| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private ruling
Authorisation Number: 1011763063955
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Ruling
Subject: Rental property - division of income and loss between co-owners
Questions and answers:
Are you assessable on 100% of the income from a jointly owned investment property?
No.
Are you entitled to a deduction for 100% of the expenses incurred in maintaining a jointly owned investment property?
No.
Are you assessable on 50% of the income from a jointly owned investment property?
Yes.
Are you entitled to a deduction for 50% of the expenses incurred in maintaining a jointly owned investment property?
Yes.
This ruling applies for the following period:
Year ending 30 June 2011
The scheme commenced on:
1 July 2010
Relevant facts:
You intend to purchase and rent out an investment property.
You intend to enter into the purchase contract in your name only and borrow all funds to acquire the property in your name only.
You intend to service any shortfall between rental income and loan repayments and to fund all ongoing expenses related to the rental property from your own earnings.
You wish to add your spouse to the legal title as joint tenant.
Your spouse will not be contributing financially towards the property in any way.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Section 8-1 of the 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, or relate to the earning of exempt income.
Taxation Ruling TR 93/32 Income Tax: rental property - division of net income or loss between co-owners explains that the loss or income from 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 41 of TR 93/32 states that where taxpayers are related, for example, married, the equitable right is presumed to be exactly the same as the legal title.
Paragraphs 38 to 40 of TR 93/32 consider the extremely limited circumstances where the legal and equitable interests are not the same. An equitable interest may differ from the legal interest when an owner is holding their share as trustee for the other owner. A Family Court order dealing with settlement of joint owned property may also alter this equitable interest.
The legal interest in a property is determined by the legal title to that property. The legal owner of the property is recorded on the title deed for 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 and each owns an identical 50% share in a property.
Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between the owners, either oral or in writing stating otherwise. Where a co-owner forgoes their share of the rental income and/or pays for all the expenses this is considered to be a private arrangement between the co-owners. It does not alter the fact that they are legally entitled to their share of the income and only liable for their share of the expense.
In your case, the inclusion of your spouse as a joint tenant on the legal title means that you will both hold an equal share in the property and therefore both hold a 50% legal interest. You are a married couple and as such the Commissioner presumes equitable right is exactly the same as legal right. The private arrangement you have made with you spouse in which you receive all the rental income and incur all the expenses, is not sufficient to show that a trust has been created and therefore that the equitable interests differ from the legal interests. The private arrangement between you and your spouse does not alter your legal interest in the property.
Therefore, in your case, it is considered that the equitable interest is the same as the legal interest. As joint tenants, with equal legal interests, you and your spouse will be required to equally divide and report for tax purposes both the rental income derived and the expenses incurred.
Consequently, you can only include 50% of the rental income in your assessable income and only claim a deduction for 50% of the expenses associated with the rental property.