Edited version of your written advice

Authorisation Number: 1012860439296

Date of advice: 14 August 2015

Ruling

Subject: Rental property - ownership

Question

Should all of the income received and expenses incurred in respect of a property fully owned by your spouse by fully declared by your spouse?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Your spouse has a 100% ownership interest in a property you both reside on. The mortgage on the property is also only in your spouse's name.

The property also contains a granny flat in respect of which you retain all of the rent and pay all of the expenses. You also lease out a section of the land in respect of which you also retain all of the rent and pay all of the expenses.

You do not contribute to the mortgage over the entire property.

Relevant legislative provisions

Income tax Assessment Act 1997 Section 8-1

Reasons for decision

A legal or equitable interest in a dwelling erected on land or a right to occupy it is taken to be ownership interest in land/dwelling. A legal or equitable interest in a stratum unit, a licence or right to occupy it, or a company share is taken to be an ownership interest in a flat or a home unit.

Generally, it is legal interest which determines the distribution of the net income or loss from a rental property. Any agreement between a husband and wife to vary the proportion of net income claimable by each spouse is of no effect for taxation purposes. Such agreements are merely domestic in nature, and cannot override the rights governed by property law.

Accordingly, to establish ownership, generally we refer to the legal owner. However, ownership can also be claimed by an equitable owner for reasons explained below. If this fact can be proven beyond doubt, then ownership belongs to the equitable owner.

To prove that a different equitable interest exists, there must be evidence that a trust, whether express, resulting or constructive, has been established such that one spouse is taken merely to hold their interest in the property for the benefit of the other. This is the only means of proving that you hold a share of the interests in the property in equity.

Oral evidence is insufficient to prove such a claim, as the Property Law Act requires such changes in ownership interests to be evidenced in writing. Generally this office is of the view that we would not recognise a 'resulting trust' that is not declared by a Court of Equity.

Taxation Ruling TR 93/32 (TR 93/32) discusses the Commissioner's interpretation of the law regarding the division of net income/loss between co-owners of rental property. You are not a legal co-owner of the rental property, however the principles discussed in this ruling are relevant to your situation (i.e. do you have an equitable interest in the rental property legally owned by your spouse?).

This ruling discusses the implications for taxpayers' who contend that the equitable interests in the property do not correspond to the legal interest, and concludes with the following advice (at paragraph 41)

'We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, eg husband and wife, that the equitable right is exactly the same as the legal title.'

Where it can be established that the equitable interests are different from the legal interests then the profits or losses will be distributed according to those interests.

For example, where a person purchases and pays for property but legal title to it is transferred to another person at the purchaser's direction, if that other person is a stranger, the presumption of resulting trust arises and the property is considered to be held on trust for the purchaser.

However, where the property is transferred to a spouse or child of the purchaser, the presumption of resulting trust is replaced by the presumption of advancement which deems the purchase to be prima facie an advancement (i.e. an absolute gift from the purchaser to the spouse or child). The consequence of the presumption of advancement being upheld is that the parties will hold their equitable interests in the property in the same proportions as their legal interests.

An example of a typical husband and wife co-ownership and presumption of advancement scenario is given in TR 93/32 (paragraphs 48 -49):

'Mr and Mrs Z rent out a house which 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, i.e., 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.'

The presumption of advancement may be rebutted by evidence to the contrary. This will effectively require evidence that your spouse holds a percentage of the legal interest in the property in trust for you. If this can be supported by such evidence you would have an equitable interest in the property. Such a trust may be an express, resulting or constructive trust

Another appropriate course of action may be to seek a declaration of your respective equitable interest by a Court and then take whatever consequential action is necessary and available in respect of each of your tax returns.

Another solution in respect of future treatment of net profits or losses from the rental property is to have the legal title amended to reflect your contentions as to your equitable interest. That is, the legal title may be amended to register you as the joint legal owner of the property. Half of the expenses incurred after this transfer in relation to the rental property will be fully deductible to you. However, all expenses incurred prior to the transfer will remain deductible to your spouse.

In summary, to establish that you have an equitable interest in the property owned by your spouse, you must prove that your spouse holds a share of his legal interest in trust for you. The facts given by you are not sufficient to establish you have equitable interest in the property.

The mere fact that you collect rental and contribute to the mortgage repayments and other expenses related to the property does not extinguish your spouse's legal rights in respect of the property. In the absence of strong evidence demonstrating the existence of a resulting trust, your spouse still has the legal and equitable right to 100% of the income received from the property. Similarly, your spouse has a legal responsibility for payment of 100% of the expenses in relation to the property. The fact that you receive rental and pay the associated expenses merely indicates a loan or gift from you to your spouse.

In your case, your spouse owns the property as you have not demonstrated beyond doubt that you have an equitable interest in the rental property. Accordingly, we do not consider your situation to be one where the equitable interest is different from the legal interest in the property. The situation is more appropriately characterised as a domestic arrangement that has no force under taxation or property law.

Therefore, your spouse must declare the profits received from the rental property in accordance with his legal interest in the property. Similarly, your spouse is the only one entitled to claim rental deductions pertaining to the property.

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