Claiming a share of IP Costs

Discussion in 'Accounting & Tax' started by [email protected], 30th Sep, 2016.

Join Australia's most dynamic and respected property investment community
  1. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

    18th Jun, 2015
    There are numerous posts on PC that address the common question of who claims a share of rental property costs.

    The common answer is that the sharing of rental property income, costs and the resulting net loss / income is based on LEGAL TITLE and not on who borrowed the money, provided the funds or the agreement between owners to share profit or income using some other basis. For example Dave and his wife Mary jointly borrow to buy an IP. The title is solely in Mary's name. Dave will not include the rental income and deductions in his return. All of it will go into Mary's. Spouses cannot enter into a written agreement to vary this basis.

    Why do we say this ?

    The ATO had a tax ruling ID 2002/363 which explained their position on this. It clearly indicated this view. However some exceptions came up and so this Interpretative Decision was withdrawn and replaced with other public rulings including TR 1993/32. We need to carefully consider those exceptions to the general view.

    Exception : Where spouses or other taxpayers as legal owners operate a business that produces rental income.
    The business test for property "partnerships" for spouses is very difficult to access let me warn you. The taxpayers must hold very significant property and rely extensively on this income. Five, No, Ten, No, 20 - Maybe, More the better. A private ruling may well be recommended to confirm or refute such a basis. It works both ways !! However positive income from rent is a key requirement. Care must be taken with the business income issue as ALL property owned by those individuals is affected. In place of say 25% / 75% Tenants in Common on all properties a partnership share may exist - 50% each which prevails over title. Refer IT 2423.

    Exception : Lack of subjective purposes.
    The ATO issued Tax Ruling TR 95/33 which addresses circumstances where a subjective purpose may affect deductibility. This gives an exception that can easily be overlooked for spousal co-borrowing and property ownership. The ATO Ruling (Para 2) considers that when the amount of deductions exceeds the amount of income (ie a tax loss) then the subjective thought processes may need to be explored. Para 4 and 5 explore that review to determine the taxpayer's subjective purpose, motive or intention in making the outgoing. Finally if that subjective purpose is not reasonable then the deduction or outgoing may need to be apportioned and only a part deduction allowed. In practice, the Commissioner can disallow the loss and allow a deduction only to the extent of income.

    TR 95/33 is important where say a scheme is engineered so that say Mrs Y receives a death inheritance. In place of acquiring a property herself which would be positively geared, She lends the proceeds to her wealthy husband Mr Y as a spousal loan for him to buy an investment property which produces a large loss for tax purposes. Mrs Y receives annual interest from Mr Y however her low income indicates no tax concerns or major costs. The loan is supported by a loan agreement for a rate of 2.5% more than the prevailing CBA rate, there is mortgage security taken by Mrs Y, there is a 10 year term of interest only with a review date for this to be extended and Mr Y neither makes payment on a regular basis and there is poor accounting of the amount/s unpaid for interest. The ATO could find the subjective basis for the loan a concern and disallow the loss or the disallow the interest deduction.

    Care must always be taken for a scheme that benefits one spouse v's the other. It may addressed by TR 95/33 and Part IVA. Unlike Part IVA which requires other tests the views in TR 95/33 require only a reasonable belief in a subjective basis for the Commissioner to "unwind" a benefit.

    Exception : Evidence of a interest

    Tax Ruling TR 93/32 is the key ruling issued on withdrawal of ID 2002/363. Para 6 contains a exception to the general view that title determines interest in property. This may occur if there is evidence of a interest in property that is not reflected on title. However note that para 41 excludes husbands and wives are there is a assumption that the interest in identical for spouses. Eg a wife cannot surrender her interest to be held on trust for say her children.

    eg : A nominee owner, a trust interest, apparent purchaser interests etc. Legal advice should be the basis for attempting to use this exception.
    EN710 likes this.