Edited version of private ruling

Authorisation Number: 1011847091077

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Ruling

Subject: Returning rental income and expenses in respect of jointly owned property

Question 1

Can you return 100% of the income derived and expenses incurred in respect of a jointly owned rental property?

Answer

No

Question 2

Can you return 100% of the capital gain derived from the sale of a jointly owned rental property?

Answer

No

Relevant facts and circumstances

You and your spouse are foreign residents who own rental properties in Australia as joint tenants.

You have lodged income tax returns in Australia but your spouse has no Australian income tax file number and has never lodged income tax returns here.

You have returned all income and claimed all expenses in respect of the rental properties in your returns of income. The properties have operated at a loss in each year of income. One property has been sold and you have included all of the assessable capital gain in your return of income.

Reasons for decision

Question 1

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a foreign resident is assessable on all ordinary income derived directly or indirectly from all Australian sources. Rental income is ordinary income.

Insofar as the derivation of rental income is concerned, Taxation Ruling TR 93/32 states that:

Ownership conveys an entitlement to exercise the maximum legally permissible rights over what is owned. Generally a legal interest in land is achieved by the owner being the registered proprietor of the legal title to the land. Where there is more than one person with a concurrent legal interest in the same land, those persons are co-owners of the land.

Co-owners of rental property will generally hold the property as joint tenants or tenants in common. These tenancies are a further classification of the co-owners' interests.

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 - e.g., A and B, who each own an identical 50% share in a property are, provided the other requisite features are present, joint tenants of that property.

You are a co-owner of a number of rental properties in Australia and in accordance with TR 93/32 you are required to return one half of the net rental income derived from those properties in your income tax returns lodged in Australia.

Question 2

Subsection 6-10(5) of the ITAA 1997 provides that a foreign resident is assessable on all statutory income derived from all Australian sources. A capital gain derived from the disposal of real estate is statutory income.

As set out above, you only have an entitlement to one half of the property sold. The capital gain returned as income by you therefore cannot properly exceed one half of the total assessable capital gain.