Private ruling: rental property expenses
Published: February 2012
Ruling period: Income year ended 30 June 2004 | Income year ended 30 June 2005 | Income year ended 30 June 2006 | Income year ended 30 June 2007 | Income year ended 30 June 2008 | Income year ended 30 June 2009 | Income year ended 30 June 2010 | Income year ended 30 June 2011 | Income year ended 30 June 2012
Date scheme commenced: 1 July 2002

Ruling: Q1: Were you in a partnership in respect of the rental property? | A2: 

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. The arrangement that is the subject of the private ruling is described below. This description is based on the application for private ruling and other documents provided. These documents form part of and are to be read with this description. You entered an oral arrangement with a person and that person's spouse to acquire a rental property. The arrangement can be summarised as: · you gave the person an initial cash payment - you claim this was a loan, however the person denies this and claims this amount was intended to represent your contribution to the purchase cost of the property · the investment property was acquired in the name of the person and their spouse · the purchase of the property was entirely funded by two loans held in person and their spouse's names, secured by the property and the person and their spouse's own home · you paid a fortnightly amount into the loans referable to the investment property · the person was responsible for the management of the property, including all legal and financial matters associated with the purchase and ownership of the property · you would share any profits realised upon the eventual sale of the property. You did not declare any income from the property nor claim any expenses associated with the property in any of the tax returns you lodged. A dispute arose between you and the other parties and the property was sold with the proceeds distributed amongst the parties after repayment of the loans and the expenses of sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Detailed Reasoning - Were you in a partnership in respect of the rental property?: Taxation Ruling TR 93/32 examines the division of income or loss between co-owners of a rental property. Co-ownership of rental property is a partnership for income tax purposes but is not a partnership at general law unless the ownership amounts to the carrying on of a business (relevantly for these purposes, a partnership for income tax purposes being defined as two or more taxpayers who are in receipt of income jointly: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)). Generally, the net income or loss from a rental property must be shared according to the legal interest of the owners, the legal interest being as described on the property's deed of title. In your situation, you had no legal interest in the rental property, rather other parties held joint legal interest in the rental property. Should you have had an interest in the property, it is considered to have been held in trust for you by the legal owners. Therefore you were not in receipt of any income jointly with the legal owners of the rental property. Instead they were in receipt of the income jointly, either in their individual capacities and/or as trustees. Accordingly it is considered that you were not in a partnership in respect of the rental property. | Detailed Reasoning - Are you entitled to a deduction for the fortnightly payments you made?: Section 8-1 of the ITAA 1997 allows a deduction to the extent that expenditure is incurred in the gaining or producing of assessable income, or in the carrying on of a business to gain or produce assessable income. No deduction is allowable to the extent that the expenditure is private, domestic or capital in nature. Expenditure will generally be deductible if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce your assessable income, provided that the expenditure is not of a capital, private or domestic nature. The essential character of an expense is a question of fact to be determined by reference to all the circumstances: Taxation Ruling TR 95/33. If, after weighing all the circumstances, including the direct and indirect objectives and advantages, in a commonsense and practical manner, it can be concluded that the expenditure is genuinely, and not colourably, used in an assessable income producing activity, a deduction is allowable for the loss or outgoing. Where two taxpayers borrow jointly, both taxpayers will have presently existing pecuniary liability to discharge interest on that borrowing once it accrues and is due and payable: paragraph 6 of Taxation Ruling TR 97/7. Therefore, each of the borrowers will only incur their share of the interest expense, notwithstanding circumstances where one borrower may meet all repayments in respect of the borrowing: paragraph 6 of Taxation Ruling TR 97/7. In your case, you are not a co-borrower of the rental loan. Therefore you have not incurred any interest expense charged in respect of the rental loan. In examining the essential character of the expenditure and the whole circumstances surrounding your motivation and the advantages you were seeking in making the payment, it must be concluded that it is made in order to make a contribution to the purchase cost of the property or make a payment of principal to the rental loan. In either of these instances the character of the expenditure is one of a capital nature and accordingly you are not entitled to a deduction.

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