Edited version of private advice

Authorisation Number: 1051989950886

Date of advice: 16 June 2022

Ruling

Subject: Assessable income - main residence exemption

Question 1

Do the payments you receive from a company for using your property form part of your assessable income?

Answer

Yes.

Question 2

Are you entitled to a full main residence exemption when you dispose of your property?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You entered a contract to purchase your first property in 20xx with the settlement occurring in same year.

You moved into the dwelling and you treat it as your main residence.

The sale contract contains an agreement (the Agreement), which is an agreement between the vendor and a company.

The Agreement was passed on to you through the sale of the property.

The Agreement provides that the property has been selected for the company product.

You do not need to vacate the dwelling while the company is on site.

You are not allowed to make significant changes to the exterior of the dwelling.

The Agreement provides that the company agrees to pay the owner a certain amount for using the property.

You started receiving payments from the settlement date.

The property has been rented out and you continue to treat it as your main residence.

You do not treat any other property as your main residence.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-20

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

Question 1

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Based on case law, it can be said that ordinary income generally includes receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity.

In your case, you receive payments from a company for using your property, these payments are expected and perhaps relied upon, have an element of recurrence or regularity. The payments are ordinary income and are assessable under section 6-5 of the ITAA 1997.

Therefore, the payments form part of your assessable income and you are required to declare them in the years they are earned.

Question 2

Main residence exemption

Section 102-20 of the ITAA 1997 provides that a taxpayer makes a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or loss made from a CGT event that happens to a dwelling which is your main residence. To qualify for the full exemption, the dwelling must have been your main residence for the whole period you owned it and must have not been used to produce assessable income.

Dwelling used to produce income

Where the dwelling is used to produce income (such as rent), you can only claim a partial main residence exemption for the period if you could have deducted some or all of any interest you would have incurred on any money borrowed to acquire the dwelling. This applies even if you do not claim a deduction for any interest expense, or you did not borrow money to acquire the dwelling.

When the dwelling is disposed of, the proportion of the capital gain or capital loss that is taxable is an amount that is reasonable having regard to the extent to which you would have been able to deduct the interest on money borrowed to acquire the dwelling (section 118-190 of the ITAA 1997).

Absence

As a general rule, a dwelling is no longer your main residence once you stop living in it. However, in some cases you can choose to have a dwelling treated as your main residence for CGT purposes even though you no longer live in it.

Section 118-145 of the ITAA 1997 allows you to treat a dwelling (that was your main residence) as your main residence indefinitely, if you do not use it for the purpose of producing assessable income.

However, if you do use it for that purpose, you can only treat the dwelling as your main residence for a maximum period of 6 years while you use it for that purpose. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

For any period(s) you choose to apply the main residence exemption, you cannot treat any other dwelling as your main residence for that period of time.

For the purposes of section 118-190 of the ITAA 1997 you ignore any use of the dwelling for producing income during the period you continue to treat it as your main residence under section 118-145 of the ITAA 1997, except any use of the dwelling for producing income just before it ceased to be your main residence.

Application to your case

In your case, you receive payments from a company for using your property, these payments are assessable income. You are not entitled to a full main residence exemption as you use your property to produce assessable income.

For the purpose of calculating your capital gain under section 118-190 of the ITAA 1997 you can ignore any income you earned during the period you continued to treat the property as your main residence under section 118-145 of the ITAA 1997, except for use of the dwelling for producing income just before it ceased to be your main residence. This means the use of the property to derive income from the Arrangement continues to be applicable in determining the extent of your capital gain.

For example, you have indicated that x% of the price you paid for your property is attributable to the Arrangement. It therefore may be reasonable to claim a deduction of x% of any interest expense you have incurred.

To continue the example, assume the Arrangement is in place for one year, and you sell your property after owning it for 10 years. You do not lease your home for more than six years. Apart from using the property to produce assessable income from the Arrangement, you are otherwise entitled to the full main residence exemption.

On a reasonable basis, the amount of any capital gain or loss that will apply would be x% x 1/10 of the total gain or loss.