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Ruling

Subject: Property beneficial ownership

Question 1

Are both the rental property and parcel of land still considered jointly held for taxation purposes?

Answer

No

Question 2

Is the rental property loss still to be allocated equally to you and your former spouse?

Answer

No

Question 3

How is the total amount of interest on the loan for the rental property to be allocated between you and your former spouse?

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 and your former spouse jointly purchased a property for rental purposes.

You both had also jointly purchased a parcel of land.

The loan for the rental property was in joint names.

You and your spouse have since separated.

You filed an application with the Family Court of your state.

In 2011 the Family Court of your state consented to the order.

The order was for your former spouse to transfer there right, title and interest in the rental property as well as the parcel of land to you.

This means that you would have full ownership of both properties in their entirety.

You have confirmed that there are no other conditions for the ownership to be transferred to you.

You have been unable to secure finance to recompense your former spouse for their share of the properties, and so the bank has not released the title deeds so that they can be changed into your name.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 81- and

Income Tax Assessment Act 1997 Section 6-5.

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.

Section 8-1 of the ITAA 1997 provides that in order for a loss or outgoing to be deductible, there must be a connection between the expense and the gaining or producing of assessable income. However, you cannot deduct a loss or outgoing that is of a private, capital 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.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or losses between co-owners refers to the division of the 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. Persons who own two or three rental properties would not normally be considered to be carrying on a rental property business.

Paragraphs 38 to 41 of TR 93/32 address the legal and equitable interests issue confirming at paragraph 41 that there are extremely limited circumstances where the Tax Office will accept that the equitable interest is different from the legal title. Where the taxpayers are related the Tax Office will assume that the equitable right is exactly the same as the legal title. Therefore, as you were related to your former spouse, it would be assumed that your legal and equitable interests are in parallel unless you can show that they were different.

You have provided a copy of the terms of settlement of Orders by consent pronounced by the Family Court of your state which sets out how these assets of you and your former spouse were divided.

The Orders by consent provides that:

Your former spouse wishes to transfer their right, title and interest of your two properties to you, absolutely.

You have confirmed that there are no further conditions attached to the orders made by the court.

Consequently, the orders made by the Family Court effectively confirms your 100% equitable interest in the investment property even though, on the date the orders were made, you and your former spouse were the registered owners.

Accordingly, it is accepted that your equitable interest is different from your legal interest from the date of the orders made by the Family Court of your state.

Therefore, from this date, the property is considered to be yours.

If the property is rented or available for rent, you are entitled to claim all rental property expenses (other than loan interest) you incurred in relation to the investment property from the date of the orders made by the court.

While the property is rented or available for rent, you may claim 50% of the interest on the loan for the property. This is because the loan for the property is in joint names, and so this is shared equally.

However, for an expense to be claimed there has to be a connection between an income producing activity and the expense incurred. Because you are now the beneficial owner of the property, you are deriving all the income from it, and any other party to the investment loan is not gaining income from it, therefore the other half of the loan interest which they are liable to pay may not be claimed as an expense by either you or the other party to the loan.