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Edited version of private advice
Authorisation Number: 1012641491149
Ruling
Subject: Division of net income or loss between co-owners of a rental property
Question
Are you entitled to 50% of the net gain or loss from your rental property up to the date of the Family Court order?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2013
Year ended 30 June 2014
The scheme commences on
1 July 2012
Relevant facts and circumstances
You own a rental property as joint tenants with your former spouse.
You had an agreement with your former spouse that even though they would pay the majority of the expenses in relation to the property, and receive all of the rental income, you would each include 50% of these amounts in your respective tax returns.
By order of the Family Court the property is to be transferred to your former spouse.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 8-1
Reasons for decision
Your assessable income includes ordinary income derived directly or indirectly from all sources during the income year (section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)). Ordinary income includes income from property such as rent.
You are entitled to a deduction for all losses and outgoings to the extent which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature (section 8-1 of the ITAA 1997).
Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners explains the basis upon which the net income or loss from a rental property is to be divided between co-owners, and provides:
• because co-owners of a rental property are generally not partners at general law, a partnership agreement, either in oral or in writing, has no effect on the sharing of income/loss from the property, and
• 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.
An example of where the equitable interest may differ from the legal title is where a party is holding the property in trust for another party. A Family Court order that determines the financial relationship between two parties in divorce proceedings may also provide sufficient evidence to establish that the equitable interest is different from the legal title.
In your case, it is considered that the Family Court order has altered the equitable ownership of the property as at the date of the order. Accordingly, you are entitled to 50% of the net loss or gain from the property up until the date of the order.
This remains the case irrespective of the fact that the other co-owner has paid the expenses for the property. Any agreement to share the income and expenses in different proportions to your ownership interests is a private arrangement which has no effect for income tax purposes.