Edited version of private ruling

Authorisation Number: 1011489083966

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Ruling

Subject: Main residence used for income producing purposes

Are you eligible for a partial main residence exemption in relation to the sale of your property?

Yes.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You jointly purchased the property with your spouse.

You used this property as your main residence.

You work requires you do certain tasks after hours. You need the ability to respond to issues on a 24/7 basis and in a timely manner.

You set up a home office in order to provide after hours support for your employer.

Your employer provided you with the information systems and telecommunications connections.

Your home office expense claims included pro-rata amounts of your mortgage interest payments, insurance, and rates.

The home office was used for income producing activities shortly after you occupied the dwelling until you disposed of the property.

You have never rented any part of your dwelling.

You sold the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-10

Income Tax Assessment Act 1997 Section 118-190

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain capital gains you make. You may make a capital gain or capital loss as a result of a CGT event (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). The sale of a property constitutes CGT event A1 (section 104-10 of the ITAA 1997).

Generally, under section 118-110 of the ITAA 1997 you can ignore a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence for the entire period you owned it.

Section 118-190 of the ITAA 1997 applies to deem a capital gain or capital loss to have accrued to the extent to which the sole or principal residence disposed of was also used for the purpose of gaining or producing assessable income during the period of ownership. 

In determining whether a main residence has been used for producing assessable income, section 118-190(1)(c) of the ITAA 1997 relies on a "notional interest deductibility" test, namely that if the taxpayer had borrowed money to acquire the dwelling (or an ownership interest in it), the interest on the borrowed funds would have been deductible. The amount of the partial gain or loss attributable to income producing use will be calculated under section 118-190(2) ITAA 1997 by reference to what is "reasonable" in terms of the extent to which the taxpayer would have been able to claim a deduction for this interest. For example, if 10% of a taxpayer's dwelling is used as a place of business and the taxpayer would have been able to claim 10% of the interest on borrowed funds as a deduction, 10% of the capital gain is subject to CGT.

In your circumstances, you have claimed a deduction for interest payable on borrowed funds for the purchase of your house (that is, part of your mortgage interest payments). Therefore, you are entitled to a partial main residence exemption upon disposal of your dwelling.

Calculation of capital gain or loss

Generally speaking, unless the part of the dwelling used to gain assessable income is distinctly of a greater or lesser proportionate value than the rest of the dwelling, the extent to which it was used to gain assessable income will be determined on an area basis. This amount of the capital gain or capital loss will also be determined having regard to the period for which that part of the dwelling was used:

· by the individual, or

· by any another person

· to gain assessable income.

In your situation, you will need to apportion the area within your dwelling used for the operation of your business. The formula for apportionment is as follows:

Capital gain multiplied by

percentage of floor area not used as main residence multiplied by

percentage of period of ownership (where that part of the home was not used as main residence) multiplied by

the percentage of ownership equals

Taxable portion to be included in your assessable income.