Edited version of your written advice

Authorisation Number: 1051371387859

Date of advice: 10 May 2018

Ruling

Subject: Beneficial Ownership

Question

Are you assessable on 100% of the rental income and entitled to 100% of the deductions from 26 May 201X?

Answer

Yes

Question

Are you assessable on 100% of the rental income and entitled to 100% of the deductions before 26 May 201X?

Answer

No

This ruling applies for the following period:

30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

You and your previous partner purchased three rental properties at:

● Property 1. The title deed shows 50% ownership to your and 50% ownership to your previous partner.

● Property 2. The title deed shows 50% ownership to your and 50% ownership to your previous partner.

● Property 3. The title deed shows 50% ownership to your and 50% ownership to your previous partner.

On 1 July 201X (separation date) you split up with your partner and it was agreed from that date, you will cover all expenses and receive all income relating to one property;

● Property 1

And, it was agreed that your previous partner will cover all expenses and receive all income relating to two properties;

● Property 2

● Property 3

Your previous partner stopped paying any contributions associated to Property 1. You paid all expenses and costs and all rental income was deposited into your bank account for the property, from separation date.

You stopped paying any contributions to the other two properties. Your previous partner paid all expenses and costs and all rental income was deposited into their bank account for the Property 2 and Property 3, from separation date.

The following documents show during the period from separation 1 July 201X to the court order date of XX/XX/201X, the ownership is held in joint names for all properties;

● Legal title ownership

● Bank statements

● Council rates and water rates

● Insurance documents

● Real estate documents

On XX/XX/201X, the consent orders were dated and the Family Court ordered the transfer of the property to you.

Legal titles on all three properties are in the process of being transferred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for Decision

Summary

As stated in the consent order, Property 1 is to be transferred to you. You are therefore entitled to 100% of the deductions in relation to the property from the court order date. You are also assessable on 100% of the associated rental income.

However, before that date you are only assessable on 50% of the rental income and entitled to a deduction for 50% of the associated expenses incurred in relation to the property.

Detailed reasoning

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.

In your case, following separation, you stated that you have paid for all expenses and received all income in relation to the rental property from separation date. 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 property is to be shared according to your legal interests in the property.

However, under the Family Law Act 1975 Consent Order, the property is to be transferred to you. As your former partner is to transfer all their title interest in the property to you, this effectively confirms your 100% interest in the investment property from the court order date. Even though, on the date the Order was made, you and your former partner were still the registered joint owners, for taxation purposes, the consent order is sufficient evidence to show that the income and expenses from the property belong solely to you.

Before the court order date, it is acknowledged that your former partner has not contributed towards the property expenses since separation date; however the legal titles, bank statements, insurance documents, real estate documents, council rates and water rates are held in joint names, this does not change your legal or beneficial interest in the property.

Therefore, from the court order date you are assessable on 100% of the income and entitled to claim 100% of the rental property expenses incurred in relation to the property. The fact that the actual transfers of legal titles have not occurred does not change this.

However, before the court order date, as the property was owned as tenants in common, the income and deductions for the property are shared according to your legal ownership.