Edited version of your written advice

Authorisation Number: 1012914579914

Date of advice: 19 November 2015

Ruling

Subject: Renting main residence

Question 1

Are you entitled to a six year exemption from capital gains tax under the absence rule for your dwelling?

Answer

No.

Question 2

Are you entitled to a deduction for the expenses in relation to your rental property that exceed the rental income received?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You purchased a property which is your principal place of residence.

The property has a granny flat that has been tenanted.

Your relative would like to live with you in the main home and pay a part rent at market rates.

The agreement will be on commercial terms with a lease agreement in place and market rental rates charged to your relative.

Your relative will take up one of the bedrooms together with sharing the living space and bathroom/laundry.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Section 118-190

Reasons for decision

Summary

You are not eligible to apply the absence rule for the main residence exemption as the property hasn't ceased to be your main residence.

You are entitled to a deduction for the apportioned expenses of the property exceeding the rental income earned as the property is being let at market rates.

Detailed reasoning

Capital Gains Tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset.

According to section 104-10 of the ITAA 1997, CGT event A1 will happen when you dispose of the CGT asset to someone else. Property is a CGT asset.

Main Residence Exemption

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence.

To get a full exemption from CGT, you must satisfy the following conditions:

• the dwelling must have been your home for the whole ownership period;

• the dwelling must not have been used to produce assessable income; and

• any land on which the dwelling is situated must be two hectares or less.

Continuing main residence status during absence

Section 118-145 of the ITAA 1997 provides that if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence for a maximum period of six years if you use the dwelling for the purpose of producing assessable income.

In your case, the property is your principal place of residence. You are currently renting the granny flat and your relative would like to move into the house and pay part rent at commercial rates.

We consider that the absence rule under section 118-145 of the ITAA 1997 does not apply to you because you will not be vacating the home and it will remain your main residence.

Further information

Section 118-190 of the ITAA 1997 is about use of dwelling for producing assessable income. Subsection 118-190(1) allows a partial exemption for a CGT event that happens in relation to a dwelling if the dwelling was used for the purpose of producing assessable income (such as rental income).

In your case, you will be entitled to a partial main residence exemption under subsection 118-190(1) of the ITAA 1997 as your main residence was used for the purpose of producing assessable income.

Rental deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

IT 2167 states, that where property is let to relatives, the essential question is whether the arrangement is consistent with normal commercial practices in this area. If they are, the owner of the property would be treated no differently for income tax purposes from any other owner in a comparable arm's length situation.

Where a property is used partly for income producing purposes, apportionment of the expenses incurred in respect of that property may be required.

As a general approach apportionment should be made on a floor area basis that is by reference to the floor area of the residence to which the tenant has sole occupancy together with a reasonable figure for access to the general living areas including the garage and outdoor areas. The floor area used to produce income is divided by the total area of the building to arrive at the percentage of the costs that can be claimed as a deduction.

Paragraph 10 of IT 2167 states that:

If, for example, the tenant/lodger had sole occupancy of one room in the residence and shared the general living areas equally with the owner/occupier, it would be appropriate to add one half of the floor area of the general living areas to the floor area of the room of sole occupancy in order to make the necessary apportionment.

In your case, the rental payments you will receive from your relative will be at market rates and consistent with normal commercial practices. Therefore, you will be entitled to claim a deduction for the apportioned amount of all eligible expenses incurred in relation to the property under section 8-1 of the ITAA 1997.