Edited version of private advice

Authorisation Number: 1052333527638

Date of advice: 19 November 2024

Ruling

Subject: Capital gains tax

Question 1

Is the grant fee considered to be prepaid rent that is assessable as ordinary income, where the resident is entitled to a full refund of the grant fee on the early termination of the arrangement?

Answer

No.

Based on the information provided to the Commissioner the grant fee is not considered to be ordinary income and is therefore not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

If the resident was entitled to a pro rata refund on the early termination of the agreement, such that the resident was effectively paying a periodic rental for the length of their occupancy, then the grant fee would have the character of prepaid rent. However, in this case the default effect of the clause for early termination is that the resident will be refunded the entire grant fee without any reduction for the period they occupied the dwelling. Therefore, the grant fee does not have the character of rent received in advance and consequently is not assessable as ordinary income. For further information, access ATO Interpretative Decision ATO ID 2003/526 Income Tax - Assessability of lump sum payment - for lifetime right to reside in a property - rent in advance in our Legal Database on ato.gov.au

Question 2

Are any capital gains tax (CGT) consequences for the receipt of the grant fee disregarded due to the CGT exemption provided by section 137-15 of the ITAA 1997?

Answer

Yes.

Based on the information provided to the Commissioner any CGT consequences in relation to the receipt of the grant are disregarded under section 137-15 of the ITAA 1997.

The requirements for the CGT exemption under section 137-15 of the ITAA 1997 are met because:

•         Your relatives who have a granny flat interest in your dwelling under the granny flat arrangement are of pension age; and

•         The arrangement is in writing, it indicates an intention for the parties to be legally bound by it, and it is not of a commercial nature.

For further information, search ato.gov.au for 'QC 66038'

Question 3

Are you entitled to any tax deductions in relation to the dwelling during the period of the arrangement?

Answer

No.

Based on the information provided to the Commissioner you are not entitled to any deductions in relation to the dwelling under section 8-1 of the ITAA 1997.

As the grant fee is not assessable income, no deductions in relation to the dwelling are allowable during the period of the arrangement.

Question 4

Will a partial CGT exemption apply to the sale of the dwelling in the future in relation to the period of the arrangement?

Answer

No.

Based on the information provided to the Commissioner you will not be entitled to a partial CGT exemption on the sale of the dwelling in the future in relation to the period of the arrangement.

The CGT exemption provided under Division 137 of the ITAA 1997 is for creating, changing, or terminating a granny flat arrangement rather than for the dwelling itself. The normal CGT rules will apply to the dwelling itself when it is sold. For further information, search ato.gov.au for 'QC 66038' and refer to the tax consequences for Ava in the example involving Sophia, Mateo and Ava.

This ruling applies for the following periods:

Year ended 30 June 2024

Year ending 30 June 2025

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

You have a property which you rented out for several years.

You have some elderly relatives who approached you asking if they could live in the property.

In a previous year you stopped renting out the property and instead, commenced allowing your elderly relatives to live in the property.

In the year after the relatives moved into the property, you entered into a granny flat arrangement with your relatives.

The written agreement grants your relatives a lifetime right to live in the dwelling for a grant fee of $X.

Your relatives had the funds for the grant fee after the sale of the property they had been living in.

Your relatives proposed the grant fee amount.

The market value of the property was around $Y when it was valued a couple of years ago.

You were receiving $Z per week when the property was last rented out.

The granny flat arrangement is registered, signed and in line with Centrelink's guidelines and satisfies their reasonableness test.

Your relatives are of pension age.

The agreement contains a clause which has the default effect that if the arrangement is terminated during the lifetime of the residents, they will be refunded the grant fee without any reduction for the period they have already lived there.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 137-15