Edited version of private ruling

Authorisation Number: 1011790196778

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Ruling

Subject: Meaning of "quasi-owner"

Question 1

Can a life tenant in a domestic dwelling claim a deduction for depreciation under the capital allowances provisions as a quasi owner against rental income earned from the property?

Answer

Yes, to the extent that the life tenant is the owner of a depreciating asset that is used in generating rental income, and for which they incurred a capital outlay.

Question 2

Can a life tenant in a domestic dwelling claim a deduction for capital works as a quasi owner against rental income earned from the property?

Answer

No

This ruling applies for the following periods>:

Income years ended 30 June 2010

Income years ended 30 June 2011

Income years ended 30 June 2012

Income years ended 30 June 2013

The scheme commences on:

1 July 2009

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 are in possession of a life interest in domestic real estate, pursuant to the terms of a will.

You do not occupy the house, but lets it out at arm's length.

You derive rental income and claims deductions for repairs and maintenance, and agent costs.

No borrowing is involved.

The property is held on trust by the trustee of a testamentary trust.

The terms of the will include:

1. After paying specific monetary legacies and the deceased's just debts, funeral and testamentary expenses the residuary estate would be given to the executor upon trust to divide the residuary estate into [a number of] parts and pay it as specified.

2. Of the parts, X parts to the deceased's executor upon trust to hold the same for your lifetime upon the provisions set out in the life interest clause in the will.

Life Interest

1. The executor was directed to use an amount of up to three-quarters of the said X parts of the residuary estate comprising your life interest to purchase a home-unit or similar accommodation ("the property") and allow you the right to reside therein or have the use of the property for the whole of your lifetime.

2. The executor was to invest the balance of the said X parts in authorised trust investments and to pay from the income earned the rates, taxes, levies, insurance premiums and other similar outgoings on the property. The executor was also responsible for paying income tax on income earned by the fund; the cost of any minor repairs necessitated by fair wear and tear; and any reasonable ongoing administrative charges payable for the continuing administration of the life interest.

3. Any unused income was to be reinvested back into the Fund.

4. You shall be responsible for paying the abovementioned outgoings in the event the Fund becomes insufficient to cover such expenses and shall also be responsible for maintaining the home to the satisfaction of the Executor.

A rates instalment notice addressed to the trustee of the testamentary trust was also provided.

Preliminary comments

A "life tenant" is, according to the Butterworths Concise Australian Legal Dictionary, 2nd edition (BCALD),

A person who holds a life estate, being an interest in land entitling the life tenant to exclusive possession and use of the land for as long as he or she lives.

A "life estate" is described as '...an estate in land that endures only until the death of the person upon whom it is conferred (the "life tenant") or some other specified person.' (BCALD)

The word "owner" has an extended definition in BCALD, but is summed up as 'a person in whom the ownership of property is vested'. "Ownership" is defined as,

The right recognised by law, in respect of a particular piece of property (real or personal), to exercise with respect to that property all such rights as by law are capable of being exercised with respect to that type of property against all persons, including the right to possession of the property and any proceeds of its sale.

The ruling application raises the question of whether a life tenant can be considered an 'owner' and consequently access the deductions available for capital expenditure, in the capacity of a "quasi-owner".

Question 1

Summary

A life tenant is entitled to a deduction for depreciation of capital items which they hold and for which they incurred the capital expenditure, to the extent to which the items are used in generating assessable rental income.

Detailed reasoning

The term "capital allowances" covers the deduction claim formerly known as depreciation.

You can deduct an amount equal to the decline in value for an income year (as worked out under the capital allowances provisions) of a depreciating asset that you held for any time during the year.

Land is excluded from the class of depreciating assets. However the capital allowances provisions apply to an improvement to land, or a fixture on land, as if it were an asset separate from the land.

The term "depreciating asset" is defined as being an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. The capital allowances provisions do not apply to capital works for which a deduction is available under the provisions dealing with capital works (income producing buildings and structural improvements). Hence, for example, the capital allowances provisions would apply to a dam pump, artesian bore, or similar improvement or fixture on the land, if they are not considered to be covered by the capital works provisions.

The capital allowances provisions include a table to determine who "holds" a depreciating asset. A provision in that table covers any depreciating asset, and states that the holder of the asset is the owner, or the legal owner if there is both a legal and an equitable owner.

You, as a life tenant, are not considered to be either a legal owner or an economic owner in broad terms of the property you are renting out. Eligibility to a deduction for capital allowances will relate to those depreciating assets which are held by you; for which there was a cost incurred by you; and for which a deduction under the capital allowances provisions is available.

Where a life tenant is deriving income from renting a property for which they hold a right of occupancy and use (as in this case), a deduction for depreciation would therefore be available to the life tenant in respect of depreciating assets they own and for which they incurred a capital outlay.

In the other hand, household items that are classed as depreciating assets and which were purchased by the executor, or were part of the property purchased by the executor, are not considered to be owned by the life tenant. Consequently no deduction would be available to the life tenant on those items.

Question 2

Summary

A life tenant is not entitled to a deduction under the capital works provisions for the construction costs of a property in which they are a life tenant, but which was purchased, and is owned, by the executor of the estate.

Detailed reasoning

The provisions covering deductions for the construction costs of capital works in relation to income-producing buildings and structural improvements (often referred to as building depreciation) are separate from those covering capital allowances.

You can only deduct an amount for the construction costs of capital works if:

· the capital works have a construction expenditure area; and

· there is a pool of construction expenditure for that area; and

· you use your area in the income year in the way set out in het provision.

The definition of "your area" ensures that only owners and certain lessees of capital works, and certain holders of quasi-ownership rights over land on which capital works are constructed, can deduct an amount for capital works.

"Your area" is defined as the part of the construction expenditure area that you lease, or hold under a quasi-ownership right over land granted by an exempt Australian government agency or an exempt foreign government agency, and that:

· is attributable to a pool of construction expenditure that you incurred; and

· you have continuously leased or held since the construction was completed.

The term "quasi-ownership right" is generally defined as meaning

· a lease of the land; or

· an easement in connection with the land; or

· any other right, power or privilege over the land, or in connection with the land.

This general definition is narrowed in the capital works provisions, which limits the entities from which a quasi-ownership right can be acquired. The creation of a life tenancy does not fall within the scope of the capital works provisions and therefore you are not considered to be a quasi-owner for the purposes of the capital works provisions.

In addition, a capital works deduction is available in respect of the construction expenditure attributable to the part of the construction area expenditure that you own. Since the terms of the Will make it plain that the executor was to use part of the bequest to you to purchase a unit or similar housing, the executor is the person who is considered to be the owner of the property, not you.

Consequently, you are not entitled to a deduction for capital works in respect of the property in which you have a life interest, and which you are renting out.