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Tax Tip 56: 2 Co-owners and Deductibility of interest where one rents to the other

Discussion in 'Accounting & Tax' started by Terry_w, 15th Oct, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    2 Co-owners and Deductibility of interest where one rents to the other


    What happens if A and B jointly own a property, 50/50. A wants to live there but B does not so B rents his portion of the property to A. B wants to claim all costs associated with his share of the property and A will pay him half of the market rent of the property.

    Is this possible?

    Yes. B is earning assessable income and should be able to claim all associated expenses incurred in producing this income - s8-1 ITAA97.

    But B will only be able to claim his share of the expenses - in this instance 50% of the interest and other costs such as rates.

    A lease agreement is suggested that gives the occupier of the property exclusive possession of the property.

    Authority

    Taxation Ruling TR 93/32 states in paragraph 6 that the income/loss from a rental property generally must be shared according to the legal interest of the owners
    https://www.ato.gov.au/law/view/document?docid=TXR/TR9332/NAT/ATO/00001


    Case R16, Board of Review No. 1 (Australian Taxation Board of Review No1), 15 March 1984
    http://www.iknow.cch.com.au/#!/docu...an-taxation-board-of-review-no1-15-march-1984


    Case P76, Board of Review No. 1 (Australian Taxation Board of Review No1), 03 September 1982

    http://www.iknow.cch.com.au/#!/docu...axation-board-of-review-no1-03-september-1982


    ATO ID 2010/193 (now withdrawn). This cannot be relied upon now but the general principles still apply.
    https://www.ato.gov.au/law/view/document?docid="AID/AID2010193/00001"


    Private rulings – which cannot be relied on


    PBR Authorisation Number: 1011932140456
    https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1011932140456.htm


    PBR Authorisation Number: 37409
    https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/37409.htm


    PBR Authorisation Number: 30108
    https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/30108.htm


    PBR Authorisation Number: 1012437894494
    https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1012437894494.htm


    PBR Authorisation Number: 1012399975396
    https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1012399975396.htm
     
  2. D.T.

    D.T. Adelaide Property Manager Business Member

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    I guess the main issue with this is loss of CGT free status (if it's a PPOR) ?
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It can't be a PPOR if the other person isn't living there. Their share will be subject to CGT. They may still use the 6 year exemption though if the property was their main residence.