Taxation Assignment: Rental Property Loss Allocation, Finance Law

This assignment delves into the critical issue of rental property loss allocation within the realm of taxation. It examines the application of Taxation Ruling TR 93/32 to determine how losses should be proportionally allocated among co-owners of a rental property. The assignment analyzes a specific scenario involving Joseph and his wife, who have an agreement on sharing rental profits and losses, and assesses whether their agreement impacts their tax obligations. It references the case of "McDonald v FC of T (1987)" to illustrate how the courts view similar situations where co-ownership arrangements exist, and how the tax law partnership is identified. The conclusion emphasizes that private agreements between co-owners do not affect the proportionate sharing of profits and losses for tax purposes, and that the couple must share the loss equally, despite their private agreement. The assignment highlights the importance of understanding tax implications for co-owned rental properties and the significance of adhering to established tax rulings.

Running head: TAXATION
Taxation
Name of the student:
Name of the University:
Authors note:

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Answer to question 4:
Issue:
To ascertain whether the rental property’s loss incurred should be proportionally
allocated of the taxpayer’s legal interest.
Rule:
The co-owners of a rental possession should divide the net profit or loss from that as per
the guidelines of “Taxation Ruling of TR 93/32”. The taxation commissioner accepts this
guidance of division of this amount among the co-owners for the income tax (Becker et al 2015).
This co-owner partnership does not fall under general law since they do not run a
business but they are liable to pay tax as per “Taxation Ruling of TR 93/32”. The agreement
between the co-owners, may it be written or oral, does not affect the sharing of the profit and loss
from the rented property (Richardson et al 2015).
The co-owners of the rented property will hold this possession as tenants in common or
joint tenants. The lawful renter’s interest is the noticing feature of tenant in common. The
income or loss and he co-ownership of the property is controlled by this interest.
The co-owners of the property will hold the same legal interest. In terms of nature,
duration and extent, their interest will be the same. Partnership of jointly owned rented property
originates the tax law partnership that ATO identifies as partnership. The taxpayer and his wife
possessed two units of the property that were rented as the citation of “McDonald v FC of T

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(1987)”. Their agreement stated that Mr. and Mrs. McDonald will share the profit in 25% and
75% respectively. And Mr. McDonald will bear the full loss (Enste 2018).
Now the main case is whether both of them should incur the loss or just buy Mr.
McDonald. The federal court said that since their partnership so not fall under general law so
they should pay the profit and loss in equal proportion. The court stated that the losses and
profits between them does not have an effect in their respective taxation purpose as the co-
owners arranged it privately between them.
In brief as the co-owners, both of them must include their tax return of the half expenses
and incomes. Any agreement that the co-owners shows up will not have any effect on the sharing
of proportionate profits and loss (Susanti et al 2017).
Application:
It is observed that Joseph and his wife acquired this rental property as co-owners by
borrowing money. Joseph and Jane agreed that they will share 20% and 80% rental profits
respectively. However, Joseph will incur 100% of the loss. The taxpayer reported a loss of
$40,000 from the rental property.
In this case “Taxation Ruling of TR 93/32” is applicable. Since this partnership does
not fall under general law so their agreement will not have any effect in the distribution of the
profit and loss from the rented possession.
Joseph and Jane did not had a partnership under general lawas per “McDonald v FC of T
(1987)”. So the co-owners should share the profits and losses proportionately. So the loss of
$40,000 will be paid by them proportionately for income tax purpose.

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If later on they decided to sell this property then both will get 50% interest of the net
capital loss or gains for their partnership for income tax purpose. In taxation purpose the
agreement which the couple had will be ineffective.
Conclusion:
As it was arranged privately between the co-owners, it can be concluded that the
agreement of sharing the profit and loss that the couple had is ineffective and individually they
are entitled of taxation purpose. Therefore, they have to share the profit and loss equally.

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References:
Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions. Kluwer
Law International.
Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax
avoidance spanning the global financial crisis: Evidence from Australia. Economic
Modelling, 44, pp.44-53.
Enste, D.H., 2018. The shadow economy in OECD and EU accession countries–empirical
evidence for the influence of institutions, liberalization, taxation and regulation. In Size, Causes
and Consequences of the Underground Economy (pp. 135-150). Routledge.
Susanti, I., Nasir, L.A. and Sukardianti, V.P., 2017. IMPLEMENTATION OF TAX
REGULATIONS ON INTERNET-BASED BUSINESS ACTIVITY CASE STUDY:
GOOGLE’S TAX AVOIDANCE IN INDONESIA.