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Edited version of your private ruling
Authorisation Number: 1012437894494
Ruling
Subject: Renting to co-owner and relative
Question
Can your share of rental property expenses be claimed against rental income received from the co-owner who is a relative and lives in the property?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You and a relative will together purchase 50% of a property, 25% each.
Another relative will purchase the other 50%.
The three parties will own the property as tenants in common.
The title and loan documentation will reflect this proportion of ownership.
All expenses and mortgage costs will be shared in the proportion of ownership.
The relative who owns the 50% share will reside in the property and pay you 50% of the commercial rate of rent.
You will determine the market rate of rental by direct comparison with similar properties in the same area.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 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.
In Case R16 84 ATC 179; 27 CTBR (NS) Case 67 the Board of Review held that one tenant in common can lease premises from their co-tenant in common (so as to have exclusive possession) and be liable to pay the amount reserved by the lease. Such amount is assessable income in the hands of the recipient, the amount of rent being paid equal to that of a fully arms length transaction.
Where a taxpayer rents property to their co-owner at a commercial rental, the income derived from the rent received will be assessable under section 6-5 of the ITAA 1997. Expenses incurred by the taxpayer in deriving that income will therefore be deductible under section 8-1 of the ITAA 1997.
Taxation Ruling TR 93/32 states in paragraph 6 that the income/loss from a rental property must be shared according to the legal interest of the owners, except in very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.
Consequently, as you will be receiving a commercial rate of rent from your relative, the income you receive in respect of your 25% interest in the rental property is assessable income under section 6-5 of the ITAA 1997 and you are entitled to claim 25% of the deductible rental property expenses.