Private ruling: Investment interest
Published: May 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2011

Ruling: Q1: Is a deduction for interest on a loan held by one party used to service a jointly held rental property required to be split between both parties that hold ownership of the property? | A1: Yes.

Relevant facts and circumstances: You have joint and equal ownership of a rental property. You wish to perform repairs and/or renovations on this property. You wish to take out a loan in one owner's name. This loan will be used to service the rental property as required.

Relevant legislative provisions: Income Tax Assessment Act 1997 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. Interest is an allowable deduction where the necessary connection with your assessable income is present. 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. A person's legal interest in a property is determined by the legal title to that property under the land law legislation in the State or Territory in which the property is situated. The legal owner of the property is recorded on the title deeds for the property issued under that legislation. In your case, you jointly own a rental property, as specified on the title deed to the property. It is used for the purpose of gaining assessable income. Your loan will be used to pay for repair and/or renovation expenses, outgoings related to this income-earning activity. Where a co-owner forgoes their share of the rental income and/or pays for all the expenses this is considered to be a private arrangement between the co-owners. It does not alter the fact that they are legally entitled to their share of the income and/or are only liable for their share of the expenses. Consequently, you can only claim a deduction for the proportion of the total expenses associated with the rental property that is equivalent to your proportion of legal interest in the rental property. Ownership of the loan from which these interest expenses are incurred is not relevant. It is the purpose for which these expenses are incurred that is important, in this case, the maintenance and/or improvement of a jointly held rental property.

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