Edited version of private advice

Authorisation Number: 1051790833930

Date of advice: 17 February 2021

Ruling

Subject: Rental income - ownership

Question

Is only XX% of the gross rental income from The Property included in your assessable income?

Answer

No. 50% of the gross rental income from The Property is included in your assessable income.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your ex-spouse purchased a property several years ago (The Property). You own the residential property as joint tenants.

You split from your ex-spouse in 20XX and have been financially independent since then. You made an agreement with your ex-spouse to split and transfer into each party's personal primary savings account the net rental income each month after payment is received from the property agent.

The agreement provided that your ex-spouse would receive XX% of the net rental income and you would receive the remaining amount of the net rental income.

In 20XX, you began renting out The Property. The Property is currently leased and is positively geared. The real estate agent takes their agent fee out of the rent received and pays for any other property costs like rates, water and repairs.

The agent deposits the remaining net proceeds into the joint home loan account of you and your ex-spouse.

Rental funds are then deposited into a bank account of which your ex-spouse holds authority. They are the primary account holder and you are a joint account holder.

Funds are then paid into each of your individual accounts in the amounts agreed by both of you.

Your ex-spouse's accountant is advising them that all rental income derived from The Property must be declared to the Australian Taxation Office (ATO) in accordance with your legal ownership interests as an income split between your ex-spouse and yourself as individuals.

You have included rental income for The Property in accordance with your ownership interest in your individual income tax return for the income year ending on 30 June 20XX. You wish to include the rental income you have received rather than an amount that accords with your ownership interests in your individual income tax returns for the income years ending on 30 June 20XX and 30 June 20XX respectively. You would amend your return for the income year ending on 30 June 20XX if a favourable ruling is granted.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for Decision

These reasons for decision accompany the Notice of private ruling

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

You must declare rental income and claim deductions in proportion to your legal interest in The Property. As you are one of two joint tenants holding interests in The Property, this means that you include the 50 percent that reflects your ownership interest of the rental income or losses in your tax returns.

Detailed reasoning

Income or losses 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

Generally, a legal interest in land is achieved by the owner being the registered proprietor of the legal title to the land. Where there is more than one person with a concurrent legal interest in the same land, those persons are co-owners of the land. It is the legal interest in The Property which ultimately determines, among co-owners of property, the division of the net income or loss from the property.

Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration.

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.

Income received from rent is a form of ordinary income. Rent is the name given to the payments that a lessee (the tenant) makes to a lessor (the landlord) for the right to the use and enjoyment of property owned by the lessor.

The tenant may make the rent payments directly to the landlord, or the landlord may direct that rent payments are to be made to an intermediary (such as a property agent).

To work out whether you have derived an amount of ordinary income, and if so, when you are taken to have derived it, you need to refer to the definition in subsection 6-5(4) of the ITAA 1997. That subsection states that, to work out whether you have derived an amount of ordinary income, and if so, when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way, on your behalf or as you direct.

Consequently, a landlord is considered to have received rent and therefore derived assessable income once the tenant has paid it to an intermediary as directed by the landlord.

Application to your circumstances

While you and your ex-spouse are separated and have been for a number of years, the legislation outlines that the division of net property income/losses are to be shared based on your legal interests in The Property.

The agreement with your ex-spouse does not alter or over-ride their respective entitlements for income tax purposes. You have not provided evidence to establish that the equitable interest is different from the legal title.

Therefore, for the reasons outlined above, you have derived your share of the gross rental income once the tenant has paid it to the real estate agent. This is because the real estate agent is acting as you and your ex-spouses' agents and that is where you have directed the tenant to pay the rent.

You are not able to limit the amount you must declare to the XX% share you receive under the agreement you have with your ex-spouse. You must declare your share of the gross rental income in your tax returns based on legal ownership. That is - 50%.

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