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Edited version of your written advice
Authorisation Number: 1012781933366
Ruling
Subject: Rental income and expenses
Question 1
Are you required to include X% of the rental income from a property that you owned jointly with your former spouse in your assessable income?
Answer
Yes.
Question 2
Can you claim a deduction for X% of the interest expenses associated with the property while it was available for rent?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2013
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You owned a property jointly with your former spouse in which you both resided for several years.
The property was rented for a period of time, it was then sold.
You and your former spouse separated and all rental income earned from the property was being distributed to your former spouse.
You were making X% of the repayments for the loan account associated with the rental property.
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 your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
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.
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. The equitable interest will only be different if one of the owners shown on the title deed is holding their share of the property in trust for the other party.
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.
You and your former spouse were joint owners in the property. Following your separation, there was no change to your legal or equitable ownership in the property.
Therefore as a joint owner having a X% ownership interest in the property, you will be assessed on X% of the rental income.
It is acknowledged that you may not actually receive any of the rental income of the rental property. However this is regarded as a private arrangement and has no effect for taxation purposes.
For a period of time, you were making more than X% of the repayments in relation to the joint loan associated with the property. Although you have paid for more than your share of the loan repayments for a period of time, the expenses must be shared according to the proportion of the legal interest in the property held by the relevant co-owners.
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