Edited version of private advice

Authorisation Number: 1051830541308

Date of advice: 29 April 2021

Ruling

Subject: Rental income -apportionment

Question

Are you required to declare any rental income relating to the Property in your tax return after the Final Court Order was issued?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

You and your spouse acquired a property (the Property).

The Property is in joint names.

You and your spouse (your ex-spouse) separated.

A property settlement was undertaken with Final Consent Orders made.

The consent orders stated the following:

BY CONSENT IT IS ORDERED

The Property

1. That within 60 days of the date of these orders the spouses shall do all such acts and things and sign all such documents as may be necessary and required to list for sale and sell the real property and the sale shall be effected as follows:

(a)  The listing price of the property shall be agreed between the parties and if there is no agreement then the real estate agent handling the sale of the property shall determine a listing price;

(b)  The property shall be listed for sale by private treaty with a real estate agent to be agreed between the parties and if there is no such agreement, to be nominated by the CEO for the time being of the Real Estate Institute or his/her nominee;

(c)   In the event that the property has not been sold on or before a date 3 months from the date it was first listed for sale (hereinafter referred to as the "date of failure to sell by private treaty") and unless otherwise agreed between the parties then spouses shall make all arrangements and do such all acts and things necessary to procure a sale by public auction of the property upon the following terms:

(i)            The auctioneer shall be agreed between the parties and if there is no agreement within 7 days of the date of failure to sell by private treaty such auctioneer shall be as nominated by the CEO for the time being of the Real Estate Institute or his/her nominee;

(ii)           The auction will take place within 2 months from the date of failure to sell by private treaty

(iii)          The reserve price shall unless agreed upon by the parties be as decided by the auctioneer.

(d)  In the event that the property is not sold by auction or private negotiation within 14 days after the said auction and unless otherwise agreed between parties the spouses shall do all such acts and things and sign all such deeds, documents and instruments as may be necessary to procure a second auction within a further 5 days of the expiry of the said 14 day period upon the same terms and conditions as applied to the first auction.

(e)  Upon completion of the sale of the property, the proceeds of the sale shall be applied in the following priority:

(i)            To pay all costs, commissions and expenses of the sale; thereafter

(ii)           To discharge all loans secured by mortgage over the property; thereafter

(iii)          To pay Person A the sum of $X to be paid to an account nominated by Person A; thereafter

(iv)          The balance to Person B.

2.     That pending the sale of the property referred to in paragraph 1 above of these orders, the spouses shall be equally responsible for the minimum principal and interest loans repayment due and owing towards loans secured by the mortgage over the property and all other costs of whatsoever nature associated with the Property.

Your ex-spouse wanted to retain ownership of the Property. They tried to obtain finance to enable them to pay you an amount equal to your share of equity in the Property, and have the title transferred into their sole name.

The bank was reluctant to provide your ex-spouse with the home loan based on their income.

Your ex-spouse made the decision to rent part of the Property through Airbnb to increase their level of income.

You have had nothing to do with the Property since the divorce settlement.

Your spouse has received all rental income from the Property and has paid for all expenses associated with the Property.

Once your ex-spouse obtains the finance the Property will be transferred into their sole name.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

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 with your ex-spouse. Since your separation from your ex-spouse you have not received the benefit of any rental income; instead your ex-spouse has controlled the Property and received all rental income resulting from their decision to rent our part of the Property on Airbnb. Your ex-spouse has also covered all costs associated with the Property. Unfortunately, this is not sufficient to establish that equitable interest is different from legal title.

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.

TR 93/32 provides the following example:

Mr and Mrs Y purchase a rental property. Mr Y contributed 80% of the funds used to purchase the property while Mrs Y contributed 20%. They register their purchase as joint tenants. They also sign a written agreement to share any profits or losses from the property in accordance with their capital contributions, but share interests in the property equally.

Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs Y are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their legal ownership interests, i.e., 50:50. Their agreement to share the profits and losses in proportion to their capital contributions is a private arrangement which has no effect for income tax purposes.

Although you did not receive any rental income from Property, the income and expenses must be shared according to the proportion of the legal interest in the Property.

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

Therefore, you are required to include 50% of the income (and expenses) as you hold a 50% legal and equitable interest in the Property. This income cannot be attributed to another party who may have received all of the benefits.

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