Private ruling: Rental property expenses and deductions
Date of advice: 6 September 2018
Published: October 2018
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you entitled to claim 100% of the rental property loss? | A1: No.

Relevant facts and circumstances: You and your ex-spouse own a investment property as joint tenants. You and your ex-spouse have been separated for a number of years. You have paid 100% of the expenses relating to the investment property. You have deducted 50% of the losses associated with the investment property. You have received 100% of the income from the investment property.

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

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. An equitable interest is an " interest held by virtue of an equitable title (a title that indicates a beneficial interest in property and that gives the holder the right to acquire formal legal title) or claimed on equitable grounds, such as the interest held by a trust beneficiary." A legal title refers to the responsibilities and duties the owner has in maintaining, using, and controlling a property. Legal title is the actual ownership of the property. The documented name of the property owner, as visible through the public records, typically describes the person with legal title . The difference between an equitable interest versus a legal interest is that the latter is the only one that gives actual ownership of the property. Equitable interest establishes the person’s financial interest in the property. You and your ex-spouse are joint owners in a investment property. Following your separation from your ex-spouse, you paid all expenses associated with the investment property and received all of the income. No change to your legal ownership has occurred. 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. For a period of time, you have been contributing to all of the expenses in relation to yours and your ex-spouse’s interest in the property. Although you have paid for more than your share of the property expenses for a period of time, this is not enough to establish that the equitable interest in the property is different from the legal interest. Therefore, the expenses must be shared according to the proportion of the legal interest in the property held by the relevant co-owners. 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.