Edited version of private ruling

Authorisation Number: 1011615912249

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Ruling

Subject: Rental property expenses - interest - borrowing expenses

1. Are you entitled to a deduction for 100% of the interest expenses incurred on a joint loan used to purchase a rental property?

No.

2. Are you entitled to a deduction for 100% of the borrowing expenses incurred on a joint loan used to purchase a rental property?

No.

This ruling applies for the following period:

1 July 2009 to 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You co-own a rental property as tenants in common with a relative. You hold a 75% interest in the property, and your relative holds a 25% interest.

Your financier would not lend you the money to purchase your share of the property unless you took out a joint loan (mortgage) with your relative.

To secure the property you accepted the financiers' requirement and took out a joint mortgage. Your relative paid cash for their 25% interest in the property.

You have paid 100% of the mortgage repayments since the loan was taken out.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 25-25

Reasons for decision

Question 1

Summary

You are not entitled to a deduction for 100% of the interest incurred on the joint loan used to purchase the property. The interest 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. As you hold a 75% interest in the property, you are entitled to a deduction for 75% of the interest expenses incurred.

Detailed reasoning

You can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income except where the loss or outgoing is capital, private or domestic in nature or relates to the earning of exempt income (section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)).

Interest paid on a mortgage over a rental property is considered an allowable deduction for the purposes of section 8-1 of the ITAA 1997.

Taxation Ruling TR 93/32 explains the basis upon which the Commissioner will accept the division of the net income or the loss from a rental property between the co-owners of that property. The ruling 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 TR 93/32).

Paragraphs 46 and 47 of TR 93/32 provide the following example:

46. 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.

47. 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.

Your circumstances are considered comparable to the above example. You and your relative co-own a rental property as tenants in common. There is no dispute that you hold a 75% interest in the property, and your relative holds a 25% interest. While it was only your financier's requirement that both of you sign the mortgage documents, there is also no dispute that the mortgage is in joint names. As the names on the mortgage are the same as the title deed, the interest expenses must be shared according to your legal interest in the property. Any agreement to share the interest expenses in proportions different to your respective ownership shares is a private arrangement which has no effect for income tax purposes.

Therefore, you are not entitled to a deduction for 100% of the interest expenses incurred on the joint loan used to purchase the rental property.

Question 2

Summary

You are not entitled to a deduction for 100% of the borrowing expenses incurred on the jointly held mortgage used to purchase the property. The borrowing expenses must be attributed to each co-owner according to their legal interest in the property. As you hold a 75% interest in the property, you are entitled to a deduction for 75% of the borrowing expenses incurred.

Detailed reasoning

Borrowing expenses are capital in nature and therefore not deductible under section 8-1 of the ITAA 1997. However, borrowing expenses are deductible under section 25-25 of the ITAA 1997 where the borrowed funds are used to produce assessable income.

As you incurred borrowing expenses in respect to the jointly held mortgage you are entitled to a deduction under section 25-25 of the ITAA 1997 for your share (75%) of the borrowing expenses incurred.

Note that expenses deductible under section 25-25 of the ITAA 1997 that exceed $100 must be apportioned over five years or the period of the loan, whichever is the lesser.