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Ruling

Subject: Rental property expenses

Question

Are you entitled to a deduction for 100% of the interest expenses, for a property that you co-own, for the period where you paid all the interest expenses?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You hold an interest in an investment property of less than 100%.

The property was in dispute between your and the other co-owner's lawyers.

The other co-owner refused to contribute their share of the interest expenses on the loan for the property.

To avoid defaulting on the loan, you paid the entire interest expense on the loan for a period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 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.

Taxation Ruling TR 93/32 explains that the loss or income 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.

You co-own an investment property. The property is currently in dispute and the other co-owner refused to contribute their portion of the interest expense for a period. This is not sufficient to establish that equitable interest is different from legal title.

Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between the co-owners, either oral or in writing stating otherwise.

Where a co-owner pays for more than his or her share of the expenses, this is considered to be a private arrangement between the co-owners. It does not alter the fact that they are only liable for their share of the expenses.

TR 93/32 provides the following example:

Mr and Mrs Z rent out a house which they own as joint tenants. The rent is paid into a joint account from which expenses of the property are paid. The expenses of the property exceed the rental income from it each year. Mr Z claims that as he is the sole income earner and had in effect paid all the expenses, he is entitled to claim 100% of the loss.

Net profits and losses from the property should be shared in the same proportion as their ownership interests, i.e., 50:50. The fact that Mr Z has paid all the expenses on the property is of no consequence for income tax purposes. We would simply treat the payment of Mrs Z's share of the expenses by Mr Z as no more than a loan by Mr Z to Mrs Z.

Although you paid for 100% of the investment property interest expenses for a period, the expenses must be shared according to the proportion of the legal interest in the properties held by you the other co-owner.

While we can appreciate your circumstances, the Commissioner does not have any discretion under the tax law to allow a taxpayer to claim more or less than their legal entitlement to investment property income and expenses.

Therefore, you can only claim a deduction for the proportion of the interest expenses that is equivalent to your proportion of legal interest in the property, and you can only include in your assessable income the income that is equivalent to your proportion of legal interest in the property.