Edited version of private ruling

Authorisation Number: 1011503492549

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Ruling

Subject: Rental property - Change of ownership - interest and deductions - Family Law Act

Are you entitled to 100% of the deductions on a rental property which you have been granted full ownership rights to under the Family Law Act 1975 (FLA) when the title is still tenants in common?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You and your partner purchased an investment property as tenants in common and it has been rented for the past few years. The property is currently rented.

You have separated from your partner and have finalised a binding financial agreement under the FLA to split your joint assets.

On finalising the agreement you have given your partner complete immunity from all liability of the investment property on him transferring ownership to you.

You have a loan for the investment property that has a fixed interest rate.

Your ex partner has agreed to leave the property in joint names until you have refinanced a loan and transferred the property in your name solely.

You are to then pay your ex partner as per the agreed settlement.

Your ex partner will receive no income or be required to pay any outgoing costs including the mortgage from the date of the agreement.

You will declare 100% of the rented income.

You have provided a copy of the binding financial agreement under the FLA.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Summary

You are entitled to 100 % interest and other rental property expenses for your rental property from the date of your Financial Agreement under the FLA.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts, which is called ordinary income.

Section 8-1 of the ITAA 1997 provides that in order for a loss or outgoing to be deductible, there must be a connection between the expense and the gaining or producing of assessable income. However, you cannot deduct a loss or outgoing that is of a private, capital or domestic nature.

A deduction under this 'general deductions' provision is only allowable if the expense is actually incurred, has the relevant connection with income and meets the substantiation rules.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or losses between co-owners refers to the division of the net income or loss between joint owners of a rental property. The Ruling only examines the taxation position of co-owners whose activities do not amount to the carrying on of a business. Persons who own two or three rental properties would not normally be considered to be carrying on a rental property business.

Paragraphs 38 to 41 of TR 93/32 address the legal and equitable interests issue confirming at paragraph 41 that there are extremely limited circumstances where the Tax Office will accept that the equitable interest is different from the legal title. Where the taxpayers are related the Tax Office will assume that the equitable right is exactly the same as the legal title. Therefore, as you were related to your ex partner, it is assumed that your legal and equitable interests are in parallel unless you can show that they were different.

You have provided a copy of the terms of settlement of an Agreement under the FLA which sets out how the joint assets of you and your ex partner were divided.

The Agreement provided that as soon practical:

· your former partner transfer and assign to you his right, title and interest in the property and you retain the property for your sole use and benefit

· you will indemnify your ex partner against all payments and liability pursuant to the mortgage and all outgoings of the property

· contemporaneously with a payment to your former partner you will do all necessary acts or things and sign necessary documents as required to discharge the mortgage and refinance the mortgage into your name solely.

The property will remain in joint ownership as agreed by your former partner when your fixed interest rate on the loan will expire, and then the legal title of the property will be transferred to you.

Consequently, the Agreement under the FLA effectively confirms your 100% equitable interest in the investment property even though, on the date the Agreement was made you and your ex partner were the registered owners as tenants in common.

Accordingly, it is accepted that your equitable interest is different from your legal interest from the date of the Agreement under the FLA. Therefore, from the date you signed the Agreement, the property is considered to be yours and, if the property is rented or available for rent, you are entitled to claim interest and other rental property expenses you incurred in relation to the investment property from the date of the Agreement.