Private ruling: Partial main residence exemption
Published: November 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Questions and Answers: | 1. Are you eligible for a full main residence exemption for the period you were working in a remote area? | No. | 2. Are you eligible for a partial main residence exemption for the period you were working in a remote area? | Yes.

Relevant facts and circumstances: In 200X, you purchased a house as a main residence in a major city. However, your employment was in a remote area, which also provided you with free accommodation. From the time of your purchase, to its sale, your house held your furniture and belongings and its utilities were billed to you. Your house had three bedrooms. During your period of employment in the remote area, you rented your house to a relative as caretaker, who used one bedroom and the general facilitates of the house. One large bedroom was permanently your bedroom and you would reside at the house during most school holiday periods, particularly the Christmas holidays. Your relative paid you what you considered to be a percentage of the market rental value and you lodged the rental income in your tax returns, from which you deducted the same percentage of the associated expenses. In 200Y, you moved permanently into your house, after taking employment in the city. During the relevant year you sold the house.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 118-B | Income Tax Assessment Act 1997 Section 118-145 | Income Tax Assessment Act 1997 Section 118-190

Reasons for decision: Summary: Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) can disregard a capital gain or capital loss that happens to a dwelling that is a main residence. Section 118-145 therein is about absences. It provides if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence for a maximum period of six years if you use the part of the dwelling that was your main residence for the purpose of producing assessable income. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence. Section 118-145 provides the following example: You live in a house for 3 years. You are posted overseas for 5 years and you rent it out during your absence. On your return you move back into it for 2 years. You are then posted overseas again for 4 years (again renting it out), at the end of which you sell the house. You have not treated any other dwelling as your main residence during your absences. You may choose to continue to treat the house as your main residence during both absences because each absence is less than 6 years. You can make this choice when preparing your income tax return for the income year in which you sold the house. Section 118-190 is about use of dwelling for producing assessable income. Subsection 118-190(1) allows a partial exemption for a CGT event that happens in relation to a dwelling if the dwelling was used for the purpose of producing assessable income (such as rental income). The Tax Office publication Guide to capital gains tax 2014 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 However, subsection 118-190(3) provides you ignore any use of the dwelling for the purpose of producing assessable income during any period that you continue to treat the dwelling as your main residence under section 118-145 (about absences). The Tax Office publication Guide to capital gains tax 2014 states the following factors may be relevant in working out whether a dwelling is your main residence: • the length of time you live there (there is no minimum time a person has to live in a home before it is considered to be their main residence) • whether your family lives there • whether you have moved your personal belongings into the home • the address to which your mail is delivered • your address on the electoral roll • the connection of services (for example, phone, gas or electricity) • your intention in occupying the dwelling. In your case, we are satisfied your dwelling was your main residence from the time you purchased it. However, we consider the 'absences' rule under section 118-145 does not apply to you because: (i) you never fully vacated the home since it contained your personal belongings; (ii) you remained liable for the connected services; (iii) it was always available for your use; and (iv) you did not have another main residence that contained your personal belongings for which you were liable to pay for the connected services. Therefore, you cannot receive the exemption in subsection 118-190(3), which allows a full main residence exemption when renting a residence for a period of less than six years. Instead, because your main residence was always available for your use, we consider subsection 118-190(1) applies. Here, you can only receive a partial main residence exemption, where you cannot use the tax exemption for the time and proportion to which your tenant used your residence. For any capital gain you must pay tax on, you qualify for discount capital gains.