Edited version of private ruling

Authorisation Number: 1011800132240

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Ruling

Subject: Rental property - division of income and loss between co-owners

Questions and answers:

Are you entitled to claim 100% of the income and deductions in relation to rental property 1 after you have been granted full ownership rights by the Family Court when the title is still in joint names?

Yes.

Are you entitled to claim 100% of the income and deductions in relation to the rental property 1 you have been granted full ownership rights by the Family Court when the title is still in joint names?

No.

Are you entitled to claim X% of the income and deductions on rental property 2 prior to its sale?

No.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2010

Relevant facts:

You co-own two investment properties with your former spouse.

The titles for these properties were both originally held on a joint basis as joint tenants.

Your former spouse has not contributed financially to maintaining the rental properties in recent income years.

Your former spouse left you in the income year ending 30 June 20XX.

The Family Law Court of Australia issued an Order pursuant to the Family Law Act (1975) on a date in 2010.

The Order provided that:

Your former spouse transfer to you their right, title and interest in rental property 1 within 60 days of this Order.

The parties sell rental property 2 and after paying all costs and discharging loans, the remaining balance be divided Y% to your former spouse and X% to you.

Pending the completion of the sale of rental property 2, you have sole right to occupy the property and will collect the rental income and pay all expenses as they fall due.

Any joint tenancy of the parties is expressly severed.

The Family Law Court Order did not alter the ownership interest of you and your former spouse in rental property 2.

Rental property 1 remained in joint ownership until a date approximately two months after the Court Order when the legal title of the property was transferred to you.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

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. Income derived from a rental property is ordinary income.

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.

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 rental income or loss between co-owners

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 and states that persons who own two or three rental properties would not normally 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 ownership is different from the legal title.

Paragraph 38 provides that in certain circumstances if the ownership is not the same as shown on the legal title, there is some basis for the profit/loss to be distributed differently to the legal basis. Where the taxpayers are related the Tax Office will assume that the ownership is exactly the same as the legal title. Therefore, as you were related to your ex-spouse, it is assumed that your ownership interests are in parallel with the title deeds unless you can show that they were different.

You provided a copy of the terms of settlement of an Order under the Family Law Act 1975 which sets out how the joint assets of you and your ex-spouse were divided.

Rental property 1

The Family Court Order provided that within 60 days of the date of the Order, your former spouse transfer to you their right, title and interest in rental property 1. Their legal interest in the property was transferred into your name on a date some months later. The property therefore remained in joint ownership until some months after the Order.

The Order made under the Family Law Act 1975 on a date in 2010 confirms your 100% ownership in rental property 1 even though, on this date, you and your ex-spouse were the registered joint owners. 

Accordingly, it is accepted that your ownership interest was different from your legal interest from the date of the Order. Therefore, from the date you signed the Order in 2010, the rental property is considered to be yours.

In summary, you are entitled to include 100% of the income derived and deduct 100% of the expenses incurred in relation to rental property 1 for the 2010-2011 income year from the date of the court order.

Rental income/loss prior to issuing of court order

We acknowledge that your former spouse was not contributing financially from the start of the 2010-2011 income year and left you during this year. As a result you solely contributed and paid all the expenses in relation to rental property 1.

However, in line with paragraph 49 of TR 93/32 the net profits and losses from rental property 1 should be shared in the same proportion as their ownership interests. The fact that one taxpayer has paid all the expenses on the property is of no consequence for income tax purposes.

As the names of you and your former spouse were on the title deed before the court order was issued, you are both legal co-owners of rental property 1 and therefore, you are assessable only on your 50% share of income less expenses of the property until the full ownership was declared to you by the court order on a date in 2010.

In summary, for the period 1 July 2010 until the date of the court order you are only entitled to include 50% of the income derived and deduct 50% of the expenses incurred in relation to rental property 1.

Rental property 2

The Family Court Order provided that rental property 2 be sold and that the proceeds after costs and loans were discharged be divided X% to you and Y% to your former spouse. The Order stated that pending the completion of the sale, you had the sole right to occupy the property and must collect rental income and pay all expenses as they fell due. The Order specified that any joint tenancy of the parties be expressly severed but there be no change to ownership interests or rights of this property under the Order. You have been awarded X% of the balance of sale proceeds but not X% of the ownership of the property. Your legal interest remains 50%.

According to the principle set out in TR 93/32, as you and your former spouse were related, it will be assumed that ownership of rental property 2 is exactly the same as is shown on the legal title. The Court Order provides no grounds to argue that ownership is any different from the title or that income/loss should be divided any differently from the legal ownership. Therefore, the income and loss from rental property 2 will be divided between you and your former spouse according to the legal ownership specified on the title deed.

In conclusion, until rental property 2 is sold you are only entitled to include 50% of the income derived and deduct 50% of the expenses incurred in relation to the property in line with your ownership interest as stated on the title deed.