Private ruling: Rental property deductions
Published: February 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1:  | A1: No

Relevant facts and circumstances: You own a rental property as joint tenants with your spouse. Your spouse has not been earning any income until they started working recently. You have been paying all of the expenses (such as interest, insurance, brokerage fees) relating to the rental property out of your own salary during the 2013-14 income year.

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

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 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 Ruling TR 93/32 explains that the loss or income from a 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. You co-own an investment property; your interest in the property is 50%. Due to your spouse not having employment for a period of time, you paid all of the expenses relating to the property from your own salary. This is not sufficient to establish that equitable interest is different from legal title. Rental income and expenses must be attributed to each co-owner according to their legal interest in the property, despite any agreement between the co-owners, either oral or in writing stating otherwise. Where a co-owner pays for more than his or her share of the expenses, this is considered to be a private arrangement between the co-owners. It does not alter the fact that they are only liable for their share of the expenses. TR 93/32 provides the following example: Mr and Mrs Z rent out a house which 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. Net profits and losses from the property should be shared in the same proportion as their ownership interests, i.e., 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. Although you paid for 100% of the investment property interest expenses for a period, the expenses must be shared according to the proportion of the legal interest in the properties held by you the other co-owner. While we can appreciate your circumstances, the Commissioner does not have any discretion under the tax law to allow a taxpayer to claim more or less than their legal entitlement to investment property income and expenses. Therefore, you can only claim a deduction for the proportion of the interest expenses that is equivalent to your 50% proportion of legal interest in the property, and you can only include in your assessable income the income that is equivalent to your 50% proportion of legal interest in the property.