Private ruling: Rental property expenses
Published: November 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to a deduction for the full amount of expenses you have paid in relation to your rental properties? | A1: No | Q2: Are you entitled to a deduction for the expenses relating to your rental properties in proportion to your legal ownership interest? | A2: Yes

Relevant facts and circumstances: You own a number of rental properties jointly with your spouse. You and your spouse separated. Your spouse has only contributed $X towards the joint rental expenses since your separation. In order to be able to cover the joint rental property expenses yourself you have had to draw from your superannuation, rent out your personal property and sell your personal property. There is a court order to sell the jointly owned properties.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 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 explains that the loss or income from a 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. You co-own investment properties. Since your separation from your spouse, they have not contributed their share of the expenses relating to the properties. This is not sufficient to establish that equitable interest is different from legal title. Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between the co-owners, either oral or in writing stating otherwise. Where a co-owner pays for more than his or her share of the expenses, this is considered to be a private arrangement between the co-owners. It does not alter the fact that they are only liable for their share of the expenses. TR 93/32 provides the following example: 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. 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. Although you have paid for more than your share of the property expenses for a period of time, the expenses must be shared according to the proportion of the legal interest in the properties held by you and the other co-owner. 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. Therefore, you can only claim a deduction for the proportion of the interest expenses that is equivalent to your proportion of legal interest in the property, and you can only include in your assessable income the income that is equivalent to your proportion of legal interest in the property.

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