Private ruling: Capital gains tax
Date of advice: 24 March 2016
Published: May 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2015

Ruling: Q1: After re-establishing your property as your main residence and subsequently moving out, will you be able to continue to treat it as your main residence while renting it out for another six years? | A1: Yes. | Q2: If you rented out a room in the property to a friend while you were also living there, would you be granted another six year period of absence after moving out? | A2: Yes. | Q3: If the period of absence were to exceed six years and a full main residence exemption did not apply, would the 'home first used to provide income' rule apply? | A3: Yes.

Relevant facts and circumstances: You built a property and moved into it as soon as practicable after its completion. The land on the property is less than two hectares. Sometime later you moved out and rented out the property for a number of years. You plan to move back into the property within six years of it first being rented out. You are considering renting out a room of the property to a friend of yours during this period. You plan to move out of the property again a short time later and begin renting it out again.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 102-20, | Income Tax Assessment Act 1997 - Section 118-145, | Income Tax Assessment Act 1997 - Section 118-192, | Income Tax Assessment Act 1997 - Section 118-185, and | Income Tax Assessment Act 1997 - Section 118-110

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a capital gains tax (CGT) event occurring. The most common CGT event, event A1, occurs when you dispose of a CGT asset to someone else and a CGT asset includes real property. You will trigger a CGT event when you sell your property. Under section 118-110 of the ITAA 1997, you can generally disregard any 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 when: • the dwelling was your home for the whole period you owned it; • the dwelling was not used to produce assessable income; and • any land on which the dwelling is situated is not more than two hectares. Once a dwelling has been established as your main residence, you may continue to treat that dwelling as your main residence during periods of absence. Section 118-145 of the ITAA 1997, provides where the dwelling is rented, the maximum period that you may continue to treat the dwelling as your main residence is six years. You are entitled to another maximum period of six years each time the dwelling becomes and ceases to be your main residence. If a dwelling stops being a taxpayer's main residence more than once during the ownership period, the six-year limitation applies separately for each period of absence (subsection 118-145(2) of the ITAA 1997). A person need not choose whether to treat the dwelling as their main residence at the time of the absence. The choice only needs to be made on the disposal of the dwelling. For a new six-year period to start, the dwelling must again become and then cease to be the taxpayer's main residence. There is no minimum time a person has to live in a home before it is considered to be their main residence. Consequently, you would be entitled to another period of absence after moving back into the property. If you decide to rent out a room of the property to a friend when you move back into the property, you will still be entitled to another six year period of absence if you decide to rent out the property after moving out. This is because despite you using part of the property to produce assessable income, it would still be considered your main residence if you were living in it at the time. However, a full-main residence exemption is only available if your property was not used to produce assessable income. If you decide to rent out part of the property to your friend, you would not meet this condition and you would only be eligible for a partial exemption from CGT. The amount of CGT payable over this period would depend on the portion of the property that was used for income producing purposes based on floor area. The Tax Office publication Guide to capital gains tax 2015 provides the following example: Thomas purchased a home under a contract that was settled on 1 July 1999 and sold it under a contract that was settled on 30 June 2013. The home was his main residence for the entire fourteen years. Throughout the period Thomas owned the home, a tenant rented one bedroom, which represented 20% of the home. Both Thomas and the tenant used the living room, bathroom, laundry and kitchen, which represented 30% of the home. Only Thomas used the remainder of the home. Therefore, Thomas would be entitled to a 35% deduction for interest if he had incurred it on money borrowed to acquire his home….Thomas made a capital gain of $120,000 when he sold the home. Of this total gain, the following proportion is not exempt: capital gain x percentage of floor area = taxable portion $120,000 x 35% = $42,000 Unlike the above example, because your home would only be rented out to your friend for a small portion of your ownership period, you would be eligible for a partial main residence exemption under section 118-185 of the ITAA 1997. It states that you calculate the part of the capital gain that is taxable as follows: Capital gain X non-main residence days total days in ownership period Capital gain is the amount that you would gain from the CGT event that takes place on the disposal of your property (this would be adjusted based on the portion of the floor area in the property that was rented out as per the above example). Non-main residence days is the number of days in your ownership period when the dwelling was being used to produce assessable income. Total days in ownership period is the date of settlement to purchase the dwelling until the date of settlement to dispose of the dwelling. In your case you would calculate your non-main residence days from the date your friend moved into the dwelling until they moved out and stopped paying rent. Please note that the absence rule under section 118-145 (as discussed above) cannot apply to exempt you from paying capital gains tax as a result of your friend staying with you. This is because you will not be vacating the home and it will remain your main residence over this period. In working out a capital gain or loss on a dwelling, the home first used to produce income rule in section 118-192 applies if: • only a partial main residence exemption would be available because the dwelling was used for the purpose of producing assessable income during your ownership period • the income producing use started after 20 August 1996, and • you would have been entitled to a full main residence exemption if you had entered into a contract to dispose of the dwelling just before the first time it was used for the income producing purpose. If your period of absence while renting out the property were to extend beyond six years, you would satisfy the above requirements. Consequently, you would be taken to have acquired the dwelling at its market value at the time you first started using it for income producing purposes. ATO ID 2003/1113 Capital gains tax: main residence exemption - interaction between the 'absence' rule and the 'first used to produce income' rule , states that this has the effect that the first element of the dwelling's cost base and reduced cost base is the market value of the dwelling on the day it was first used for income producing purposes (and that expenditure incurred by the taxpayer prior to that day is ignored). Please note that the home first used to produce income rule will also apply if you decide to rent out part of your dwelling while living in it, even if your periods of absence do not exceed six years.