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Ruling
Subject: Rental property income and expenses
Question:
Are you entitled to claim 100% of the net income or loss for the rental property that you and your sibling own as joint tenants?
Answer:
No
This ruling applies for the following periods
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commences on
1 July 2012
Relevant facts and circumstances
You own a property with your sibling as joint tenants.
The property is being rented.
The property was previously owned by your parent and transferred to you and your sibling some year ago.
You and your sibling live in your own homes.
Your sibling has signed a written agreement agreeing that you should collect all rents and pay all expenses of the property from when the rent was first received until the end of three years after your parent's death.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5 and
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Taxation Ruling TR 93/32 refers to the division of net income or loss between joint owners of a rental property whose activities do not amount to the carrying on of a business.
TR 93/32 explains that the net 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. An example of where the equitable interest may differ from the legal interest is when an owner is holding their share as trustee for the owner. A Family Court order dealing with settlement of jointly owned property may also alter this equitable interest.
A person's legal interest in a property is determined by the legal title to that property under the land legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deed for the property issued under that legislation.
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 and each owns an identical 50% share in a property.
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 forgoes their share of the rental income and/or pays for all the expenses this is considered to be a private arrangement between the co-owners. It does not alter the fact that they are legally entitled to their share of the income and liable for their share of the expenses.
In your case, the inclusion of your sibling as a joint tenant on the legal title means that you will both hold an equal share in the property and therefore both hold a 50% legal interest. The private arrangement you have made with your sibling in which you receive all the rental income and incur all the expenses, is not sufficient to show that a trust has been created and therefore that the equitable interests differ from the legal interests. The private arrangement between you and your sibling does not alter your legal interest in the property.
Therefore, in your case, it is considered that the equitable interest is the same as the legal interest. As joint tenants, with equal legal interests, you and your sibling will be required to equally divide and report for tax purposes both the rental income derived and the expenses incurred.
Consequently, you can only include 50% of the rental income in your assessable income and only claim a deduction for 50% of the expenses associated with the rental property.