Edited version of your private ruling

Authorisation Number: 1012569578872

Ruling

Subject: Assessable income - trust income - deceased estate

Question

Are you assessable on net rental income (which your late spouse's will has given you the right to receive for your life) derived from an interest in a rental property that has been legally transferred to your children pursuant to the terms of the will?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your spouse died.

Your late spouse had an interest in a rental property.

The other interest in the rental property is owned by another family.

The property was co-owned as tenants in common.

Probate of your late spouse's will was granted during the income year.

Under the terms of the will you were given for your lifetime, for your 'own use and benefit absolutely', the net rental moneys (that is, after payment of expenses such as rates and repairs) received from the leasing of your late spouse's interest in the above property.

Pursuant to the will, your children were given your late spouse's share of freehold interest in the property 'for their own use and benefit subject always to the payment of the net unencumbered rental moneys' to you for your life.

Legal title to your late spouse's interest in the property has been transferred to your children.

The renting of the property involves a mere leasing of property only. That is, there is no provision of services.

Relevant legislative provisions

Income Tax Assessment Act 1997 - subsection 995-1(1)

Income Tax Assessment Act 1936 - subsection 92(1)

Income Tax Assessment Act 1936 - subsection 92(2)

Reasons for decision

Summary

Your late spouse's will has created a trust and is evidence to establish that the equitable interest in the property does not follow the legal title. The net rental income from the property can therefore be distributed on the equitable and not the legal basis.

Detailed reasoning

Partnerships

The term partnership is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 as an association of persons carrying on business as partners or in receipt of income jointly.

The mere receipt of rents from properties does not amount to the carrying on of a business (Taxation Rulings TR 93/32 and IT 2423). TR 93/32, which explains the basis upon which the net income or loss from rental property should be divided between co-owners, states that as a general proposition, it is more accurate to describe the owners of rental property as co-owners in investments rather than as partners in a business operation.

Consequently, co-owners of rental property are generally not partners at general law with the result that they are not subject to the general law applicable to partnerships including the division of profits and losses from the property.

In this case, the rental arrangement does not involve a provision of services. There is a mere investment in property which yields rent rather than a participation by the co-owners in a business activity. The co-owners of the rental property each own a certain percentage share, and so are in receipt of income jointly. Therefore, a partnership exists for taxation purposes.

Income and deductions of a partner in a partnership

Subsection 92(1) of the Income Tax Assessment Act 1936 provides that the assessable income of a partner shall include so much of the individual interest of the partner in the net income of the partnership of the year of income. 'Net income' means the assessable income of the partnership less all allowable deductions.

Subsection 92(2) states that if a partnership loss is incurred by a partnership in a year of income, a deduction is allowable to a partner of so much of the individual interest of the partner in the partnership loss. 'Partnership loss' means the excess (if any) of the allowable deductions over the assessable income of the partnership.

Therefore, each partner (co-owner) is required to include so much of their individual interest of the net income or loss of the partnership (the jointly owned rental property) in their tax return for the relevant income year.

Interests in rental property

Generally, a legal interest in land is achieved by the owner being the registered proprietor of the legal title to the land.

TR 93/32 states that the net income or loss 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.

Your late spouse's interest in the rental property has been transferred to your children pursuant to the terms of the will. Your children own the property jointly with the other family who are co-owners. Your children and the other family each hold a certain percentage legal interest. The net income or loss from the rental of the property must be shared accordingly, unless there is sufficient evidence to establish that the equitable interest is different from this legal interest.

Legal and equitable interests

TR 93/32 states that if the equitable interest in property does not follow the legal title, there is some basis for the profit/loss to be distributed on the equitable and not the legal basis.

Your late spouse's will has created a trust and is evidence that the equitable interest in the property is different from the legal interest.

It is considered that there is sufficient evidence in this case to establish that the equitable interest in the property does not follow the legal title. The net rental income from the property can therefore be distributed on the equitable and not the legal basis.