Private ruling: Portion of rental property as principal residence
Published: May 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 January 2012

Ruling: Q1: Are you required to return a portion of the rent received and entitled to claim a portion of all the deductible rental expenses associated with a rental property where you rent part of the premises on a commercial basis? | A1: Yes. | Q2: Are you entitled to a partial main residence exemption where a portion of the property is your sole and principal residence? | A2: Yes

Relevant facts and circumstances: You and a relative brought a property as tenants-in-common. You each hold different proportions of the title. The property consists of two separate dwellings. One dwelling is rented out at arms length. Half of the other dwelling is occupied by you, with the other half rented out to arm's length tenants. You do not own any other properties. The property you own is less than two hectares in size. Professional advice has been provided from sources, so that it may be possible to establish the rent of the dwellings at normal commercial rates.

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 118-100

Reasons for decision: Detailed Reasoning - Rental income and expenses: Section 8-1 of the Income Tax Assessment Act 1997 (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. As you reside in the property any rent paid or expenses applicable to the portion of the property you are renting at commercial rates would be considered as private or domestic in nature. The rent you paid would not be assessable income to you and deductions would not be allowable as for tax purposes you cannot rent from yourself. Taxation Ruling TR 93/32 states in paragraph 6 that the income/loss from a rental property must be shared according to the legal interest of the owners, except in very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title. Consequently, if you were receiving a commercial rate of rent from the other portions of the rental property, the income you receive in respect of your percentage interest in the rental property is assessable income under section 6-5 of the ITAA 1997 and you are entitled to claim the same percentage of the deductible rental property expenses. Therefore where a commercial rate of rent is received for the portions of the property not being rented by you, you would be required to return the percentage of the rental income for the portion of the property not rented by you and would be entitled to the same percentage of the overall deductible expenses for the portion of the property not rented by you. | Detailed Reasoning - Main residence exemption: Generally, if you are an individual you can ignore a capital gain or capital loss from a capital gains tax (CGT) event that happens to your ownership interest in a dwelling that is your main residence. To get the full exemption from CGT: · the dwelling must have been your home for the whole period you owned it · you must not have used the dwelling to produce assessable income, and · any land on which the dwelling is situated must be two hectares or less. If you are not fully exempt, you may be partially exempt if: · the dwelling was your main residence during only part of the period you owned it · you used the dwelling to produce assessable income, or · the land on which the dwelling is situated is more than two hectares. Usually, you cannot get the full main residence exemption if you: · acquired your dwelling on or after 20 September 1985 and used it as your main residence · used any part of it to produce income during all or part of the period you owned it, and · would be allowed a deduction for interest had you incurred it on money borrowed to acquire the dwelling (interest deductibility test). The interest deductibility test applies regardless of whether you actually borrowed money to acquire your dwelling. You must apply it on the assumption that you did borrow money to acquire the dwelling. If you rent out part of your property, you would be entitled to deduct part of the interest if you had borrowed money to acquire the dwelling. When a CGT event happens to the property, the proportion of the capital gain or capital loss that is taxable is an amount that is reasonable according to the extent to which you would have been able to deduct the interest on money borrowed to acquire the property. In most cases, this is the proportion of the floor area of the home that is set aside to produce income and the period you use the home to produce income. This includes if the dwelling is available (for example, advertised) for rent. In your circumstances it would be considered to be reasonable that, if you met the conditions for a main residence exemption, that a partial main residence exemption would apply on the basis that one-third of your percentage ownership interest would be exempt .The interest deductibility test would apply to the other two-thirds of your ownership interest and this percentage would not be eligible for a main residence exemption.