Private ruling: Rental property ownership
Published: July 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you entitled to claim a deduction for all the outgoings for rental properties of which you are a joint owner? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You and your ex-spouse are joint owners of rental properties. Settlement of the properties is proceeding through the legal system. During a conciliation conference you and your ex -spouse agreed that you would be responsible for all the outgoings on the two properties. Since that time you have paid for all the mortgage payments, insurance, rates and utility bills. Your ex-spouse has decided not to sign off on the conciliation agreement, and legal proceedings are underway.

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

Reasons for decision: Detailed Reasoning - Division of net income or losses between co-owners of rental properties: Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners refers to the division of net income or loss between joint owners of a rental property. The ruling only examines the taxation position of co-owners whose activities do not amount to the carrying on of a business. Persons who own two rental properties would not be considered to be carrying on a rental property business. According to TR 93/32, 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. The equitable interest will only be different if one of the owners shown on the title deed is holding their share of the property in trust for the other party. That is, in your case, you would have to show that your ex- spouse has given up all claims of ownership of his 50% share of the property and is merely holding it in trust for you. The agreement you made early 2012 is not sufficient to show that the equitable interest is different from the legal title. | Detailed Reasoning - Co-ownership: Co-owners of a rental property will generally hold the property as joint tenants or tenants in common. An important feature of both a joint tenancy and a tenancy in common is the legal interest of the tenant. It is this legal interest which ultimately determines among co-owners of property, the division of the net income or loss from the property. Co-owners of a property who are joint tenants of that property will hold identical legal interests in the property. That is, their interest must be the same in extent, nature and duration - each owns an identical 50% share in a property. Paragraphs 48 and 49 of TR 93/32 provide the following example: Mr and Mrs Z rent out a house that 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. Owning and renting out the one property does not amount to carrying on a business. Mr and Mrs Z are not partners at general law although their relationship is treated as a partnership for income tax purposes. Net profits and losses from the property should be shared in the same proportion as their ownership interest that is 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. Since the reconciliation conference your ex -spouse has not contributed to the expenses of the rental properties including payment of the mortgage, insurance, rates and utility bills. This does not alter the fact that he is a joint owner both legally (there has been no change to the title deed) and beneficially (there is no indication that he has given up ownership of his 50% share of the property). Until your legal or equitable interest in the property changes, (for example, if title passes to you or your ex-spouse gives up ownership of his 50% share of the property and creates a trust to hold it for your benefit), the income and expenses of the property must be split equally between you and your ex-spouse, the joint owners.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.