Edited version of private advice

Authorisation Number: 1051891899390

Date of advice: 31 August 2021

Ruling

Subject: Assessable income - rental property - co-ownership

Question

Are you assessable on your share of the rental income sourced from the Property in accordance with your legal ownership under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period

20XX-YY income year

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

You and your then spouse, Person A, jointly purchased the Property with equal interests, which you shared during your marriage.

You and Person A divorced and as part of your informal financial settlement Person A continued to reside at the Property. As a result of the settlement you and Person A retained your respective 50% ownership interests in the Property.

Person A used the Property for rental purposes via an accommodation platform during several income years prior to the ruling period.

You did not receive any of the rental income from Person A's rental use of the Property but have recorded it in your income tax returns in the earlier income years. You have claimed deductions for expenses incurred in relation to the Property's rental usage in the earlier income years.

Person A has continued to use the Property for rental purposes during the period covered by this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Division of rental income between co-owners of a rental property

Section 6-5 of the 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.

Taxation Ruling TR 93/32 outlines 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.

A person's legal interest in a propertyis 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.

TR 93/32 provides the following example:

Mr and Mrs Y purchase a rental property. Mr Y contributed 80% of the funds used to purchase the property while Mrs Y contributed 20%. They register their purchase as joint tenants. They also sign a written agreement to share any profits or losses from the property in accordance with their capital contributions, but share interests in the property equally.

Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs Y are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their legal ownership interests, i.e., 50:50. Their agreement to share the profits and losses in proportion to their capital contributions is a private arrangement which has no effect for income tax purposes.

Application to your situation

You and your then spouse, Person A, jointly purchased the Property. Following the informal financial settlement as part of your divorce, you and Person A retained your respective 50% ownership interests in the Property.

Person A continued residing at the Property following the divorce and used part of it to earn rental income via an accommodation platform. You have not received any rental income in relation to your ownership interest in the Property but had recorded rental income your earlier income tax returns, claiming deductions for expenses incurred in relation to the Property's rental usage during those income years.

While Person A has controlled the rental usage of the Property and had retained all of the rental income, nothing has been provided to support that either your or Person A's respective equitable interest is different from the legal title you each have in the Property.

It is stated that you had not sought to have Person A pay you for your ownership interest in the Property during the settlement as you had not wished to cause them financial duress. Additionally, you are reluctant ask for your share of the rental income earned from the Property as Person A earns less than you do, and you want them to consolidate their finances.

In your case, the equitable interest in the ownership of the Property is not different from the legal title. The fact that you do not receive the rental income is a private arrangement between you and Person A. As an owner of the Property you have legal rights in relation to how the Property is used and are also responsible for any taxation implications arising in relation to your ownership interest in the Property.

As a co-owner of the Property, there is nothing in the legislation which allows a choice to be made to allocate income on a basis different to the legal title, such as attributing it to another party who may have received all of the benefits.

While we can appreciate your circumstances, the Commissioner does not have any discretion under the tax law to allow a taxpayer to include more or less than their legal entitlement to a property's income and expenses in relation to their rental usage.

Therefore, you are assessable on 50% of the rental income earned from the Property in accordance with your legal ownership interest in the Property.