Edited version of private advice

Authorisation Number: 1052317437702

Date of advice: 25 October 2024

Ruling

Subject: Deductibility of expenses in relation to a rental property

Question

Are the expenses that you incurred in respect of the rental property located at the Property, beneficially owned by you, subject to equitable interests of Person A and Person B, deductible to you under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

1 July 2023 to 30 June 2024

1 July 2024 to 30 June 2025

The scheme commenced on:

xx/xx/20xx

Relevant facts and circumstances

On xx/xx/20xx you purchased a property solely in your name located at the Property.

On xx/xx/20xx you entered a Deed of Acknowledgement (the Deed) whereby you hold half of the Property on trust for Person A and Person B jointly (A&B), for the purpose of subdividing the Property in half and constructing a dual-occupancy development. The intention is for both parties to live in their own respective dwellings post subdivision and construction.

Contract of Sale of Land and Vendor Statement dated xx/xx/20xx (Original Contract) listed you and Person A as the Purchasers.

Sale of Real Estate Nomination Form dated xx/xx/20xx (Nomination Form) stated that under the Original Contract, you and Person A as the Purchasers nominate yourself as substitute Purchaser to take a transfer or conveyance of the Property in addition to the Purchaser. You and Person A acknowledge that you are jointly and severally liable for performing the obligations of the Purchaser under the Contract and payment of any expenses resulting from this nomination (including Stamp Duty).

You and A&B acknowledge and agree that from the Ownership Date:

1.    Until such time that you transfer one of the two subdivided lots of the Property to A&B, you hold on trust for A&B one of the two subdivided lots of the Property based on the following conditions being satisfied:

a.    The existing loan in your name with the Bank for the sum of $xxx and any existing mortgage over the Property will be paid monthly by the Parties jointly and equally.

b.    All rates, water, maintenance, upkeep, insurances or any other ongoing costs or liabilities in respect to the Property including the cost of any improvements and all such monies and expenses associated with the Property will be paid by the Parties jointly and equally.

c.     All taxes or any other financial obligations or liabilities in relation to the continued ownership or sale of the Property will be paid jointly and equally, that is, you pay half and A&B pay half. The parties undertake to make all and any such payments personally or through a corporate entity owned and controlled by the Parties jointly and equally.

d.    No interest will be payable by either of the Parties to each other.

2.    You and A&B will enter or will have entered a signed Contract of Sale to effect the transfer of one of the two subdivided lots of the Property to A&B as joint proprietors once the registration of the plan of subdivision takes effect and they will become the beneficial owners of one of the two subdivided lots of the Property based on the following terms:

a.    On behalf of A&B, Person A's deposit contributions to the principal component of the loan as set out in 1.a., and all financial contributions made towards settlement of the Property pursuant to the Original Contract will be accounted as payments towards the purchase price deposit of the Contract of Sale between the Parties, mortgage repayments and settlement contribution funds.

b.    The Contract Price will be based on the purchase price stipulated in the Original Contract and calculated on a pro-rata based on the eventual division percentage of the land.

c.     The contract will be signed by no later than 14 days after the Parties have obtained all the following documents: plan of subdivision, a planning permit and initial building plans drawing and specification.

d.    Any outstanding debts and credits in relation to the Property to be accounted for when refinancing the Property at settlement of the signed Contract of Sale between the Parties.

e.    All costs including legal costs, taxes, levies, statutory impositions from Victorian Titles Office to be paid jointly and equally, that is you pay half and A&B jointly pay half, before, through-out and after the subdivision process and prior to the title being registered.

f.      Should the existing loan in your name with the Bank increase then the purchase price payable by Person A in the Contract of Sale between the Parties will be adjusted accordingly to be in proportion to the funds received by Person A from such loan increase.

g.    The obligations set out in 1.a. to d. will continue until settlement of the signed Contract of Sale between the Parties.

h.    The proposed settlement date of the Contract of Sale between the Parties will take effect by 14 days after notice of the registration of the plan of subdivision unless the Parties otherwise jointly agree to an alternative settlement date in writing.

You describe the flow of funds as follows:

1.    Mortgage Repayment Flow

A&B pay you half of the mortgage repayment amount and then you pay CBA monthly.

2.    Deposit Payment Flow

You paid the deposit initially and A&B reimbursed you shortly after. It was done this way as A&B were waiting on funds from a refinance to pay their share of the deposit.

3.    Holding Costs and Rental

All rental and costs related to the property are split 50/50 between you and A&B. Both parties make payments and reimburse each other as required.

The Property is currently rented to a non-related party at market value. This will continue until the lot is subdivided and construction commences.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Question 1

Are the expenses incurred in respect of the rental property located at the Property, deductible to you under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Detailed reasoning

Section 6-5 of ITAA 1997 explains income according to ordinary concepts including income you derived directly or indirectly from all sources, during the income year. This includes income derived as a beneficial owner of a property that is used to produce rental income.

Subsection 8-1(1) of the ITAA 1997 provides you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. However, in accordance with subsection 8-1(2) of the ITAA 1997 you cannot deduct a loss or outgoing under this section to the extent that:

•         it is a loss or outgoing of capital, or of a capital nature; or

•         it is a loss or outgoing of a private or domestic nature; or

•         a provision of this Act prevents you from deducting it.

You currently rent the Property to a non-related party at market value and intend for this to continue until the lot is subdivided and construction commences. You are entitled to deduct from your portion of the gross rental income derived, eligible expenses in accordance with your interest.