Private ruling: Deductions - rental property
Published: July 2011
Ruling period: 1 July 2009 - 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you, in your capacity as individuals, entitled to claim deductions under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for expenses incurred in relation to the rental property? | A1: No

Relevant facts and circumstances: You and your spouse (you) are the trustees of a discretionary family trust (the trust). The trust was established by deed. Shortly after the trust was established, you entered into a contract for the purchase of an investment property. The contract sets out that the buyer was you as trustees of the trust. The record of certificate of land title was issued which lists the owners as you as joint tenants. The expenses relating to the property, e.g. water, electricity, council rates etc, have issued in mixed names, some in the name of the trust, and some in the name of you. The mortgage for the property was taken out by you. The lease agreement for the property was entered into by you. The trust deed was provided. A provision in the trust deed sets out: You, or the trustee from time to time, is aware that if the trust acquires real estate, then a caveat should be lodged over the real estate stating that you, or the trustee from time to time, only holds the real estate as trustees for the trust. On the land title deed there is a single registered interest listed, in respect of the mortgage over the property.

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

Reasons for decision: Summary: The general provision that determines the deductibility of expenses is section 8-1 of the ITAA 1997. Under section 8-1 of the ITAA 1997 you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income. No deduction is available unless there is a nexus between the incurring of the outgoing and the derivation of assessable income or the prospect of the derivation of assessable income as a consequence of the particular outgoing. As a result, in this case it is necessary to determine if you are entitled to receive the rental income from the investment property, in order to determine if you are eligible to claim deductions in relation to the property. Generally, income derived from an asset should be returned by taxpayers according to who has the beneficial entitlement to the income, unless there is evidence to the contrary. From a consideration of the facts provided we consider that the owner of the property is the trust. This decision is based on the fact that the trust was executed by deed and within a short period of time of this, a contract for the purchase of the investment property was entered into. The contract sets out that the buyer was you as trustees of the family trust. We consider this clearly indicates that the trust is the owner of the asset. The rental agreement was entered into by the trustees. There is no evidence of a subletting arrangement from the trust to the individuals. The trust is therefore entitled to income derived under the rental agreement. It is noted that the trust deed includes a provision relating to the acquisition of real estate and that no subsequent caveat was lodged over the property in question. However this condition imposed in the trust deed is not a legal or income tax requirement, and on the evidence provided, little weighting can be given to this fact. In any event, the provision merely states that a caveat 'should' be lodged, rather than a strict requirement i.e. that it must be lodged. Therefore, the absence of a caveat in itself does not prevent the investment property from being a trust asset. In conclusion, the individuals do not use the investment property to produce assessable income; as a result they are not eligible to claim deductions in respect of the investment property. Expenses cannot be claimed in the individual's tax returns.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.