Ownership %

One of the often quoted rules that gets discussion on SS is that of ownership %. The basic rule is that if title ownership is X % then all the rental income and costs must be shared based on ownership interest on title not by the contribution made by each owner.

This isn't always the case however. In some (rare / isolated) instances the % ownership on title may be disregarded. There are two ways
1. Ownership % on title is ignored and shared EQUALLY or
2. Ownership % on title is ignored and a different fixed % share is used if the partners have a written agreement.

The basic condition for either option is that the partners operate a rental property BUSINESS.
The ATO have some info here-

Factors to consider :
- the significant size and scale of the rental property activities
- the time spend on the activities
- extensive personal involvement in the activities, and
- the business-like manner in which the activities are planned, organised and carried on.

And the ATO suggest small business concessional may even be available.

In the example given a number of 26 is used and this is considered a business. But this is just one example. In the non-business example the number of IPs is two. So somewhere between 2 and 26 is a big gap....
 
What it appears to me that you're saying, is that the explicit title-based ownership can be overruled if the (possibly documented) behaviour of the interested parties is different?

Is this a fair observation?

Are there any examples where this came back to haunt someone?
 
Or if beneficial ownership is different from legal ownership. No business need exist in this instance.

Such asresulting trusts.
 
What it appears to me that you're saying, is that the explicit title-based ownership can be overruled if the (possibly documented) behaviour of the interested parties is different?

Is this a fair observation?

Are there any examples where this came back to haunt someone?

Not "over-ruled" as such. More that one may prevail over the legal title. Robs example is very good. A trust deed prevails over the trustee being legal owner.

The most common example is a partnership agreement. Yes that can also includes spouses. So a couple who accumulate a LOT of IPs may structure some as 5%/95%, 50/50 and other forms of TIC. Yet if they have a Partnership agreement which states that they both equally share in the income and profits then perhaps the deductions will be 50/50 and that will prevail The ATO require more than some verbal agreement however. An explicit partnership agreement would be requested.

I expect someone will ask the question- Can we create the agreement later ?? Yes. However I have always considered this poses a risk if one party obtains a tax benefit v's the other. So I would encourage a binding private ruling.

As always remember this view is based on a business so the charecter of substantial ownership and reliance on the income etc needs to be evident. And the impact on CGT discounts may also need to be considered.

I always reluctant where spouse undertake dev and passive ownership to consider this approach without a restructuring approach. Its where a structure to quarantine the dev work may be VERY sensible. That way ordinary income and CGT assets are kept separate.
 
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