Private ruling: Interest expense
Date of advice: 25 August 2016
Published: September 2016
Ruling period: Year ended 30 June 2016 | Year ending 30June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Can you claim the total amount of interest you incur in relation to the loan you took out in the names of both you and your spouse to purchase a rental property, where only your name appears as the owner of the property on the title deed? | A1: Yes.

Relevant facts and circumstances: You purchased land at in order to build a house as an investment property. This land settled in 20XX. The property is currently under construction and is due for completion on or before 20YY. The title for the property is in your name only. In order to purchase this property you had to apply for a loan. You are married. All of your bank accounts and credit cards are in your and your spouse's names. The investment loan is in the name of you and your spouse. Your spouse is on the investment property loan as a guarantor. They also have the right to contact the bank in regards to the loan only. You are employed. You are the only one who pays for all bills in relation to the investment property, including the loan repayments and water bills. You have been solely responsible for all decisions made in regards to the investment property.

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

Reasons for decision: Summary: Taxation of net income or loss in relation to a rental property Taxation Ruling TR 93/32 deals with the division of net income or loss in relation to rental properties. Paragraph 6 of the ruling states: 'The income/loss from the 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.' Generally, a legal interest in land is achieved by the owner being the registered proprietor of the legal title to the land (TR 93/32, paragraph 8). Paragraph 41 of TR 93/32 also states: 'We consider that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different to legal title. We will assume where taxpayers are related, e.g., husband and wife, that the equitable right is exactly the same as the legal title.' In light of the foregoing, it is considered that you have sole legal interest in the rental property and therefore are required to declare any income or loss generated by the property. Deductibility of the interest expense An interest expense will be deductible where it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, except to the extent that the expense is of a capital, private or domestic nature or is incurred in gaining or producing exempt income. The deduction is provided by section 8-1 of the Income Tax Assessment Act 1997 . In the circumstances of your case, we need to establish whether you have incurred the whole of the interest expense. In your case, the mortgage broker applied for the loan in both your names as you already had joint accounts. Your spouse is on the loan as guarantor. It is therefore necessary to determine whether the substance of the joint loan is in reality a loan in which one party to the loan is acting merely as a nominee or agent for the other in order to satisfy the requirements of the lender. The substance of such an arrangement is that of a bare trustee who receives the borrowed funds on behalf of the other party while acting as a guarantor for that other party who is the beneficial recipient of the full amount of the borrowed funds. Such an arrangement is in substance that of a sole borrower and a guarantor in spite of its legal form as a joint loan. It is considered that this is the case in your situation, and as such your partner can be said to only be a party to the loan due to the requirements of the lender. Given the facts set above there is no evidence that your spouse has a beneficial interest in the investment property. As previously discussed, the title for the rental property is in your name only, and so it is considered that you have the legal interest in the property. Accordingly, despite the fact that the loan is in both names, you are able to claim all of the interest incurred in relation to the loan.