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Edited version of your written advice
Authorisation Number: 1012768092802
Ruling
Subject: Rental property deductions
Question 1
Are you entitled to claim a deduction for all the outgoings for the rental property of which you are a joint owner?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2015
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You purchased an investment property jointly with your ex-spouse.
You are both listed on the title deed.
You pay 100% of the associated expenses with the property.
This is causing you great financial hardship.
The property has been on the market for a number of years.
Your ex-spouse is willing to change the title deed.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1.
Reasons for decision
Summary
As a joint owner of a rental property, the net income or loss must be shared according to the legal interest of the owners.
Detailed reasoning
Division of net income or losses between co-owners of rental properties
Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners refers to the division of net income or loss between joint owners of a rental property.
According to TR 93/32, 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.
The equitable interest will only be different if one of the owners shown on the title deed is holding their share of the property in trust for the other party. That is, in your case, you would have to show that your ex-spouse has given up all claims of ownership of their 50% share of the property and is merely holding it in trust for you.
You have stated that your ex-spouse is willing the change the title deed however that is not sufficient to show that the equitable interest is different from the legal title.
Co-ownership
Co-owners of a rental property will generally hold the property as joint tenants or tenants in common. An important feature of both a joint tenancy and a tenancy in common is the legal interest of the tenant. It is this legal interest which ultimately determines among co-owners of property, the division of the net income or loss from the property.
Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration - each owns an identical 50% share in a property.
Paragraphs 48 and 49 of TR 93/32 provide the following example:
Mr and Mrs Z rent out a house that they own as joint tenants. The rent is paid into a joint account from which expenses of the property are paid. The expenses of the property exceed the rental income from it each year. Mr Z claims that as he is the sole income earner and had in effect paid all the expenses, he is entitled to claim 100% of the loss.
Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs Z 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 ownership interests, that is 50:50. The fact that Mr Z has paid all the expenses on the property is of no consequence for income tax purposes. We would simply treat the payment of Mrs Z's share of the expenses by Mr Z as no more than a loan by Mr Z to Mrs Z.
Your ex-spouse is not contributing the expenses associated with the property. This does not alter the fact that they are a joint owner both legally (there has been no change to the title deed) and beneficially (there is no indication that they have given up ownership of their 50% share of the property).
Until your legal or equitable interest in the property changes, (for example, if title passes to you or your ex-spouse gives up ownership of their 50% share of the property and creates a trust to hold it for your benefit), the income and expenses of the property must be split equally between you and your ex-spouse, the joint owners.
While we can appreciate 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 investment property income and expenses.
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