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Ruling
Subject: Rental ownership
Question
Are you entitled to a deduction for your share of rental property expenses against rental income received from the co-owner who lives in the property?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
Your friend (person A) currently owns their home.
You are considering purchasing a share of person A's home at a price determined by an arm's length valuation.
Person A offered to sell you the share in the property because they are suffering from mortgage stress.
You will engage a professional settlement agent to affect the transfer of ownership.
You will pay stamp duty based on the value of the share of the property transferred to you.
The property will be owned by you and person A as tenants in common.
Person A will live in the property.
Person A will pay you rent based on the percentage of the property you own and an arm's length rental value.
You will not live in the property.
You will treat the property as an investment with an intention to earn a profit.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5 and
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Summary
As all the transactions will be conducted at arms length, the income you derive will be assessable and eligible expenses will be deductible.
Detailed reasoning
Section 8-1 of the Income Tax Assessment Act 1997 (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.
ATO ID 2010/193 Rental property expenses: co-owner rents the property states that a taxpayer's share of expenses can be claimed under section 8-1 of the ITAA 1997 against rental income received from their co-owner who lives in the property, when an amount of rent reflects an arm's length agreement.
A person is said to be dealing at arm's length with someone if each party acts independently and neither party exercises influence of control over the other in connection with the transaction.
In your case, you are purchasing a share of your friend's property at current market value and your friend will have a legal interest in the remaining share and continue to live in the property. You will charge your friend rent at current commercial rates in accordance with your share in the property, as if it were an arm's length agreement. Therefore, the rent received is assessable income under section 6-5 of the ITAA 1997.
Accordingly, you may deduct under section 8-1 of the ITAA 1997 any losses or outgoings incurred in gaining or producing the rental income - that is, where relevant, your share of such losses or outgoings in relation to the property - provided the losses or outgoings are not capital or of a capital, domestic or private nature.