Edited version of private advice

Authorisation Number: 1051837627676

Date of advice: 18 May 2021

Ruling

Subject: Disposal of assets following a deceased estate

Question 1

Am I entitled to all of the income and deductions associated with the property located for the year ended 30 June 20XX?

Answer

No

Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners, either oral or in writing, stating otherwise.

Further information on rental properties is available on the ato.gov.au website. I have included a link direct to https://www.ato.gov.au/General/property/residential-rental-properties/ or alternatively go to the ato.gov.au website and in the search box at the top of the page key in the Quick Code (QC23626)

Question 2

Am I entitled to claim 100% of the capital loss that resulted upon the sale of xxxx in the year ended 30 June 20XX?

Answer

No

Further information on rental properties and how capital gains or losses apply is available on the ato.gov.au website. I have included a link direct to https://www.ato.gov.au/General/Capital-gains-tax/Your-home-and-other-real-estate/Sale-of-property-and-other-CGT-events/CGT-when-selling-your-rental-property/ or alternatively go the ato.gov.au website and in the search box at the top of the page key in the Quick Code (QC 22172)

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse divorced but you never transferred the properties owned together in accordance with the Consent Orders regarding the property distribution. The orders listed xx properties.

As neither party had transferred the properties as per the original Consent Orders, you and your ex-spouse prepared an altenate Deed of Agreement to vary the Consent Orders orginally entered into. Both of these agreements listed the ownership percentage of the properties that were held iin both names and the subsequent actions that were to occur to redistribute the properties.

Your spouse had remarried since your divorce and the issue of the original Consent Orders, and as a consequence they prepared a new will. Your ex-spouse's new will included clauses which acknowledged the Deed of Agreement entered into with you on the same date as the new will and distribution of certain assets were contingent on the actions being undertaken.

On signing the documents outlined above all parties were aware that time was of the essence.

Your ex-spouse subsequently died. The will named the new Spouse as the Executor of the Estate.

The estate of your ex-spouse has not yet been fully administered but the following actions concerning the coowned properties has been undertaken by yourself and the Executor of the estate:

•         Property 1 which was jointly owned and was your main residence was sold on XX March 20XX

•         Property 2 which is currently rented but the intent is to be sell as soon as possible to allow the Estate to be fully administered. Legal ownership is 90% Executor for the Estate and 10% xxxx.

•         Property 3 which was rented until you moved into the property. This property was sold. The property was owned as tenants in common with 90% as Executor for the Estate and 10% xxxx.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Division 110

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Division 118

Reasons for decision

Summary

Co-owners who are not carrying on a business of letting rental properties must divide the income and expenses for the rental property in line with their legal interest in the property. You only declare rental income and claim rental expenses as per your percentage ownership named on the title deed.

Any capital gain made on the disposal of a 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.

Detailed reasoning

Title in joint names

Section 8-1 of the Income Tax Assessment Act 1997 (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 (paragraph 6). It is this legal interest which ultimately determines, among co-owners of property, the division of the net income or loss from the property. It goes on to explain at paragraph 41, that there are extremely limited circumstances where the legal and equitable interests are not the same and that where taxpayers are related, eg husband and wife, the equitable right is exactly the same as the legal title.

A person's legal interest in a property is determined by the legal title to that property under the relevant legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation.

Where the title deed indicates ownership of a property, and the mortgage is held in joint names, the legal owner can claim the full amount of the interest paid. The fact that the other party to the mortgage may have paid some of the mortgage expenses is of no consequences for income tax purposes.

Paragraph 42 goes on to state that any capital gain or loss should also be apportioned on the same basis as the rental income or loss.

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, occurs when your ownership interest in a CGT asset is transferred to another entity.

When considering the disposal of your interest in a property, the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. In absence to the contrary, property is considered to be owned by person(s) registered on the title, but it is possible for legal ownership to differ from beneficial ownership.

Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner.

The Australian Taxation Office (ATO) considers that there are extremely limited circumstances where the legal and equitable interests are not the same, and if they differ, that there is sufficient evidence to establish that the equitable interest is different from the legal title.

Present Entitlement

Section 97 of the Income Tax Assessment Act 1936 provides a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate.

The term 'present entitlement' is not defined in the ITAA 1936. It is therefore necessary to rely on the meaning which has been given to the term by the Courts.

The leading case on present entitlement under a trust arising during the administration of an estate is the decision of the High Court in FC of T v Whiting (1943) 68 CLR 199 (Whiting's Case). The High Court held that a beneficiary of a deceased estate cannot be presently entitled to the income of the trust estate until the estate has been fully administered.

In Whiting's Case the High Court found that in order for a beneficiary to be 'presently entitled' to the income of a trust estate, the beneficiary must be able to demand immediate payment of such income from the trustee.

The High Court decided that the beneficiaries of a deceased estate have no right to demand payment of any part of the estate until such time as the estate has been fully administered. An estate will be fully administered when all of the assets and liabilities have been ascertained and payment or provision for payment of liabilities has been made. Until such time, the residue cannot be ascertained and there is no present entitlement to income.

Taxation Ruling IT 2622 discusses the tax office view of present entitlement during the stages of administration of deceased estates. It explains beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate.

In the case of the estate you have advised that the administration of the deceased estate has not been completed. Not all of the properties have been sold and the net income of the estate is not ready for distribution.

Application to your situation

In your case, the title of the property located at xx xxxx xxxx and the title of the property located at xx xxxx xxxx lists you as a tenant in common with legal ownership of 10%.

Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners, either oral or in writing, stating otherwise. Therefore the Commissioner considers that you are only entitled to declare income and claim expenses commensurate with your ownership percentage.

When considering the disposal of your interest in the property located at xxxx, the Certificate of Title has not been transferred into your name as sole owner. The requirements agreed to in the original Consent Orders and then the subsequent Deed of Agreement were never undertaken.

The Commissioner considers the most important element in the application of the CGT provisions is ownership. It must be determined who is the legal and/or beneficial owner of the property. In absence to the contrary, the Commissioner considers that you are not entitled to 100% of the Capital Loss that resulted upon the sale of the property.

In relation to both your rental expenses and your capital loss you are entitled to claim them based on your legal ownership percentage.

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