Private ruling: Renting part of private residence
Published: September 2013
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Are you in the business of renting properties? | A1: No. | Q2: Is the renting of part of your main residence considered to be a commercial rental arrangement? | A2: Yes. | Q3: Will capital gains tax apply to a portion of your property when it is sold? | A3: Yes.


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 118-120 | Income Tax Assessment Act 1997 Section 118-190

Reasons for decision: Summary: The Commissioner's view on whether the letting of property amounts to the carrying on of a business is found in a number of places. Taxation Ruling IT 2423 is about whether rental income constitutes proceeds of business (for withholding tax purposes). IT 2423 states: A conclusion that an individual is carrying on a business of letting property would depend largely upon the scale of operations. An individual who derives income from the rent of one or two residential properties would not normally be thought of as carrying on a business. On the other hand if rent was derived from a number of properties or from a block of apartments, that may indicate the existence of a business. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in a business for tax purposes. The factors that are considered important in determining the question of business activity are: · whether the activity has a significant commercial purpose or character · whether the taxpayer has more than just an intention to engage in business · whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity · whether there is regularity and repetition of the activity · whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business · whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit · the size, scale and permanency of the activity, and · whether the activity is better described as a hobby, a form of recreation or sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is being carried on largely depends on the large or general impression. | Detailed Reasoning - Application to your circumstances: We have determined that your activity is not carried on as a business for taxation purposes. Your activity is not conducted on a sufficient scale to be considered to be business. You are making half of your main residence available for rent. This is not of a scale to take the activity beyond a passive income producing property. An ordinary business of managing residential properties would involve more than this. You provide fresh linen but not meals for guests, and they have access to common living areas. This level of involvement is not indicative of the level needed for the activity to be considered a business. As your activity is considered to be a passive rental investment, income and expenses are included on your income tax returns in line with your legal interest in the property. Further detailed information to assist you is contained in the ATO publication Rental properties 2013, which can be found on our website www.ato.gov.au | Detailed Reasoning - Letting on a commercial basis: Taxation Ruling IT 2167 has some guidance on arms length letting of part of a residence, in paragraphs 9 to 12, which relate closely to your situation. Also, in paragraph 22: The rent received from the commercial letting of the properties i.e. the letting of the properties, at a commercial rental, is clearly assessable income. It is a question of deciding what amount of the losses and outgoings incurred in connection with the properties is allowable as an income tax deduction. The room and use of common areas of your main residence is approximately 50% of the size of the dwelling, and you apportion your property expenses accordingly. This is an acceptable rental arrangement where the rent is calculated at market rates. It is also acceptable to apportion the expenses on a floor area basis in your situation. | Detailed Reasoning - Capital Gains tax: You may make a capital gain if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). You can generally disregard a capital gain or capital loss made on the disposal of a dwelling that is your main residence if: · the property was your home for the whole period you owned it; · the property was not used to produce assessable income and · any land on which the dwelling is situated is not more than two hectares (section 118-120 of the ITAA 1997). In your case as a portion of your dwelling is used to produce assessable income you may only be eligible for a partial main residence exemption (section 118-190 of the ITAA 1997).

Relevant facts: You rent out a room at market rates in your main residence on a casual, short term basis through a website. | You don't provide meals for guests, but they have access to the kitchen, living room and bathroom. | The room and use of the common areas is approximately 50% of the size of your property. | Your income from letting the room is seasonal, from May to September you have guests almost every day, but from October to April you may have only a few bookings per month. | You only advertise on the one website, and it also has tools to assist you with the rental income and occupancy rates. | For the website services you pay a fee for all bookings. | You purchased your property after September 1985.