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Edited version of your written advice
Authorisation Number: 1012768393700
Ruling
Subject: Rental property deductions
Question 1
Is X entitled to a deduction for the full amount of expenses they have paid in relation to the rental properties?
Answer
No
Question 2
Is X entitled to a deduction for the expenses relating to the rental properties in proportion with their legal ownership interest?
Answer
Yes
This ruling applies for the following periods:
Year ended 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commences on:
1 July 2013
Relevant facts and circumstances
X and Y are joint owners in two investment properties (Property A and Property B).
The relationship between A and Y ended and court orders list that both parties are to continue to cover all expenses of the joint properties.
Y stopped paying their share of the expenses including mortgage, rates, water rates, insurance, body corporate fees, repairs, etc.
X has maintained their share and Y's share of expenses from the date that they ceased payments.
Y applied for bankruptcy.
From that date, any rental income from the properties has been split between X and the trustee of the bankrupt estate.
The trustee of the bankrupt estate has not acknowledged any expenses.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 104-10.
Reasons for decision
Summary
The income and expenses of the properties must be split equally between you and your ex-spouse, the joint owners.
Detailed reasoning
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.
X and Y were joint owners in Property A. X and Y also each held an ownership interest in Property B. Following Y's bankruptcy, Y's interest in the properties vested in the trustee in bankruptcy. There has been no change to X's legal or equitable ownership in the properties.
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.
For a period of time, X has been contributing all of the expenses in relation to X and Y's interests in the properties. Following Y's bankruptcy, this has continued and the trustee of the bankrupt estate has not acknowledged any of the expenses.
Although X has paid for more than their share of the property expenses for a period of time, the expenses must be shared according to the proportion of the legal interest in the properties held by the relevant co-owners.
While we can appreciate your circumstances, the Commissioner does not have any discretion under the tax law to allow a taxpayer to claim more or less than their legal entitlement to investment property income and expenses.