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Edited version of your written advice
Authorisation Number: 1051454611685
Date of advice: 15 November 2018
Ruling
Subject: Rental deductions
Question
Are you able to claim all expenses incurred on your jointly owned rental property?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
● You were married.
● In January 20XX your spouse left to work in another area.
● Your spouse was uncommunicative.
● You bought and sold several properties together whilst married.
● When a property was sold you were to be reimbursed your share, but your former partner would make another purchase and you would continue to pay the loan.
● You then commenced divorce proceedings.
● Your divorce was finalised in mid 20XX.
● The property settlement was not done at this stage, as one of the properties had a contract for sale, subsequently this sale fell through.
● You have been paying all the expenses for the remaining rental properties for approximately X years.
● You have been claiming half the expenses as a joint owner.
● You were unaware of your spouse’s financial situation.
● Your application for settlement failed to be heard in Court before your spouse’s situation finalised.
● You were planning to take over the rental properties.
● The properties are secured by a mortgage in joint names.
● The appointed Trustee has not acknowledged you as the rightful owner of the properties.
● Your former spouse was living in one of the rental properties rent free and pay all associated outgoings; these have not been paid.
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 your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
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 explains that the net 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. An example of where the equitable interest may differ from the legal interest is when an owner is holding their share as trustee for the other owner. A Family Court order dealing with settlement of jointly owned property may also alter this equitable interest.
A person's legal interest in a property is determined by the legal title to that property under the land legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deed for the property issued under that legislation.
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 forgoes their share of the rental income and/or pays for all the expenses this is considered to be a private arrangement between the co-owners. It does not alter the fact that they are legally entitled to their share of the income and liable for their share of the expenses.
In your case, the equitable interest in the ownership of the property is not different from the legal title. Therefore, you must declare the income and claim the deductions with respect to the property in proportion with your legal interest in the property. As a co-owner of the rental property, there is nothing in the legislation which allows a choice to allocate income on a basis different to the legal title.
While we acknowledge 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 property income and expenses.