Private ruling: CGT - main residence used for income producing purposes
Published: February 2015
Ruling period: Year ended 30 June 2013 | 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 2012

Ruling: Q1: Are you entitled to claim a deduction for occupancy and running costs for your home office? | A1: Yes | Q2: Are you entitled to a full main residence exemption upon the sale of the dwelling? | A2: No | Q3: Are you entitled to a partial main residence exemption upon the sale of the dwelling? | A3: Yes

Relevant facts and circumstances: You are employed. Your employers are based in another city. You are the only employee in your location and there is no office supplied by your employer. You are provided with a mobile phone and a laptop computer by your employer for the completion of your work duties. You are not provided with any financial assistance from your employer in relation to the expenses of working from home. You have set up a room in your house which contains a desk, chair, filing cabinet and printer. This room is almost exclusively used as your home office. You are required to hold a stock of the product which you sell. You have boxes of product stored in the garage, in which you have installed shelving and in the room you also use as your home gym. You split your time between working in the home office and on the road visiting clients. While at home you make phone calls to clients and complete paperwork required for your role. The time you spend at home working varies depending on client visits. Some weeks you may be home for 2 or 3 days, other weeks you may be away for the entire week. You stated that last year you travelled more than 65,000km by car visiting clients. Clients do not come to your home and there is no signage on your property advertising your affiliation with your employer. You maintain a post office box for correspondence and delivery of stock. You have owned and lived in your home for 6 years.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-190 | Income Tax Assessment Act 1997 Paragraph 118-190(1)(c) | Income Tax Assessment Act 1997 Paragraph 118-190(2)

Reasons for decision: Summary: The Commissioner considers your home office to be a place of business as your employer does not provide you with an office in which to perform your duties, so there is a requirement that you work from home. As your home office is considered a place of business, you are entitled to a deduction for both occupancy and running costs. As your residence has been used for the purpose of gaining or producing assessable income you will not be entitled to the main residence exemption when you dispose of this property. You will however be entitled to a partial main residence exemption as only a portion of your residence has been used for gaining or producing assessable income. | Detailed Reasoning - Home office as place of business: 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, or relate to the earning of exempt income or a provision of the taxation legislation excludes it. As a general rule, expenses associated with a taxpayer's home are of a private or domestic nature and do not qualify for deductions for taxation purposes. An exemption to this general rule is where part of the home is used for income producing activities and has the character of a 'place of business'. Another exemption to this general rule is where part of the home is used in connection with the taxpayer's income earning activities but does not constitute a place of business. In this case, a more limited range of deductions may be available. There are two broad categories of deductible expenses in respect of a home office: • Occupancy expenses • Expenses relating to ownership or use of a home which are not affected by the taxpayer's income earning activities. • These include rent, mortgage interest, municipal and water rates, land taxes and house insurance premiums. • Running expenses • Expenses relating to the use of facilities within the home. • These include electricity charges for heating/cooling, lighting, cleaning costs, depreciation, leasing charges and the cost of repairs on items of furniture and furnishings of the office. Whether an area of the home has the character of a place of business is a question of fact which depends on the particular circumstances of each case. In Taxation Ruling TR 93/30, it is the Commissioner's view that a place of business exists only if: • it is a requirement inherent in the nature of the taxpayer's activities that the taxpayer needs a place of business: • the taxpayer's circumstances are such that there is no alternative place of business and it is necessary to work from home; and • the area is used exclusively or almost exclusively for income-producing purposes. In your case, your employer does not provide you with an office in which to perform your work duties and therefore there is no alternative place of business and it is necessary for you to work from home. The room you have set up as your home office is used exclusively or almost exclusively for income producing purposes, that is performing your work duties from home. The garage and gym area in which you store product are not used exclusively or almost exclusively for income producing purposes as you still use these areas for their intended purpose, ie. parking the car and home gym. It is considered that the area of your home you have set aside as your home office would be considered a place of business. As such you are entitled to claim both occupancy and running costs relating to the portion of your home that is used as your home office as a deduction under section 8-10 of the ITAA 1997. | Detailed Reasoning - Capital gains: Capital gains tax (CGT) is the tax you pay on certain capital gains you make. You may make a capital gain or capital loss as a result of a CGT event (section 102-20 of the ITAA 1997). The sale of a property constitutes CGT event A1 (section 104-10 of the ITAA 1997). Generally, under section 118-110 of the ITAA 1997 you can ignore a 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. Section 118-190 of the ITAA 1997 applies to deem a capital gain or capital loss to have accrued to the extent to which the sole or principal residence disposed of was also used for the purpose of gaining or producing assessable income during the period of ownership. In determining whether a main residence has been used for producing assessable income, section 118-190(1)(c) of the ITAA 1997 relies on a "notional interest deductibility" test, namely that if the taxpayer had borrowed money to acquire the dwelling (or an ownership interest in it), the interest on the borrowed funds would have been deductible. If you set aside and use part of the dwelling exclusively as a place of business, you cannot get a CGT exemption for that part of the dwelling by not claiming a deduction for the interest. Nor can you include interest in the cost base if you are entitled to a deduction but do not claim it. The amount of the partial gain or loss attributable to income producing use will be calculated under section 118-190(2) ITAA 1997 by reference to what is "reasonable" in terms of the extent to which the taxpayer would have been able to claim a deduction for this interest. For example, if 10% of a taxpayer's dwelling is used as a place of business and the taxpayer would have been able to claim 10% of the interest on borrowed funds as a deduction, 10% of the capital gain is subject to CGT. In your case, your house has been used for producing assessable income as you have set aside a part of your residence as a home office used exclusively or almost exclusively as a place of business. You will satisfy the 'notional interest deductibility' test as you are entitled to a deduction for mortgage interest in relation to the portion of your home that is used as your home office. Any capital gain in relation to the portion of your home used for the home office will be subject to CGT. | Detailed Reasoning - Calculation of capital gain or loss: Generally speaking, unless the part of the dwelling used to gain assessable income is distinctly of a greater or lesser proportionate value than the rest of the dwelling, the extent to which it was used to gain assessable income will be determined on an area basis. This amount of the capital gain or capital loss will also be determined having regard to the period for which that part of the dwelling was used by the individual or by another person to gain assessable income. In your situation, you will need to apportion the area within your home used for your home office. The formula for apportionment is as follows: | Detailed Reasoning - as main residence: The taxable portion would be included in your assessable income. | Detailed Reasoning - Further issues for you to consider: It is noted that you asked for the private ruling to apply for an indefinite period. The Commissioner does not rule for indefinite or extended periods as there may be changes to the facts of the arrangement or the law in question. Also, a public ruling may issue which affects the private ruling. Therefore, we have only ruled for the 2013 to 2018 financial years.