Edited version of your written advice

Authorisation Number: 1012737976362

Ruling

Subject: Rental properties

Question 1

Are you entitled to 100% of the rental income on the rental properties before the date of the consent order?

Answer

No.

Question 2

Are you entitled to claim 100% of the deductions on the rental properties before the date of the consent order?

Answer

No.

Question 3

Are you assessable on 100% of the rental income on the rental properties from the date of the consent order?

Answer

Yes.

Question 4

Are you entitled to claim 100% of the deductions on the rental properties from the date of the consent order?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ending 30 June 2015

The scheme commenced on

1 July 2012

Relevant facts

Your former spouse left the family home a few years ago and you later divorced.

You and your former spouse owned investment properties.

Since your former spouse left the family home, he/she has not contributed in any way to the upkeep of your investment properties. You have a written statement from your former spouse confirming this.

All the rental income has been going into an offset account and you make up the shortfall from your personal account each month. You also paid for any other expenses relating to the investment properties as your former spouse has refused to contribute.

A consent order was granted by the court recently after the application was filed several months earlier.

You are currently in the process of refinancing and having the properties converted into your name only as per the consent order.

As outlined in the consent order, you are solely responsible for all liabilities relating to the rental properties. Your former spouse is not entitled to any income from the rental properties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

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. Rent is regarded as ordinary assessable income.

Section 8-1 of the 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.

Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners discusses the income/loss from a rental property jointly owned by husband and wife. The ruling states that this income and expenses 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 or beneficial interest is different from the legal title. Where taxpayers are related, such as husband and wife, the equitable right is the same as the legal title.

TR 93/32 states at paragraph 11 that it is the legal interest which ultimately determines the division of the net income or loss from the property. That is co-owners must divide the income and expenses for the rental property in line with their legal interest in the property according to the title deed. If they are joint tenants, they each hold an equal interest in the property.

The above principles in TR 93/32 were taken from the decision of the Federal Court in F.C. of T. v McDonald (1987) 18 ATR 957; 87 ATC 4541. In that case the Federal Court held that where co-owners split the rental income and expenses differently than as per their ownership interest, the arrangement is private in nature and does not alter or over-ride their respective entitlements for income tax purposes.

In your case, following separation, you have paid for all expenses in relation to the rental properties. However such an arrangement is private in nature and has no effect for income tax purposes. That is, the profits and/or losses from the rental properties are to be shared according to your legal interests in the properties.

However, under the Family Law Act 1975 Consent Order, you are solely responsible for all liabilities relating to the investment properties. As your former spouse is to transfer all their rights, titles and interest in the properties to you, this effectively confirms your 100% interest in the two investment properties from the date of the order. Even though, on the date the order was made, you and your former spouse were still the registered joint owners, for taxation purposes, the consent order is sufficient evidence to show that the income and expenses from the properties belong solely to you. 

Before the date of the order, there is insufficient evidence for tax purposes to establish that your equitable or beneficial interest in the properties is 100%. It is acknowledged that your former spouse has not contributed towards the property expenses for several years, however this does change your legal or beneficial interest in the properties. Furthermore, the fact that your consent order application was filed some months before the order was made does not mean you had beneficial ownership of the properties from when the application was filed.

Therefore, from the date of the order you are entitled to 100% of the income and claim 100% of the rental property expenses incurred in relation to the properties. The fact that the actual transfers will not occur until a later date does not change this.

However, before the date of the order, as the properties were co-owned, the income and deductions for the two properties are shared according to your legal ownership.