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Edited version of your written advice
Authorisation Number: 1051353260697
Ruling
Subject: Income tax - assessable income - rental property income - residential
Question 1
Are you entitled to claim 100% of the net income or loss for the rental property that you and your mother own as joint tenants?
Answer 1
Yes
Question 2
Are you liable for 100% of the capital gains tax (CGT) if the rental property is sold?
Answer 2
Yes
This ruling applies for the following period:
Income year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You own a property with your parent as joint tenants.
You purchased a property in July 201X. In order to obtain a mortgage, the mortgage was taken out with your parent. Your parent resides in another country.
Legal ownership of the property is 50% to you and 50% to your parent r. Your parent was included on the deed to assist you in obtaining the home loan.
All property related costs including the mortgage are paid for by you.
You lived in the property from when it was purchased until it was rented out in August 201Y.
Your parent never lived in the property.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 102-20
Income Tax Assessment Act 1997 section 104-10
Reasons for decision
Issue 1
Question 1
Summary
In your case you have stated you paid 100% for all the property related costs including the mortgage and your parent was only included on the deed to assist you in obtaining the home loan. It is accepted that this is sufficient evidence that the equitable and legal interest are different.
Detailed reasoning
When considering the tax implications of a rental property, an important element is ownership. It must be determined who is the owner of the asset.
Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title. However, in limited circumstances, it is possible for legal ownership to differ from beneficial/equitable ownership for taxation purposes.
Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. There must be a valid trust over the property and that the equitable owner is entitled to benefit from the property.
According to Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners, the income/loss from the 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 40 of TR 93/32 states:
40. Cases where the title includes the name of a person who is a nominee or trustee, must be decided on an individual basis on the evidence available to establish that fact. Authority can be found in Napier v Public Trustee (Western Australia) 32 ALR 153 where the court accepted there was sufficient evidence to establish that the equitable interest was different from the legal title. Aickin J said (at p 158):
'The law with respect to resulting trusts is not in doubt. Where property is transferred by one person into the name of another without consideration, and where a purchaser pays the vendor and directs him to transfer the property into the name of another person without consideration passing from that person, there is a presumption that the transferee holds the property upon trust for the transferor or the purchaser as the case may be. This proposition is subject to the exception that in the case of transfers to a wife or a child (including someone with respect to whom the transferor or purchaser stands in loco parentis) there is a presumption of advancement so that the beneficial as well as the legal interest will pass. Each of the presumptions may be rebutted by evidence.
In addition, paragraph 41 of TR 93/32 states that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. Where taxpayers are related, e.g., husband and wife, it is assumed that the equitable right is exactly the same as the legal title.
In your case as the equitable owner, you inherent all the benefits and burdens associated with the property. You should report all of the income and expenses of the rental property in your income tax return. You should also report any capital gains tax when selling the property based on your beneficial ownership.
Therefore, you are able to claim 100 percent of all allowable deductions and declare all income associated with your rental property. Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Rental income is ordinary income and is assessable under section 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. Expenses incurred in producing rental income are considered to be an allowable under section 8-1 of the ITAA 1997.
In your case the income earned from the rental property and any expenses incurred can be allocated 100 percent to you.
Issue 2
Question 2
Summary
You are considered to be the beneficial owner of the property and will be 100 percent liable for any capital gain tax when the property is sold.
Detailed reasoning
Capital gains tax (CGT) is the tax you pay on certain gains you make. It is not a separate tax, just part of your income tax. You make a capital gain or capital loss as a result of a CGT event happening, section 102-20 of the ITAA 1997.
Generally, you acquire a CGT asset when you become its owner. You then make a capital gain or capital loss when a CGT event happens in relation to that asset. The most common event (CGT event A1) happens if you dispose of a CGT asset to someone else. In your situation, this will be the sale of the property, section 104-10 of the ITAA 1997.
When considering the disposal of a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal owner of the asset. In your case you are considered to be the beneficial owner of the property and will be 100 percent liable to pay tax on the capital gain when the property is sold.
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