Private ruling: Division of rental property net income/losses between co-owners
Date of advice: 15 May 2020
Published: June 2020
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you entitled to claim 100% of the net rental income or losses for your rental properties? | A1: No

Relevant facts and circumstances: You are married to your spouse, but have been separated for a number of years. You and your spouse own X rental properties in joint names. Your spouse moved to Country Y in 20XX where they intend to continue to reside. You claimed 100% of all expenditure and 100% of all income on your rental properties for the 20XX income year. You have maintained all aspects of the X rental properties from your separation and have paid all bills and made all decisions as to their management. You are of the understanding that separation in your situation is indeed a circumstance in which your equitable interest is vastly different to legal interest, especially considering your spouse no longer resides in Australia.

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

Reasons for decision: Summary: You are not entitled to claim 100% of your rental properties net income or loss based on equitable interest. | Detailed Reasoning - Detailed reasoning: Taxation Ruling 93/32 - Income tax: rental property - division of net income or loss between co-owners (TR 93/32) explains the basis upon which we will accept, for income tax purposes, the division of the net income or the loss from a rental property between the co-owners of that property. Co-ownership of a rental property is a partnership for income tax purposes only, the income/loss from the rental property is derived from co-ownership of the property and not from the distribution of partnership profits/losses. Co-owners of rental properties are not generally partners at general law, therefore a partnership agreement, either oral or in writing, has no effect on the sharing of income/loss from the property. Accordingly, the income/loss from the rental property must be shared based on 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. At paragraph 11 of the ruling it states: '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'. | Detailed Reasoning - Legal and Equitable interests: Under this section of the ruling the commission's view is that there are extremely limited circumstances where the legal title and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. We will assume where taxpayers are related, e.g. husband and wife, that the equitable right is exactly the same as the legal title. | Detailed Reasoning - Application to your circumstances: While you and your spouse are currently separated and have been so for a number of years, the legislation makes it clear that the division of net property income/losses are to be shared based on the legal interest of the owners and not equitable interest. You are not able to declare 100% of the income and claim 100% of the deductions on the X rental properties you own with your former spouse. You must declare your share of the income and your share of the deductions in your tax returns.