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Edited version of your written advice
Authorisation Number: 1012674126811
Ruling
Subject: Rental Property
Question 1
Is the rental income assessable to you in accordance with the proportion of interest you hold in the title of the property?
Answer
Yes.
Question 2
Is the interest incurred in relation to the bank loan deductible against the rental income?
Answer
Yes.
Question 3
Are you entitled to claim the interest during years where the property was used by your relative as a main residence?
Answer
No.
Question 4
When the property is sold, will you be subject to capital gains tax (CGT)?
Answer
Yes.
This ruling applies for the following periods
Year ending 30 June 2014
Year ending 30 June 2015
The scheme commences on
1 July 2013
Relevant facts and circumstances
You and your spouse lent your relative money to enable them to purchase a home that is used as a main residence.
To provide the funds, you and your spouse borrowed from the bank against a mortgage on your home.
The loan has always been treated as a personal family matter and you have not claimed any of the interest expenses.
You and your spouse appear on the legal title of the property as security against the private loan.
You and your spouse together own approximately X% of the property.
You individually hold an interest of Y%.
Your relative has health issue and was admitted to hospital.
They were subsequently relocated to a high care nursing home facility due to their medical condition.
The property is now rented out.
You pay small but regular amount to cover property expenses.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 6-10
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 subsection 118-130(1)
Income Tax Assessment Act 1997 subsection 118-130(2)
Reasons for decision
Question 1
Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources during the income year.
Taxation Ruling 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.
You co-own a property; your interest in the property is Y%. The property is currently being rented to tenants and you regularly contribute to a portion of the expenses.
Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between the co-owners, either oral or in writing stating otherwise.
Where a co-owner pays for more than his or her share of the expenses, this is considered to be a private arrangement between the co-owners. It does not alter the fact that they are only liable for their share of the expenses.
TR 93/32 provides the following example:
Mr and Mrs Z rent out a house which 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.
Net profits and losses from the property should be shared in the same proportion as their ownership interests, i.e., 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 Z's share of the expenses by Mr Z as no more than a loan by Mr Z to Mrs Z.
In this case you appear on the legal title of the property. There is no evidence to suggest that the equitable interest in the property is different to the legal title. As discussed in TR 93/32, rental income must be attributed to each co-owner is accordance with their legal interest in the property. We consider that you have legal ownership of Y% of the property; therefore a portion of the rental income earned from the property will be assessable to you.
Question 2
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.
As discussed above, as a legal owner of the property you are required to include a portion of the rental income earned in your assessable income. Therefore, your share of the interest incurred in gaining the assessable rental income is deductible to you.
Question 3
As discussed above, a deduction for losses and outgoing is only allowed to the extent to which they are incurred in gaining or producing assessable income. During the period the property was used by your relative as their main residence, you did not generate any rental income. We consider that the interest expense during this period was of a private or domestic nature. Therefore, you are not entitled to a deduction for interest incurred while your relative was living in the property.
Question 4
For CGT purposes (under subsection 118-130(1) of the ITAA 1997) you have an ownership interest in a dwelling if you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it.
Subsection 118-130(2) of the ITAA 1997 states that for a land or a dwelling that you acquire under a contract, you have an ownership interest in it from:
(a) the time when you obtain legal ownership of it; or
(b) if the contract or a related contract gives you a right to occupy it at an earlier time - the earlier time.
In this case, we consider that you are the legal owner of a portion of the property. Therefore when the property is sold, you will be liable for capital gains tax in relation to your ownership interest.
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