Edited version of private advice

Authorisation Number: 1052188330303

Date of advice: 7 November 2023

Ruling

Subject: Legal and equitable interest in property

Question

Is the rental income received from renting part of your property only assessable income to you in accordance with section 6-5 of the Income Tax Assessment Act 1997?

Answer

You are the legal owner of the Property 1 who also has an equitable interest in the same property. Your Parent is the trustee of X% of the same property, you are the beneficiary of that X% under this arrangement. Therefore, the rental income you receive from renting your property for a commercial purpose is assessable income that you are required to report in your income tax return.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20YY

Year ending 30 June 20ZZ

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

In approximately 20YY, you were intending to acquire a property for your residence. When you applied for finance, your lender advised you required a guarantor for the loan.

You discussed your financial situation with your family and your Parent agreed to support you with obtaining a loan.

A written declaration of trust was prepared and entered into between your Parent and you dated DD MM 20YY. The declaration of trust states it was made by your Parent and he is the trustee. In relation to property 1, as trustee, they are a guarantor to a loan and they hold a X% interest in the property acquired by you. The declaration goes on to state your Parent will hold the interest in the land in trust for you and they have no legal or beneficial interest in the land.

As a result of securing the declaration of trust, you were able to meet the lenders conditions and the lender agreed to fund the purchase of the residence. You purchased Property 1 on DD MM 20YY. Settlement for the property occurred on the DD MM 20YY.

When you acquired the property, there was already a business that was renting the rooms at property 1. When you became the new owner of the property, the rental agreement remained in place and the tenant continued their business.

Later, you carried out renovations to the property and the lender required your Parent's holding of the property to increase from X% to Y%.

Another declaration of trust was executed between you and your parent. The updated declaration of trust states your parent is trustee to property 1. As trustee, they are a guarantor to a loan and they hold a Y% interest in the property acquired by you. The declaration states your parent will hold the interest in the land in trust for you and he has no legal or beneficial interest in the land.

You are the only person who has been responsible for paying the initial deposit for the house and all costs to the acquisition and maintenance of the property and all repayments to the loan.

You have received rent from renting the rooms to a business.

You also carry on a business activity at your property.

You have been using a tax agent to assist you meet your tax obligations. In regard to the rent of the rooms of your property to another business, the tax agent advised you that you and your parent were required to set up a partnership to report the income.

During a recent meeting with your tax agent, the tax agent discussed about Y% of the rent was to be reported by your parent. You advised the tax agent that you had always advised him that the rental income was income that you were required to report and your parent had no ownership interest in the property.

Your tax agent has advised you that you and your parent are co-owners of the property and each were required to report their share of the rental income. You have identified the tax agent has only been reporting Z% of the rental income in your income tax return since you have been renting out the rooms to a business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). Ordinary income has generally been held to be three income categories, namely income from rendering personal services, income from property and income from carrying on a business.

You acquired a mixed use property in MM 20YY for the purposes of a residence and to rent out commercially. To acquire the property and secure a loan to finance the property purchase, your parent agreed to enter into a declaration of trust. A declaration of trust is a form of trust but without many of the obvious signs that a trust exists. It is a declaration by a person that certain property held by that person will, from this time, be held on trust for another person. The expression of an intention to create a trust stating that he or she holds property as trustee for another. A declaration of trust clearly establishes the relationship and its nature between the legal owner and the beneficial owner of the property. The legal owner acts merely as trustee for and on behalf of the beneficial owner. A declaration of trust is executed for various reasons. The declaration of trust must be executed before the beneficial owner acquires the property.

Taxation Ruling TR 93/32 Income Tax: rental property - division of net income or loss between co-owners explains 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.

Generally, an equitable interestis an interest or right a person holds because they have a lawful or legitimate interest in the property or equitable title. An example of an equitable interest is the interest a beneficiary of a trust may have to the property while the trustee of the trust may have the legal title to the property but holds the property for the benefit of the beneficiary.

We note, the legal interest that a person has in the legal title in the property exist when the property is created and the legal interest is transferable. However, generally, property will not be subject to an equitable interest. An equitable interest is required to be created.

A beneficial interest is the right to use and enjoy property. When the beneficial interest is held by the legal owner, that person's legal title is said to be 'full' or 'absolute'.

In your case, your parent holds no legal, equitable or beneficial interest in property 1. As per the written declaration of trust, your parent states they hold no legal or beneficial interest in the property and they only hold X% of the property because they are a guarantor to the loan that financed the purchase of property 1. In accordance with TR 93/32, the equitable interest in property 1 is different from the legal title. The income that you receive from renting the room in the property is assessable income that you are required to report in your income tax returns in accordance with section 6-5 of the ITAA 1997.