The Australian Taxation Office sharpened its focus on property co-ownership from 1 July 2024, expanding its data-matching program with state revenue offices and financial institutions to detect mismatches between ownership structures and tax returns. The move comes as affordability pressure from 13 rate rises since May 2022 pushes more buyers—particularly first home buyers and investors—into joint borrowing arrangements, often without formal advice on how the legal title is held. At the same time, APRA’s serviceability buffer remains unchanged at 3.0 percentage points, and the major banks have kept debt-to-income caps under tight review, making it critical for co-borrowers to understand how joint tenancy and tenancy in common shape their tax profile and borrowing capacity. The choice determines who pays income tax on rental profits, who can claim the full main residence exemption, and how land tax aggregates. Getting it wrong can mean an unexpected capital gains tax bill of tens of thousands of dollars, a denied negative gearing deduction, or a stamp duty liability that erodes equity. This article sets out the precise tax arithmetic and lender policies that borrowers need to factor into their property structure.
Ownership Structures at Law and in the Lender’s Assessment
Right of Survivorship vs Inheritable Shares
Joint tenants hold the property as a single entity with unity of title, time, interest, and possession. On the death of one joint tenant, the entire interest automatically passes to the surviving joint tenant, bypassing the deceased’s will. Tenants in common own distinct and divisible shares, which can be unequal—for example, 99% and 1%—and form part of the deceased’s estate. An ATO ruling (Taxation Determination TD 92/148, still current) confirms that for income tax purposes the beneficial ownership splits between tenants in common follow the legal share, whereas joint tenants are treated as equal owners in the absence of evidence to the contrary. This distinction drives everything from capital gains tax liability to negative gearing claims.
Default Position Under Australian Law
In all states, the transfer form registered with the land titles office must specify joint tenancy or tenancy in common. Where two or more purchasers acquire residential property and the transfer is silent, the default in New South Wales, Victoria, and Queensland is now tenancy in common (with equal shares, or as specified if otherwise noted), following legislative reforms that aimed to reduce disputes. Western Australia and South Australia still default to joint tenancy for spouses but tenancy in common for others. A buyer intending the automatic survivorship feature must therefore positively elect joint tenancy on the transfer. A late change attracts full transfer (stamp) duty on the market value of the interest transferred, at rates that in NSW reach $5.50 per $100 on values above $1,212,000.
How Lenders View Ownership Types for Serviceability
All four major banks—Commonwealth Bank, Westpac, NAB, and ANZ—assess co‑borrowers jointly for serviceability regardless of ownership type, but the treatment of rental income and tax benefits varies sharply. Under Westpac’s credit policy (effective November 2024), where borrowers hold as tenants in common, only the declared share of rental income can be counted toward serviceability; the bank also includes only that share of expenses and interest, modelling the net position at the marginal tax rate actually facing the borrower. NAB applies a 3% serviceability buffer to total loan commitments, adding the full loan repayments to the co‑borrower’s combined income, but where shares are unequal the bank’s credit manual requires that the lower‑income party must still demonstrate capacity to service 100% of the debt at the assessment rate if they are the sole party legally responsible. Macquarie Bank, a prominent non‑bank lender, takes a stricter line on tenants in common with a disparity exceeding 80/20, often capping the LVR at 70% instead of the standard 80% unless both borrowers are clearly co‑habiting and pooling income. The rationale is the bank’s concern about enforcing a mortgage when the economic interest and legal obligation diverge.
Capital Gains Tax and the Main Residence Exemption
The Main Residence Exemption Rules
Under section 118‑110 of the Income Tax Assessment Act 1997, a dwelling that is an individual’s main residence is wholly or partially exempt from CGT. The exemption extends for up to six years after the owner moves out, provided the property is not used to produce income for more than six years (the “absence rule”). The exemption applies per dwelling, not per taxpayer, but co‑owners each apply the rules to their own interest. An ATO web guidance note updated 28 June 2024 clarifies that where co‑owners are joint tenants, each is taken to have a 50% interest in the dwelling unless there is a declaration of unequal beneficial ownership. For tenants in common, the exemption is calculated on each owner’s specified legal share, which is reflected on the certificate of title.
How Ownership Structure Affects Partial Exemption
If one co‑owner moves out and the other remains, the person who vacates can still treat the property as their main residence under the six‑year rule if they do not claim another main residence. However, the remaining co‑owner continues to use it as a main residence so no partial exemption arises. Where both move out, the CGT outcome splits along the ownership shares. A tenant in common with a 99% share will incur 99% of any capital gain on sale after the exemption period lapses, while the 1% owner bears only 1%. The 50% CGT discount for holding the asset longer than 12 months applies to each individual’s share, so the top marginal tax rate of 45% plus the 2% Medicare levy effectively becomes 23.5% on the discounted gain, provided the owner is an individual or trust with a CGT discount entitlement. A joint tenant arrangement would, by contrast, force a fixed 50/50 split of the gain regardless of who contributed what to the purchase price or mortgage.
Working Example: A Couple with Unequal Shares
Consider a Sydney couple who bought an investment unit in 2018 for $800,000, with Partner A contributing 80% of the deposit and mortgage and Partner B contributing 20%. They hold as tenants in common in those shares. After seven years of renting, the property sells for $1,200,000, yielding a capital gain of $400,000. Partner A’s 80% share of the gain is $320,000, and after the 50% CGT discount, $160,000 is assessable, taxed at 47% = $75,200. Partner B’s 20% gain is $80,000, discounted to $40,000, taxed at, say, the 32.5% bracket plus Medicare levy ($40,000 × 34.5% = $13,800). Total CGT bill = $89,000. If instead the couple had held as joint tenants, Partner A would report only $200,000 gain (half), discounted to $100,000 taxed at 47% = $47,000, and Partner B equally $47,000—total $94,000. The $5,000 difference, though modest here, balloons where the marginal rates diverge sharply. The right structure depends on forecasting each person’s future income.
Income Tax on Rental Income and Deductions
Allocation of Rental Income and Expenses
For tenants in common, net rental income (or loss) is allocated according to the legal interest shown on title, not according to who actually paid the mortgage. The ATO data‑matching protocol (PAYG withholding and property transaction data, expanded July 2024) cross‑checks ownership shares from state land titles offices against tax returns. A common red flag occurs when a higher‑income earner claims 100% of the interest deduction while title shows a 50/50 split as joint tenants. The Commissioner may issue an amended assessment and impose a shortfall penalty of 25% of the tax avoided if the error is reckless, plus the general interest charge at 11.38% p.a. (second quarter of 2024–25). Lenders likewise validate the rental income declared: ANZ income assessment guidelines (October 2024) state that where the borrower’s tax return shows a net rental loss, the bank will add back 100% of the loss to assessable income, reinforcing the need for a correct split.
Negative Gearing Rules and Share Percentage
A negatively geared property produces a loss when allowable deductions—loan interest, rates, insurance, repairs, depreciation—exceed rental income. That loss reduces the owner’s taxable income. The immediate tax benefit equals the loss multiplied by the owner’s marginal tax rate. Therefore, a 99% holding for the highest‑marginal‑rate partner can almost double the cash flow benefit compared with a 50/50 joint tenancy, provided the ATO accepts the share corresponds to genuine beneficial ownership and the funds came from that person’s resources. The ATO’s Taxpayer Alert TA 2021/2 warns against “artificial and contrived arrangements” that allocate deductions to the higher‑income spouse without a corresponding contribution to the purchase. Where the lower‑income partner earns less than the $18,200 tax‑free threshold, a loss in their hands wastes the deduction entirely.
Common ATO Audit Triggers
The expanded data‑matching program also targets co‑owners who claim the full main residence exemption but have rented part of the property, such as a granny flat. If a tenant in common owns 50% and the other 50% is owned by a sibling who never lived there, the dwelling is the main residence of only one co‑owner; the ATO will apportion the exemption. A 2023 Administrative Appeals Tribunal case (Gill & Commissioner of Taxation) confirmed that where a taxpayer occupied only one bedroom and the sibling co‑owner (tenant in common 50%) never resided, only one‑half of the gain attracted the main residence exemption. The ATO’s compliance dividend from property data matching reached $242.6 million in 2022–23, according to the ATO annual report, and is projected to exceed $300 million in the current financial year.
Land Tax, Stamp Duty, and Other State Taxes
Land Tax Thresholds and Aggregation – Implications for Tenants in Common
State land tax is assessed on the total value of taxable land owned. For tenants in common, each owner’s interest is aggregated with any other land they own, including land in their own name. In New South Wales the 2024 land tax threshold is $969,000; for 2025 it rises to $1,075,000. A couple who jointly hold an investment property worth $1,200,000 as joint tenants will each be assessed on 50% ($600,000)—well under the threshold if they own no other land. As tenants in common with a 99/1 split, the person with 99% would be assessed on $1,188,000, which exceeds the 2024 threshold and triggers land tax at 1.6% of the excess plus $100, meaning approximately ($1,188,000 – $969,000) × 0.016 + $100 = $3,504, plus the 2% surcharge for foreign persons if applicable. Victoria’s land tax threshold for 2024 was $300,000 (individual) with rates starting at 0.2%, and an absentee owner surcharge of 4% from 2024. Careful structuring can therefore avoid thousands of dollars in annual land tax.
Transfer (Stamp) Duty on Changing Ownership Structure
Moving from joint tenancy to tenancy in common, or altering the share split, constitutes a dutiable transaction. In NSW, transfer duty is calculated on the greater of the consideration or the unencumbered value of the interest transferred. If a couple bought as joint tenants and now want to sever the joint tenancy to equal shares as tenants in common, duty applies to 50% of the property’s current market value. At a value of $800,000, the duty on $400,000 is $13,110 under the NSW sliding scale—a cost that often makes early legal advice far cheaper. Victoria applies a similar regime, and From 1 July 2024 Queensland’s transfer duty rate on an investment property transfer can exceed $21,000 on a $500,000 half-share. Lenders may permit a refinance to effect the structural change, but ING’s credit policy (March 2024) requires the loan-to‑value ratio post‑restructure to remain at or below 80% without LMI, and the refinance application triggers a full serviceability assessment at the prevailing buffer.
Recent State Budget Changes
The Victorian government’s 2024–25 budget introduced a land tax surcharge of 0.5% on property owned by discretionary trusts from 2025, with an additional absentee owner surcharge rising to 4%. A tenancy in common with a trust beneficiary holding a large share now faces a higher combined tax impost. NSW’s 2024–25 budget lowered the foreign‑owner surcharge land tax from 4% to 3% but widened the definition of foreign person. For a co‑ownership arrangement where one party is a foreign citizen, the structure of shares directly drives the surcharge liability. Buyers structuring a mixed residence purchase should model the annual land tax and surcharge using the exact thresholds for the relevant state.
Estate Planning, Asset Protection, and the Lending Nexus
Wills and Distribution Constraints
A joint tenancy overrides the will, which is both an advantage (probate avoided) and a risk. If a joint tenant leaves the property to someone other than the co‑owner, that gift fails. For blended families, a tenancy in common is often preferred because the deceased’s share can be directed to children from a prior relationship. This carries a practical funding risk: the surviving co‑owner may need to refinance to pay out the beneficiary, and the lender’s consent is required. All four major banks treat the death of a co‑borrower as a review event; Commonwealth Bank’s “Bereavement and Deceased Estates” policy (March 2024) gives the surviving borrower 12 months to establish serviceability on their own, after which the loan may be called in if they cannot meet the 3% buffer test.
Protection for Blended Families and Investors
For unrelated investors, such as friends or siblings co‑buying a property, tenancy in common is the only practical structure because it allows each to deal with their share independently. However, a bank’s “all monies” clause makes all co‑borrowers jointly and severally liable for the entire debt, so a default by one puts the other’s asset at risk regardless of share. Non‑bank lenders such as Pepper Money and La Trobe Financial may accept a limited‑guarantee structure in specialist arrangements, but the interest rates are typically 0.80‑1.20 percentage points above standard variable owner‑occupier rates, and LVRs are capped at 65% for these products. The added cost must be weighed against the asset‑protection benefit.
Lenders’ Debt‑to‑Income Treatment for Co‑Owners
When co‑borrowers hold unequal shares, lenders that use a debt‑to‑income (DTI) cap—NAB internal limit of 7x gross income for investment lending, Westpac 7.5x, ANZ 9x with tightening for LVR >80%—measure DTI at the total debt divided by the total household income if the applicants are in a spousal or de facto relationship. For non‑spousal co‑owners, ANZ policy (July 2024) splits the debt in proportion to the legal interest for DTI calculation, which can actually lower the reported DTI if the higher‑income earner holds the larger share. That nuance has become significant as APRA’s expectation that banks maintain prudent DTI frameworks remains in force, and Macquarie now builds an internal DTI overlay that triggers a credit assessment referral when DTI exceeds 6x for investment loans at LVR above 80%.
Actionable Takeaways
- Model the tax outcome before settlement. Use each co‑owner’s expected marginal tax rate and the holding period to calculate the CGT impact of the proposed share split. A professional tax schedule that factors in the 50% CGT discount, the 3% serviceability buffer, and state land tax thresholds will avoid a costly restructure later.
- Check title default rules in your state. In NSW, Victoria, and Queensland the default is tenancy in common with equal shares unless you elect otherwise. If survivorship is intended, explicitly mark “joint tenants” on the transfer. Reversing the choice later triggers full stamp duty on the transferred interest.
- Align the legal share with funding contribution. The ATO expects the ownership split on title to reflect beneficial ownership. If a higher‑income partner funds 90% of the deposit and mortgage but title shows 50/50, the Commissioner can attribute the income and deductions to the funder, nullifying the tax plan and risking an audit with penalties.
- Re‑serviceability test with your lender after any change. Severing a joint tenancy, changing shares, or bringing in a new co‑owner triggers a full credit assessment. Ensure your combined income can pass the APRA buffer at 3% above the loan product rate and that your DTI ratio stays within your chosen lender’s cap.
- Run a land tax aggregation check annually. A tenant in common with a large share will be assessed on that share combined with any other land. If the total pushes past the threshold, the ongoing cost can quickly exceed any income tax saving. For properties in Victoria, also factor in the trust and absentee surcharges if applicable. Revisit the structure before each land tax assessment date (midnight 31 December in NSW).