Edited version of your written advice

Authorisation Number: 1051346294412

Date of advice: 14 March 2018

Ruling

Subject: Rental property expenses/deductions

Question

Are you entitled to a 100% deduction of rental property expenses/deductions?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commenced on

1 July 2017

Relevant facts

You and your ex-spouse purchased a property in February 2014 as tenants in common.

Your share is X% and your ex-spouse’s Y% ownership.

You have never lived in the property.

Your ex-spouse declared bankruptcy.

They no longer contribute financially to the costs associated with the property.

You paid the mortgage arrears which had compounded as your ex-spouse did not pay.

As a result of your ex-spouse’s bankruptcy you are now paying 100% of the mortgage shortfall as well as all other associated costs.

The tenant is moving out and the property will not be rented again.

The property is for sale.

You will be paying all of the costs once the tenant moves out.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 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.

An equitable interest is an "interest held by virtue of an equitable title (a title that indicates a beneficial interest in property and that gives the holder the right to acquire formal legal title) or claimed on equitable grounds, such as the interest held by a trust beneficiary."

A legal title refers to the responsibilities and duties the owner has in maintaining, using, and controlling a property. Legal title is the actual ownership of the property. The documented name of the property owner, as visible through the public records, typically describes the person with legal title.

The difference between an equitable interest versus a legal interest is that the latter is the only one that gives actual ownership of the property. Equitable interest establishes the person’s financial interest in the property.

You and your ex-spouse are joint owners in a rental property as tenants in common. Following your ex-spouse’s bankruptcy, their interest in the property vested in the trustee in bankruptcy. There has been no change to your legal or equitable ownership in the property.

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.

For a period of time, you have been contributing to all of the expenses in relation to yours and your ex-spouse’s interest in the property. Although you have paid for more than your share of the property expenses for a period of time, the expenses must be shared according to the proportion of the legal interest in the properties held by the relevant co-owners.

While we can appreciate your circumstances, the Commissioner does not have any discretion under the tax law to allow a taxpayer to claim more or less than their legal entitlement to investment property income and expenses.

Expenses may be deductible for periods when the property is not rented out, providing the property is genuinely available for rent, that is:

● the property is advertised, giving it broad exposure to potential tenants

● considering all the circumstances, tenants are reasonably likely to rent the property.

The absence of these factors generally indicates the owner doesn’t have a genuine intention to make income from the property. You cannot claim deductions from the time your intention changed.

Accordingly, you are able to claim the costs of owning the asset as a deduction against your cost base when working out your capital gain or loss.

As you stated, the property will not be re-rented, therefore, will cease to be a rental property from the date the tenant vacates.

Further issues for you to consider

Capital gains tax

You make a capital gain or capital loss if a capital gains tax (CGT) event happens. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset. CGT events are the different types of transactions or events that may result in a capital gain or capital loss. The disposal of your rental property would trigger CGT event A1.

The principles of TR 93/32 also apply to the division of capital gains or losses between co-owners of a rental property. That is, any capital gain or loss must be shared according to the legal interest of the owners, except where there is sufficient evidence to establish that the equitable (or beneficial) interest is different from the legal title.

Therefore, as your legal or equitable interest in the properties has not changed, the capital gain or loss will be calculated in accordance with the legal ownership of the properties ie:(X% for your interest).

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