Edited version of private ruling

Authorisation Number: 1011694834600

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Ruling

Subject: Loan repayment costs

Question

Are you entitled to claim 100% of the loan repayment costs applicable to your jointly owned rental property?

Answer:

No

This ruling applies for the following period

Year ending 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

Before you were separated, you and your spouse were joint owners of a rental property. You were sole owner of another property which was your residence until sold.

You and your spouse had three loans in joint names which were in part used to pay for the rental property and in part used to run the business which you both had at the time.

You paid all of the interest on the three loans from your personal bank account.

Upon separation, you sold your solely owned property and applied the proceeds fully to repay the three loans.

The residual balance of the three loans was refinanced with a new loan in both names which was eventually finalised when the rental property was sold.

The sale of the rental property was not part of the divorce property settlement.

Due to the early loan repayments, there were bank charges and a large economic bank cost.

For the whole of the period that the rental property was rented and producing assessable income you and your spouse were sharing the net result of the rental in equal amounts. You were funding the costs related to the property as long as the property was owned.

Your spouse did not actively contribute to the rental property expenses or the expenses incurred to settle the loans, which were all fully paid by you.

You have signed a statutory declaration to confirm that you solely used your own funds to repay all joint loans.

Reasons for decision

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.

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

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners refers to the division of 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 be considered to be carrying on a rental property business.

According to TR 93/32, the income/loss from the 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.

The equitable interest will only be different if one of the owners shown on the title deed is holding their share of the property in trust for the other party. That is, in your case, you would have to show that your spouse has given up all claims of ownership of her 50% share of the property and is merely holding it in trust for you.

Co-ownership

Co-owners of a rental property will generally hold the property as joint tenants or tenants in common. An important feature of both a joint tenancy and a tenancy in common is the legal interest of the tenant. It is this legal interest which ultimately determines among co-owners of property, the division of the net income or loss from the property.

Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration - each owns an identical 50% share in a property.

Paragraphs 48 and 49 of TR 93/32 provide the following example:

Mr and Mrs Z rent out a house that they own as joint tenants. The rent is paid into a joint account from which expenses of the property are paid. The expenses of the property exceed the rental income from it each year. Mr Z claims that as he is the sole income earner and had in effect paid all the expenses, he is entitled to claim 100% of the loss.

Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs Z 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 ownership interests, that is 50:50. The fact that Mr Z has paid all the expenses on the property is of no consequence for income tax purposes. We would simply treat the payment of Mrs Z's share of the expenses by Mr Z as no more than a loan by Mr Z to Mrs Z.

You and your spouse separated and your spouse had not contributed to the expenses of the rental property including payment of the loans for it. This does not alter the fact that she is a joint owner both legally (there has been no change to the title deed) and beneficially (there is no indication that she has given up ownership of her 50% share of the property).

Consequently the income and expenses of the property must be split equally between you and your spouse, the joint owners.