Private ruling: Rental properties - beneficial ownership
Date of advice: 31 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to claim 100% of the income and expenses of a rental property that was held in joint names for the whole of the financial year ended 30 June 2015? | A1: No. | Q2: Are you entitled to claim 50% of the income and expenses of a rental property that was held in joint names for the whole of the financial year ended 30 June 2015? | A2: Yes.

Relevant facts and circumstances: You owned a rental property as joint tenants with your former spouse. You were separated from your spouse during the relevant financial year. At the start of the relevant financial year you took over all responsibilities in relation to this property. In late 20XX, under the Family Law Act 1975 by way of Consent Orders, you were given full responsibility for all liabilities in relation to this property. In early 20YY, under the Family Law Act 1975 by way of Consent Orders, you were directed to transfer all your rights, titles and interest in this property to your former spouse by a specified date. The transfer of title did not occur, which resulted in the property being offered for sale in accordance with the above Consent Orders and all residual proceeds of that sale being directed to go to your former spouse. The property remained in joint names as joint tenants for the full financial year ended 30 June 20YY.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to ordinary concepts, which is called ordinary income. Rent is regarded as ordinary assessable income. Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners discusses the income/loss from a rental property jointly owned by husband and wife. The ruling states that this income and expenses 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 or beneficial interest is different from the legal title. Where taxpayers are related, such as husband and wife, the equitable right is the same as the legal title. TR 93/32 states at paragraph 11 that it is the legal interest which ultimately determines the division of the net income or loss from the property. That is co-owners must divide the income and expenses for the rental property in line with their legal interest in the property according to the title deed. If they are joint tenants, they each hold an equal interest in the property. The above principles in TR 93/32 were taken from the decision of the Federal Court in F.C. of T. v McDonald (1987) 18 ATR 957; 87 ATC 4541. In that case the Federal Court held that where co-owners split the rental income and expenses differently than as per their ownership interest, the arrangement is private in nature and does not alter or over-ride their respective entitlements for income tax purposes. In absence of evidence to the contrary, a property is considered to be beneficially owned by its legal owner; that is the person(s) registered on the title. In your case, following separation, you have paid for all expenses in relation to the investment property. However such an arrangement is private in nature and has no effect for income tax purposes. That is, the profits and/or losses from the rental property are to be shared according to your legal interests in the property. Under the first Consent Order, you are granted sole responsibility for all liabilities relating to the investment property. However, in separate later Consent Orders, you are directed to transfer all your rights, titles and interest in that property to your former spouse, on or before a specified date. This demonstrates that your former spouse did not relinquish their equitable or beneficial interest in the property at any time. It is noted that the transfer of title was never effected, which resulted in the property recently being offered for sale in accordance with the above Consent Orders and all residual proceeds of that sale are directed to go to your former spouse. Based on the facts that you have presented, there is no evidence to show that the beneficial ownership of the property differs from the legal ownership and as such, you are only entitled to claim 50% of all income and expenses in the 20YY financial year, being your legal and beneficial interest in the property throughout this period.