Edited version of private advice

Authorisation Number: 1051614958490

Date of advice: 29 November 2019

Ruling

Subject: Rental income from an overseas property

Question 1

Is the rental income from your overseas property assessable from 200X until 20XX?

Answer

No

Question 2

Is the rental income from your overseas property assessable from 20XX until 2019?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2019

The scheme commences on:

1 July 200X

Relevant facts and circumstances

You are an Australian citizen and you reside in Australia.

Your parents owned four overseas properties, three of which were used as rental properties with the fourth being their main residence.

The rental income was paid into their account which was held in an overseas bank

After the death of your parent, your remaining parent added you and your sibling as joint account holders to the above account.

Your parent later gifted 2 of the rental properties to you and the other two properties to your sibling.

You later signed a power of attorney and usufruct agreement ceding all benefits arising from the properties to your remaining parent for the term of their natural life.

The title deeds to the two rental properties were then issued in your name.

Several years later you became aware your parent had fallen victim to a scam and had lost a significant amount of money over several years.

Due to this and their advanced age you and your sibling took control of your parents finances and established a joint account to manage the rental income and expenses and to pay for a live-in carer for them. You also arranged for a monthly allowance to be transferred to your parent's bank account.

You have never accepted any income from the rental properties and your parent has since passed away.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Rental income deposited into parents bank account

When considering the tax implications of a rental property, an important element is ownership. It must be determined who is the owner of the property.

Ownership conveys an entitlement to exercise the legally permissible rights over what is owned. In the absence of evidence to the contrary, property is considered to be owned by the person(s) registered on the title. However, in limited circumstances, it is possible for legal ownership to differ from beneficial/equitable ownership for tax purposes.

Where beneficial and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property on trust for the beneficial owner. There must be a valid trust over the property that provides the entitlement for the beneficial owner to benefit from the property.

According to Taxation Ruling 93/32 Income tax: rental property - division of net income or loss between co-owners, 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 equitable interest is different from the legal title. Paragraph 40 of TR 93/32 states:

40. Cases where the title includes the name of a person who is a nominee or trustee, must be decided on an individual basis on the evidence available to establish that fact. Authority can be found in Napier v Public Trustee (Western Australia) 32 ALR 153 where the court accepted there was sufficient evidence to establish that the equitable interest was different from the legal title.

In your case, as the legal owner, you held no beneficial interest in the property from the date the infructus agreement was entered into, and your parent was absolutely entitled to the property until the date the rental income commenced being deposited into the new bank account in your and your sibling's names.

Rental income deposited into your bank account

A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset.

At a certain point in time you changed the bank account the rental income from the properties was paid into and is now deposited into the joint bank account in your and your sibling's names. Property expenses are also paid from the joint bank account.

The change in who receives the income and pays the related bills signifies a change to the beneficial ownership as your parent no longer receives the income directly.

The income is considered foreign income in your Australian tax return and is assessable under section 6-5 of the ITAA 1997. There are special rules that apply to the deductibility of expenses related to a foreign rental property.

Note that 'any capital gain or loss should also be apportioned on the same basis as the rental income or loss' (paragraph 42 of TR 93/32).