Private ruling: Rental property - division of net income or loss
Published: July 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you entitled to 50% of the net rental gain or loss from your rental property up to the date it was sold? | A1: Yes.

Relevant facts and circumstances: You purchased a property jointly with your ex-spouse. You and your ex-spouse derived rental income from the property. The property was sold. By order of a Court the proceeds from the sale of the property were to be split in different proportions to your 50% ownership interests.

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

Reasons for decision: Summary: Your assessable income includes ordinary income derived directly or indirectly from all sources during the income year (section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)). Ordinary income includes income from property such as rent. You are entitled to a deduction for all losses and outgoings to the extent which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature (section 8-1 of the ITAA 1997). Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners explains the basis upon which the net income or loss from a rental property is to be divided between co-owners, and provides: • because co-owners of a rental property are generally not partners at general law, a partnership agreement, either in oral or in writing, has no effect on the sharing of income/loss from the property, and • the net income or loss 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 example of where the equitable interest may differ from the legal title is where a party is holding the property in trust for another party. A Family Court order that determines the financial relationship between two parties in divorce proceedings may also provide sufficient evidence to establish that the equitable interest is different from the legal title, where the order provides that the ownership shares in the property are to be altered. In your case, the Court Order does not alter the equitable ownership of the property. Rather, the order provides the basis upon which the sales proceeds are to be distributed after the property is sold. As there is no evidence that establishes that your equitable interest is any different to your legal interest in the property, the net income or loss from the property must be shared according to your legal interest. As you owned the property jointly with your ex-spouse you must include 50% of the rental income in your assessable income and are entitled to claim deductions for 50% of the rental property expenses.