Private ruling: Ownership of an investment property
Date of advice: 21 November 2018
Published: February 2019
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the $XXX,XXX (funded by a mortgage taken out on the property) paid to your sibling increase the cost base of the property? | A1: No | Q2: Will the interest paid on the mortgage taken out on the property be deductible? | A2: No | Q3: If the answer to question 2 is no, can the interest on the mortgage be added to the cost base of the property? | A3: No

Relevant facts and circumstances: You have legal title to a property. Your parent provided the deposit for the property and paid mortgage repayments, however the mortgage was in your name only. You also made mortgage repayments. The mortgage was settled by your parent. At the time of purchase, you state that your parent wanted the property to ‘belong’ to you and your sibling equally. There is no formal agreement evidencing this. Your sibling is not on the property title and has not contributed any funds to the purchase of the property. The property was rented from 19XX to 20XX. All rental income from the property was reported in your personal tax returns. The property has since been used by the family as a holiday home and improvements have been made over time. There is now an agreement between you, your sibling and your parent that you pay your sibling half the market value of the property to pay out their ‘share’ of the property. You will pay this amount by mortgaging the property again. The property will then be rented out to tenants to meet the mortgage repayments.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 110-25

Reasons for decision: Summary: You have 100% legal and beneficial ownership of the property. The $XXX,XXX mortgage taken out on the property is not referable to the acquisition of any further ownership interest in the property. You cannot include the $XXX,XXX or the interest on the mortgage in the cost base of the property, nor claim the interest on the mortgage as a deductible expense. | Detailed Reasoning - Detailed reasoning: Generally, the owner of a property is the person(s) registered on the title but it is possible for legal ownership to differ from beneficial ownership. Where beneficial ownership and legal ownership of an asset are not the same, there must be evidence that the legal owner holds the property in trust for the beneficial owner. Contributions to the purchase cost of a property are relevant in examining whether the legal interest(s) in the property match the equitable interest(s) in the property. The purchase cost of a property may include the actual purchase price of the property ( Calverley v Green (1984) 155 CLR 242, at 257), legal fees, stamp duty and incidentals ( Currie v Hamilton [1984] 1 NSWLR 687, at 691; Ryan v Dries [2002] NSWCA 3, at [52] and [53]). The purchase cost will not include loan repayments ( Calverley v Green (1984) 155 CLR 242, at 257), or legal fees and bank fees if they are not paid in order to acquire the property ( Calverley v Green (1984) 155 CLR 242, at 257; Sivritas v Sivritas & Anor (2008) 23 VR 349, at 372-373). The contributions to the purchase cost can be made by the direct payment of money ( Field v Loh [2007] QSC 350), or money funded by borrowings ( Bloch v Bloch (1981) 180 CLR 390; Brennan v Duncan [2006] NSWSC 674, at [8]). Where a contribution to the purchase cost is funded by a joint borrowing, the joint borrowers are regarded to have contributed equally to the purchase cost of the property ( Calverley v Green (1984) 155 CLR 242, at 257-258; Dinsdale v Arthur [2006] NSWSC 809 at [11]). Where a person has contributed to the actual purchase cost of the property but is not on the legal title, the legal owner is holding the portion of the legal title that relates to that person’s share of the contribution to the purchase cost on trust for them. This is due to the presumption of a resulting trust ( Calverley v Green (1984) 155 CLR 242). However, the presumption of a resulting trust may be rebutted. In certain relationships it is presumed that conferring legal title on another is intended to be a gift. This is called the presumption of advancement ( Calverley v Green (1984) 155 CLR 242). Relationships that have traditionally attracted the presumption of advancement include transfers from husband to wife and from parent (or other person being in loco parentis ) to child – including an adult child ( Wirth v Wirth (1956) 98 CLR 228, 232 and Calverley v Green (1984) 155 CLR 242, 247; Charles Marshall Pty Ltd v Grimsley (1956) 95 CLR 353, 365-6). This presumption may also be rebutted. In your case, your parent contributed to the purchase cost of the property by paying the deposit. The mortgage repayments made by your parent do not count as a contribution to the purchase price. The person taken to have contributed a borrowed amount to the purchase cost is the person who is named on the mortgage. Only you were named on the original mortgage and were liable to make the repayments. Therefore you are considered to be the person who contributed the borrowed funds to the purchase cost. Any monies spent on property improvements are not considered part of the purchase price. Under the presumption of resulting trust, your parent would be considered to hold a percentage of the property that corresponds with the deposit amount. However, the presumption of advancement would apply in this case as the contributing party was your parent and the benefiting party was you (their child). The presumption of advancement may be rebutted by evidence of the contributing party’s intention not to benefit the benefiting party at the time of the property purchase ( Charles Marshall Pty Ltd v. Grimsley (1956) 95 CLR 353, 364-5). In your case you have not provided any evidence that demonstrates that your parent’s intention at the time of purchase was not to benefit you. As the presumption of advancement applies, there is no resulting trust and consequently you have 100% legal and equitable ownership of the property. The borrowed $XXX,XXX would not be used to acquire any equitable ownership interest held by your parent or sibling as they are not considered to be equitable owners of the property. The mortgage will not be referable to the acquisition of any further ownership interest by you and therefore the mortgage and interest thereon would not be added to the cost base of the property. In relation to the interest on the loan, Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith provides the Commissioner's view regarding the deductibility of interest expenses. As outlined in TR 95/25, there must be a sufficient connection between the interest expenses and the activities which produce assessable income. TR 95/25 specifies that to determine whether the associated interest expenses are deductible, it is necessary to examine the purposes of the borrowing and the use to which the borrowed funds are put. The 'use' test, established in the High Court case Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153, (1926) 32 ALR 339 is the basic test for the deductibility of interest, and looks at the application of the borrowed funds as the main criterion. Interest on a loan taken out to refinance a loan used to acquire an investment property is only deductible to the extent it refinances the balance outstanding that directly relates to the original acquisition of the rental property or is used to finance other income producing activities. In this case, the loan will not be taken out to refinance an outstanding amount on the original loan on the property as that loan was already paid out. The borrowed $XXX,XXX will be used by you to make a payment to your sibling who does not have any legal or equitable ownership in the property. The ‘use’ of the funds will be for a private purpose, namely to fulfil an obligation you have agreed to under a private family arrangement. The interest on the mortgage will not be allowable as a deductible expense.