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Authorisation Number: 1012307474088

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Ruling

Subject: Rntal property income/expenses

Question:

If a person holds all of the beneficial interest in a rental property do they declare all of the income and claim all of the expenses they incur?

Answer:

Yes

Question:

If a person holds a portion of the legal interest in a rental property do they claim all the interest on a jointly held property loan if they are making all loan payments?

Answer:

No

Question:

If a person holds all of the beneficial interest in a rental property do they claim all the interest on a jointly held property loan?

Answer: No

Is the profit/loss and interest split between the two owners as it was prior to the court order?

Answer:

No

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on

1 July 2010

Relevant facts

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You and your spouse own an investment property as tenants in common in the proportion X and Y

X s a much greater value than Y

You are separated.

A court order has been issued which gives the Y% property holder the right to receive all the rental income from that property.

The loan for the property is in both names.

The majority property holder is still paying for the loan on the property, with the other party paying the upkeep of the property.

Prior to the court order, all income and expenses were split in the proportion of title ownership; that is X and Y.

Relevant legislative provisions

Income tax Assessment Act 1997 Section 8-1 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 minutes of consent pronounced in the court which sets out how these assets of you and your former spouse were divided.

The orders of the court provide that:

The Y% property holder will retain the rental property, and will either receive the rental income from it, or the right to reside in the property.

Consequently, the order made by the court effectively confirms the 100% equitable interest in the investment property of the Y% titleholder, even though when the order was made you and your spouse were the registered owners on the property title.

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

Therefore, from this date, if the property is rented or available for rent, the Y% title holder is entitled to claim all rental property expenses (other than loan interest) they incur in relation to the investment property.

While the property is rented or available for rent, they may claim Y% of the interest on the loan for the property. This is because the loan for the property is in joint names, and the amount of interest able to be claimed is linked to the percentage of legal title to the property.

In the case of the Y% titleholder, Y% of the loan originally was used to purchase their share of the property.

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