Ownership and distribution of profit from a Rental Property
Owned by spouses
How do you hold the property? As “tenants in common” or as “joint tenants”?
How do you tell? Check the Title.
Where both names appear on the title as tenants in common then the distribution of any profit or losses is to be split 50:50
If on the title it states they hold as joint tenants then the distribution of profits and losses then follows what each hold as a legal interest in the property. This may be 50:50 or where one has contributed more then that needs to be documented to allow distributions to vary from 50:50.
Owned by siblings or by a parent and child
Again, check the title as to how the property is held – tenants in common or as joint tenants. The usual situation, where a property is held by more than one person and they are not married to each other or the spouse/ partner, is to record the purchase as joint tenants.
Where they are recorded as joint tenants and there is a disparity in the level of ownership such that it is not 50:50 then the profit and loss is distributable based on the legal interest of each party.
Are you operating a rental property business?
The ATO’s stance is that where you own several rental properties, either as joint tenants or tenants in common. Then depending on the circumstances, you may be operating a rental property business.
In the example provided by the ATO on their website (QC 64907) a couple who own multiple houses and apartment blocks would, due to:
- the significant size and scale of the rental property activities
- the number of hours they spend on the activities
- their extensive personal involvement in the activities, and
- the business-like manner in which the activities are planned, organised and carried on.
The example as set out has them owning 8 houses and 3 apartment blocks (each block having 6 units) making a total of 26 properties.
In a previous ATO Ruling (issued 1987) the qualifying situation was owning a single block of apartments.
The advantage of being classed as a business then opens up a number of other deductions:
- Small Business Capital Allowance Pooling,
- Instant Asset Write Offs,
- CGT small business provisions, plus
- access to the Small Business Tax Offset.
Owned by family trust
A family trust can own a rental property or multiple properties. It can also co-own properties.
Depending on the scale of activity of the trust it may also be operating a business of renting out properties.
Where you or the trust hold multiple rental properties in your portfolio akin to the ATO example and are self-managing them then the ATO may consider you to be operating a business.
Where this situation arises it is best to seek their opinion, by applying for a public ruling on the matter to lock in a favourable decision.
The ATO has released their view on many aspects of Rental Properties over the years.
The below rulings are just some of them.
Taxation Ruling TR 93/32 – Income tax: rental property – division of net income or loss between co-owners.
Taxation Ruling IT 2423 – Withholding tax: whether rental income constitutes proceeds of business – permanent establishment – deduction for interest.
For more information about determining whether a business of letting rental properties is being carried on, determining whether it is being carried on in partnership, and the distribution of partnership profits and losses, see:
Taxation Ruling TR 97/11 – Income tax: am I carrying on a business of primary production?
Paragraph 13 of this ruling lists eight indicators to determine whether a business is being carried on. Although this ruling refers to the business of primary production, these indicators apply equally to activities of a non-primary production nature.
Taxation Ruling TR 94/8– Income tax: whether a business is carried on in partnership (including ‘husband and wife’ partnerships)