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Edited version of your written advice
Authorisation Number: 1051236641189
Date of advice: 12 June 2017
Ruling
Subject: Rental income and Interest deductions
Question 1
Is income derived from a rental property held in joint names assessable to the taxpayer if a court order determines that one party not receive it?
Answer
Yes.
Question 2
Is there a deduction available for interest on the loan repayments made by the taxpayer where the court has ordered the taxpayer make the payments?
Answer
Yes.
This ruling applies for the following periods:
The year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You and your former spouse purchased a property in 2010 as co-owners with both your names on the title deed.
The loan for the purchase of this property is in both your and your former spouse’s name.
You relocated to another area for work and rented out this first property.
You bought a second property together as co-owners in 2015 and lived in the home as your principle place of residence.
You separated from your former spouse and moved out of the second property.
You paid the loan repayments in full on both properties until an interim court order directed the loan repayments to be met by both you and your former spouse equally.
The interim court order also directed that all income from the rental property be directed 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
Question 1
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. Income derived from a rental property is ordinary income.
Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners refers to the division of net income or loss between joint owners of a rental property. The Ruling only examines the taxation position of co-owners whose activities do not amount to the carrying on of a business and states that persons who own two or three rental properties would not normally be considered to be carrying on a rental property business.
According to TR 93/32, the income/loss from the 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 ownership is different from the legal title. In your circumstance interim court orders have been made to determine where the resultant income from the property will be directed. These interim orders are considered to have established an interest in the income of the property to your former spouse but not a change in the legal title of the property. Where final court orders are issued the situation may change and those orders may be considered as sufficient evidence to establish that the equitable interest in the property is different from the joint legal interest.
Therefore, the income and loss from the rental property will be divided between you and your former spouse according to the legal ownership specified on the title deed. As a result you are obligated to report your share of the income received from the rental property as assessable income.
Question 2
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.
A deduction under this 'general deductions' provision is only allowable if the expense is actually incurred, has the relevant connection with income and meets the substantiation rules. However, in line with TR 93/32 the net profits and losses from the rental property should be shared in the same proportion as their ownership interests.
Your co-ownership of the rental property with your former spouse is a partnership for income tax purposes but is not a partnership at general law. The income or loss from the property is derived from co-ownership of the property and not from the distribution of partnership profits or losses. Because you are not partners at law, any agreement to share the expenses in proportions different to your respective ownership shares is a private arrangement. As such, the fact that you have paid all of the expenses is of no consequence for income tax purposes.
In conclusion, until the rental property is sold you are obligated to include 50% of the income derived and entitled to deduct 50% of the expenses incurred in relation to the property in line with your ownership interest as stated on the title deed.