Private ruling: property of estate of deceased person - life tenancy - rental income and deductions
Published: April 2012
Ruling period: Income year 1 July 2010 to 30 June 2015.
Date scheme commenced: 1 July 2010

Ruling: Q1: What is the correct apportionment of income and expenses relating to a rental property that is part of the estate of a deceased person, where one tenant-in-common (the rulee) has the full use and enjoyment of the entire property for a period of 10 years? | A1: 100 percent of the rental income is assessable to the rulee. However, the income is split and shown 50/50 between rental income assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), and a distribution from the estate which is assessable to the rulee under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936). 100 percent of those expenses which are allowable deductions under Division 8 of the ITAA 1997 are claimable by the rulee.

Relevant facts and circumstances: The deceased held a residential property ("the property"). At the date of death the property was held by the deceased and the rulee as tenants-in-common. The property was the deceased's principal place of residence. The property was held as joint tenants by the deceased and the rulee from the date of acquisition. Their ownership interests were changed prior to the death of the deceased to register them as tenants-in-common in equal shares. Will The deceased's will was made after the transfer of interests into tenancy in common. Probate on that will was granted. The will named two individuals as executors. The probate document appointed the executors as administrators of the deceased's estate. Relevant Clause of the will provided that the deceased's share in the property was to be held upon trust: · to permit the rulee to have the use occupation and enjoyment of it during the period of several years from the date of death of the deceased. The rulee was to pay all rates and taxes and other outgoings thereon and keep the same in a good and habitable state of repair fair wear and tear and keeping the same insured against fire and earthquake. · allow the Trustees at the request of the rulee to sell the said residence and to employ the deceased's share of the proceeds of sale in the purchase or erection of another residence to be held upon the same trusts including the trust for sale and erection or repurchase as are herein declared in respect of the original residence. · on the death of the rulee or the expiration of several years from the date of death of the deceased, which ever is the sooner, the said residence or proceeds of sale thereof shall be applied as follows: If the rulee is then living then for the rulee a certain share in the total value of the residence (such share including any interest of which they may be recorded as or deemed to be the legal owner); The remaining share in the total property for such of the children of the deceased as are living at the death of the deceased and if more than one in equal shares PROVIDED THAT if any of the said children die before the deceased, leaving a child or children, then such child or children shall take the share that their parent would have taken had he or she survived the deceased. The property is rented at arm's length, through a real estate agency, to non-related tenants. The total rent is being received by the rulee. A mortgage is held in the names of the estate of the deceased and the rulee.

Relevant legislative provisions: Income Tax Assessment Act 1997 , section 6-5 | Income Tax Assessment Act 1997 , Division 8 | Income Tax Assessment Act 1936 , section 97

Reasons for decision: Summary: The rulee argues that their equitable interest in the property does not follow their legal interest, and consequently the income and expenses of renting the property should be attributed 100 percent to the rulee, on the basis that the rent received is assessed as rental property income, and that none of the income is considered to be a trust distribution. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners , paragraph 38, is cited in support of that proposition. TR 93/32 goes on to state that cases where the property title includes the name of a person who is a nominee or trustee must be decided on an individual basis, on the evidence available to establish that the equitable interest differs from the legal title (paragraph 40). Paragraph 41 of TR 93/32 states the ATO view that there are extremely limited circumstances where the legal and equitable interests are not the same. The assumption is that where taxpayers are related, e.g. in marriage, the equitable right is exactly the same as the legal title. The ruling refers to the High Court of Australia case Napier v. Public Trustee (Western Australia) 32 ALR 153 (" Napier ") as illustrating an example of equitable interest being different from legal title. In Napier the appellant (Napier) was in a de facto relationship with the deceased (Evans). They lived in a house owned by Napier. Napier entered into a contract to buy another house and paid a deposit for it. After entering into that contract he discussed the purchase with Evans. The balance of the purchase price was paid by Napier and pursuant to his direction the property was transferred to Evans, who had not contributed to the purchase monies. After that the property was rented and the rent collected by Evans, who also paid the rates and other outgoings. Although the terms of Evans' will were not put before the Court, it was apparent the property in question did not pass to Napier on her death. The judgement of Aicken J (accepted by the majority) sets out part of the cross-examination of Napier, and the details of the discussion referred to above were accepted by the Court. At the time of purchase it seems that Napier was ill and not sure of his continued good health or longevity. It was apparently agreed between them that the property would be hers as long as she lived and would then pass back to Napier (or 'the family', as he referred to it, being his sons). She was to have it 'for life', not 'absolutely'. Evans apparently agreed to this and she indicated that a codicil would be added to her will to confirm that intention with regards to the property. She did not make another will. Napier argued that a resultant trust in his favour was created; or, in the alternative, that a constructive trust was effected. The Court concluded that the presumption of advancement in respect of a husband's dealings with a spouse was rebutted by the state of the law at the time, where the presumption of advancement did not apply in respect of dealings in favour of a de facto wife. There was no resultant trust operative in respect of the property during Evans' lifetime. The Court accepted that the arrangement was that title to the property was to be recovered from Evans at her death. It was not accepted that the intention of Napier was that the entire beneficial interest should go to Evans. He retained his equitable interest in remainder expectant on the on the death of Evans and when that occurred his interest became absolute. Mason J states in his judgement that ...the presumption that there was a resulting trust as to the entirety of the house property was only partly displaced, namely, by evidence of intention that the deceased was to have the property during her lifetime only. The consequence is that the appellant was entitled to an equitable estate in remainder and that on the deceased's death his estate became absolute. In the present case the terms of the will are quite clear. The will allows the rulee use, occupation and enjoyment of the property for a certain number of years maximum. Although not specifically stated in the will, use of the property includes the ability to rent the property to another person. Clearly, the rulee will be assessable on 50 percent of the rent received, since that percentage is in respect of their legal share in the property, as a tenant-in-common. The will cannot affect that 50 percent interest in the property. Regarding the 50 percent attributable to the share held by the trustees, the legal interest of the trustees would attribute the rent received by the rulee as being rental income of the trust, as legal owner. The trustees would agree that the property may be rented to unrelated parties. The trustees would be under a trust duty to ensure that rent owed to the estate is collected and the property properly maintained. The rulee would receive the trustee's share of rent as a distribution out of trust income and be assessed on it under section 97 of the ITAA 1936. Regarding expenses, the rulee is responsible under the terms of the will for all rates, taxes and other outgoings, including necessary repairs and maintenance, during the period that the estate property is used by the rulee. At the end of the relevant period, the legal ownership of the whole property, or the proceeds of its sale, will be apportioned according to the will between the rulee and the children. Should the rulee predecease the children the rulee's half-tenancy of the property would be dealt with under the terms of their own will (or intestacy, if no will was present). The will does not provide for the rulee to gain either or both shares attributed to the children should they predecease the rulee. Hence, the rulee does not have an interest in the whole property. The rulee's equitable interest in the whole property does not exceed the legal interest. Therefore we consider that the rulee does not have an equitable interest in the property beyond their legal interest. Hence, the provisions of TR 93/32 apply and income must be dealt with on the basis of their entitlement to income only, and the terms of the will regarding use of the property, and the obligation under the will to meet outgoings. No detailed information about the mortgage held over the property was sought, such as the type of mortgage (whether it is a reverse mortgage, for example); the terms of the mortgage; and the date it was taken out. We consider that this does not affect the outcome of this ruling. However, in the event the rental expenses exceed the rulee's rental income and their other financial resources, it might fall to the Executors to make up the balance. An example would be if insufficient income existed to pay the mortgage or other expense(s) requiring an outlay of cash (as opposed to deductions claimable for non-immediate cost items such as depreciation). | Detailed Reasoning - Further issues for you to consider: Details of the mortgage held have not been obtained. The rulee and the executors will need to be certain that, if the property is negatively geared, funds are available to pay expenses that must be met.

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