Edited version of private ruling

Authorisation Number: 1011669422049

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Subject: Capital gains - dwelling used to produce assessable income - deductible expenses

Question 1: Will you be eligible to make the absence choice in relation to Dwelling A?

Answer: No.

Question 2: Will you be assessable on net rental income in accordance with your ownership interest in Dwelling A?

Answer: Yes.

Question 3: Will you be eligible to claim allowable deductions for expenses incurred in relation to renting out Dwelling A in accordance with your ownership interest in the dwelling?

Answer: Yes.

This ruling applies for the following period:

Income year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You and your spouse purchased a property as tenants in common with another couple after 20 September 1985. You all have equal shares in the property. The property is less than 2 hectares.

All four names are listed on the title of the property, and the council and water rates are invoiced to all four owners.

Two dwellings are located on the property, Dwelling A and Dwelling B. Dwelling A is occupied by the other couple and their family. Dwelling B is occupied by you and your family.

It has been the intention of both couples since purchasing the property to live separately in the two dwellings as neighbours, rather than sharing both dwellings, and both families have lived in separate dwellings since the purchase of the property.

Each couple has a mortgage over 50% of the property and pays for their own telephone, internet, electricity and gas.

You and the other co-owners are currently applying for a subdivision of the property. If approved, the property will be separated into two blocks of land, with a dwelling on each block. You and your spouse's names will be on the title of the block on which Dwelling B is located, and the other couples names will be on the title for the block on which Dwelling A is located.

The other couple intend moving interstate before the subdivision has been approved, and will rent out Dwelling A while they are interstate.

You and your family will continue to residing in Dwelling B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Reasons for decision

Absence choice

In some situations you can choose to treat a dwelling as your main residence even though it has ceased to be so. The choice can be made for a total of six years where the dwelling is used for the purpose of producing assessable income, or indefinitely when it is not used for that purpose. The absence concession is only available once the dwelling has qualified as your main residence.

In your case, the other couple intend moving interstate for a period of time, and during their absence, Dwelling A will be rented out. As you have never resided in Dwelling A, and it has never been your main residence, you will not be eligible to make the absence choice in relation to Dwelling A when the other couple move to another state and rent the dwelling out.

No capital gains tax event (CGT) event will occur in relation to your ownership interest in Dwelling A when the other couple move interstate, and the dwelling is rented out, as your ownership interest in the dwelling will not change.

Legal ownership and beneficial interest in the dwellings

A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory in which the property is situated. In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title.

However, 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 on trust for the beneficial owner.

In this case, you and your spouse's names are included on the title of the property with another couple as tenants in common. The property consists of two dwellings, with you and your spouse residing in one dwelling, Dwelling B, while the other couple reside in the other dwelling, Dwelling A.

You have not provided any evidence to show that either you or the other tenants in common hold an interest in the property on trust for each other. Therefore, as no evidence has been provided to support that a trust is in existence, you and the other tenants in common are considered to be the legal and beneficial owners of equal shares in the property, meaning an equal ownership interest in each dwelling.

The arrangement you and your spouse have with the other couple in relation to the usage of the two dwellings does not change your legal interests in the property, nor does it change your equitable interests. 

Division of net income or losses between co-owners of rental properties

Co-owners of rental property generally hold the property as joint tenants or tenants in common. Net income or loss from a rental property must be shared according to the legal interest of the owners.

Co-owners of rental property are often family members, owning property jointly as joint tenants or tenants in common. Any agreement made by the co-owners, whether orally or in writing, to vary the proportion of net income claimable by each co-owner has no effect for taxation purposes. Such agreements are merely domestic in nature, and cannot override the taxation legislation in relation to the division of income or losses in relation to co-owners of rental properties.

In your case, while you and the other couple have an agreement in relation to the usage of the dwellings, we have determined that all the tenants in common have an equal ownership interest in each dwelling. Therefore, you will be assessable for net rental income or losses in accordance with your ownership interest when Dwelling A when it is rented out.

Deduction for expenses incurred in relation to the rental of Dwelling A

Deductions can be claimed 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, or relate to the earning of exempt income.

In this situation, the expenses must be divided equally between you and the other tenants in common as co-owners of Dwelling A in accordance with your ownership interest in the dwelling. Each party can claim deductions for expenses incurred in relation to the rental of Dwelling A, as long as they are not of the nature listed above which would exclude them from being deductible.

Note: If you subdivide a block of land, each block that results is registered with a separate title. Subdividing land does not result in a capital gains tax (CGT) event if you retain ownership of each subdivided block in all four names. However, you will make a capital gain or capital loss if after the subdivision the block with dwelling B is registered in you and your spouse's name and the other block is registered in the name of the other couple.