Tax Tip 475: X pays all the Expenses on a Property Owned by Y – Who claims the interest?

Discussion in 'Accounting & Tax' started by Terry_w, 4th Apr, 2023.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    To be able to claim the interest on a loan the taxpayer needs to

    a) Incur the interest, and

    b) Receive income (or expect to) connected to the incurring of the income.


    Where someone who is not a legal or beneficial owner of a property pays for the interest on the loan used to acquire they property they would not meet either of these conditions.


    Sometimes a non-owner spouse may be a co-borrower – often for servicing reasons. In these situations they would be incurring interest. But if they are not the owner of the property, legally or beneficially, then they have no entitlement to income generated from the loan.


    Where they are both owners of the property the interest is only deductible in proportion to their legal ownership (except for trust relationships).


    Example

    Homer and Marge own a property jointly as joint tenants. They receive rental income but because of the recent rate rises there is a large loss. Marge isn’t working and has no income so Homer is the one paying for the loan and associated costs.

    Homer, using his own logic, thinks “I am the one paying for things so I should be entitled to the deductions”

    But that is not how it works.

    The income will be shared 50/50 as will the expenses – joint tenants are considered to be equal owners.

    Homer is not entitled to Marge's 50% of the rent.


    Here is another example from a private binding ruling and TR 93/32:

    Example

    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.

    See PBR Authorisation Number: 1051346294412
    https://www.ato.gov.au/law/view/view.htm?docid=EV/1051346294412&PiT=99991231235958

    (if the ATO consider it a loan from one spouse to the other would that mean the borrower could later refinance that debt to repay their spouse and claim the interest on that? - A question for another tip)
     
    Last edited: 4th Apr, 2023
  2. qemist

    qemist Active Member

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    That contradicts itself.
     
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  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The issue of who claims also provides guidance for the common questions surrounding related loans etc. The legal owners of the property must lawfully incur interest. The written and executed loan agreement and the manner in which the lender charges interest (debit to a loan) provides that requiremnet of being incurred. This occurs when loan interest under a legal obligation is charged. The payment of the loan (credit to the loan) is not what taxpayers claim a deduction for- even when its a IO loan. The timing of when they pay may be different to the date incurred. . In theory a unpaid loan is just as deductible as one that is paid. However the ATO does take a dim view to loan interest that capitalises but there are some exceptions.
     
  4. craigc

    craigc Well-Known Member

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    Hi @Terry_w,

    Another helpful tip as always.

    Can I confirm my understanding of the above with relation to Tax Tip 467 below?

    On my initial reading of the above it seems to contradict Tax Tip 467.

    Tax Tip 467: Joint Loans, investment in one name – is an onlending agreement needed to claim interes

    I think I see the difference though: Is the logic that where Marge is the sole owner but both Marge & Homer are spouses and co-borrowers (as per the example in Tax Tip 467) that both of the co-borrowers joint and severally incur the interest as both are liable for 100% of the loan?

    Hence Marge can claim 100% of the interest in line with her ownership share and Homer 0%.

    Thanks again
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Many confuse incurring with paying. Incurring is the obligation to pay a cost. The legal owner/s of the property will incur a cost when it is charged to the loan account as a lender will only lend to one or all legal onwerrs of a property. Who pays this is not relevant for tax purposes.

    This issue further extends to what is paid. REPAYMENTS of a loan are not the deductible element (eg Homer pays it) but the interest charged to the loan account is what is incurred.
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Tax Tip 467 was about whether the non-owner spouse needs to formally onlend to the owner spouse where there is a joint loan but ownership in one name only.
    I don't think so because the ATO considers it onlending even without a written loan agreement.

    This tip was more about paying like Paul said many confuse incurring and paying
     
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