names at present to avoid paying lenders mortgage insurance again.
You are in the process of having a consent order written.
As you have been making all the payments involved with the property since you separated, you wish to claim all of the rental losses.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Division of net rental income or loss between co-owners
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. Amounts received as rent are assessable income under subsection 6-5 of the ITAA 1997.
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 discusses rental properties and the relationship between ownership and apportionment of income and deductions to the owners.
TR 93/32 explains that the loss or income 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 (paragraph 6). It goes on to explain at paragraph 41, that where taxpayers are related, for example, husband and wife, the equitable right is presumed to be exactly the same as 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 deed for the property issued under that legislation.
Paragraphs 48 and 49 of TR 93/32 provide the following example which is similar to your situation:
Mr and Mrs Z rent out a house that they own as joint tenants. The rent is paid into a joint account from which expenses of the property are paid. The expenses of the property exceed the rental income from it each year. Mr Z claims that as he is the sole income earner and had in effect paid all the expenses, he is entitled to claim 100% of the loss.
Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs Z are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their ownership interests, that is; 50:50. The fact that Mr Z has paid all the expenses on the property is of no consequence for income tax purposes. We would simply treat the payment of Mrs Zs share of the expenses by Mr Z as no more than a loan by Mr Z to Mrs Z.
As the names of you and your ex-spouse are on the title deed, you are both legal co-owners of the rental property. Although you are paying all expenses and your ex-spouse does not object to you declaring any income and claiming all the expenses in relation to the property, this is not sufficient to show that a trust has been created where your ex-spouse is holding their share of the property for your benefit. That is, it is considered that the equitable interest in your case is the same as the legal interest.
While we acknowledge that you and your ex-spouse have agreed to an arrangement where you retain the property, the Commissioner considers that your legal and equitable interests are shared.
As you and your ex-spouse are currently legal co-owners of the rental property, the income and expenses must be divided and shown by both you and your ex-spouse.
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