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Edited version of your private ruling
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Ruling
Subject: Rental property income and expenses
Question
Should you declare the income and claim a deduction for expenses you incur in respect renting the granny flat?
Answer
Yes.
Question
Are you entitled to a deduction for the interest on a loan taken out by your child?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2012
The scheme commenced on
1 July 2011
Relevant facts
Your child built a granny flat with funds that they borrowed in the yard of your property where you reside and to which you hold legal title.
The loan for the granny flat is in your child's name and they pay the interest.
The granny flat is now rented out.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 6-5
Reasons for decision
You are assessable on rental income received under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) but may claim deductions under section 8-1 of the ITAA 1997 for losses and outgoings you incur in gaining that income.
Taxation Ruling TR 93/32 states that the net income or loss from a 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.
A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation.
You own the property on which the new granny flat is built. Therefore, it is you who must declare the income from renting the property and you can claim a deduction for the costs you incur in relation to the property.
However, as it is not you who has taken out the loan to build the property, you are not entitled to a deduction for interest. Furthermore, as you own the property, no one else is entitled to claim a deduction for the interest incurred on the loan.