Private ruling: share dividends and investment property
Published: January 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Questions and Answers: | 1. Are you liable to pay tax on dividends from shares that remain jointly owned by you and your former spouse? | Yes. | 2. If you dispose of your ownership interest in shares that remain jointly owned by you and your former spouse, will you be able to disregard a capital gain or capital loss that is made on the disposal? | No. | 3. If you take out a mortgage on your current unencumbered investment property in order to purchase a private residence, can you claim interest deductions in respect of the investment property? | No.

Relevant facts and circumstances: You had a marriage separation. As a private agreement, your former spouse kept the private residence, shares held in joint names and the bank account into which the share dividends are paid. You kept the investment property, which is unencumbered. You wish to retain this property as an investment and take out a mortgage against it in order to purchase a private residence for yourself.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 126-5

Reasons for decision: Detailed Reasoning - Liability to pay tax on dividends: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with dividends. Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder of a company shall include dividends paid by the company out of profits derived by it from any source. Taxation Ruling TR 93/32 is about the division of net income between co-owners. Following the principle found in the case of F.C. of T. v McDonald (1987) 18 ATR 957; 87 ATC 4541, TR 93/32 states where income is derived from the co-ownership of an asset, an agreement, whether orally or in writing, to vary the sharing of income from what it rightly is under property law, is of no effect for income tax purposes. In your case, you remain a joint shareholder of shares that continue to derive dividends. The dividends are from shares agreed to be allocated to your former spouse as part of a private marriage separation property agreement. However, because you remain a joint shareholder in those companies, you remain personally liable to pay tax on those dividends paid in respect to your ownership interest. If you were not a joint owner of those shares, that is, for example, if your ownership interest was transferred to your wife, then you would not remain personally liable to tax payable on those dividends paid because you would not hold an ownership interest. | Detailed Reasoning - Disposal of ownership interest in shares: If a person transfers an asset to their spouse as a result of the breakdown of their marriage, section 126-5 of the ITAA 1997 provides an automatic rollover if certain conditions are met. For the rollover to apply, the transfer must have been because of: § a court order or an agreement made under the Family Law Act 1975 ; or § a court order or an agreement made under a state, territory or foreign law relating to breakdowns of relationships between spouses. This rollover ensures the transferor spouse disregards a capital gain or capital loss that would otherwise arise. In effect, the one who receives the asset (the transferee spouse) will make the capital gain or capital loss when they dispose of the asset at a later date. In your case, because you and your former spouse divided your property under a private or informal agreement, the marriage breakdown rollover does not apply. It follows if you transfer your ownership interest in shares to your former spouse, you must take any capital gain or capital loss you make on the transfer of that share ownership interest into account when working out your net capital gain (or net capital losses carried forward to future years) on your tax return for that income year. You (the transferor) will be taken to have received the market value of the property at the time of transfer. | Detailed Reasoning - Interest expenses: Section 8-1 of the ITAA 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 Determination TD 93/13 (which is about the deductibility of interest paid on a loan used to acquire income producing property where non income producing property, such as the family home, is used as security for the loan) states the deductibility is determined by the use of the borrowed money. If the money is used to buy income producing property, the interest expense is an allowable deduction. Your case is the opposite of that in Taxation Determination TD 93/13. Instead of borrowing against a private property to purchase an investment property, you intend to borrow against an investment property to purchase a private property. As your purpose is to use borrowed funds to purchase a private or non-income producing property, your relevant interest expense will not be deductible under section 8-1 of the ITAA 1997.

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