Edited version of your private ruling

Authorisation Number: 1012476479582

Ruling

Subject: Deduction of rental property expenses

Question

Are you entitled to a deduction for 100% rental loss, for a property that you hold a 50% interest in?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You have a 50% interest in a residential property and there is a mortgage on the property that includes you.

The property is to be sold in the future but prior to this occurring it has been rented.

All rental received is put towards the mortgage repayments.

You are paying for all expenses associated with the property, including insurances, rates, utilities and the interest charge that is in excess of the rent received.

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 a property and your interest in the property is 50%. There is currently a mortgage on the property that is in joint names. The property is currently subject to a Court order stating that the property is to be sold and 50% of the net proceeds given to you. However, this sale has been delayed and the property has been rented.

You have taken responsibility for the rental activities and incurred all the financial expenses.

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 have paid for 100% of the property's ongoing expenses, the expenses must be shared according to the proportion of the legal interest in the properties held by you the other co-owner.

Therefore, you can only claim a deduction for the proportion of the property expenses that is equivalent to your 50% proportion of legal interest in the property, and you can only include in your assessable income the income that is equivalent to your 50% proportion of legal interest in the property.