Private ruling: Main residence exemption and rental expenses
Date of advice: 21 November 2016
Published: March 2017
Ruling period: Year ended 30 June 201X | Year ended 30 June 201X | Year ended 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Are you entitled to a deduction for the expenses incurred while your property was vacant? | A1: No. | Q2: Are you able to apply the absence rule for the period you were not living in your main residence and get the main residence exemption? | A2: Yes.

Relevant facts and circumstances: You purchased a property. Since settlement you were living in the property and treated it as your main residence. You moved out of the dwelling and decided to rent the dwelling. You engaged in activities to rent out the property including obtaining the rental appraisal letter from a real estate agent to ascertain the actual market rental price, advertising to friends and families, and asking people to find the ideal potential candidate who would want to rent the property. You ended up selling the property.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subdivision 118-B

Reasons for decision: Summary: Rental 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. In order to be eligible to claim expenses that relate to your rental property, you must be holding the property or using part of the property for the purpose of gaining or producing assessable income. Generally, a property is considered to be held for the purpose of gaining or producing assessable income where it is either tenanted, listed with an agent as being available for tenancy or where the owner is making active and bona fide efforts in relation to the letting of the property. In determining whether an owner is making sufficient efforts or steps in relation to the letting of the property is a question of fact to be decided in each case. Bona fide efforts to rent the property would include such activities as listing the property with a real estate agent, placing advertisements in newspapers, and not restricting availability (for example, by making the property unavailable for rent during holiday periods) to ensure the taxpayer's private use and enjoyment of the property. The following cases considered the question of what constitutes active and bona fide efforts to let a property. Inglis and Anor v. FC of T 87 ATC 2037 ( Inglis and Anor's Case ) the taxpayer owned a house at a beach resort on the New South Wales coast. The property was mainly let during school holidays and at Easter. The house had been let for approximately 12 weeks during the 1983 year, 5 weeks during the 1984 year, 11 weeks during the 1985 year and 6 weeks during the 1986 year. The property had been advertised by word of mouth and in the Canberra Times . The Administrative Appeals Tribunal (AAT) held that the taxpayer was entitled to deductions for expenses based only on the period the property was let. In reaching this decision, Deputy President R K Todd stated (at page 2049): While it is true that the property was vacant and theoretically available at all times, it cannot be said to have been truly available for letting unless some perceptible effort was being made to obtain tenants in respect of those times, or at least some step taken to draw its availability to the attention of the public, the classic method of so doing being the placing of it with an agent. The sufficiency of the steps taken is a question of fact to be decided in each case, but in this case, considering the irregular advertising and the restriction of the opportunity of renting to Canberrans, there has in my view been insufficient done for it to be able to be said that the property was available for letting for periods adequate to support the claims made. In Case V133 88 ATC 847 ( Case V133 ) the taxpayers, a husband and wife, owned a holiday home in the Port Stephens area. They had no problems letting the house over Christmas and New Year. However, there was only limited interest at other times of the year. During the 1983 and 1984 years, the taxpayers had occupied the house on a number of nights and claimed that for the balance of the year the house was available for letting. The AAT held that the taxpayers were entitled to deductions for expenses based on the period the property was let and available for letting. In reaching this decision, Senior Member B J McMahon stated (at page 848): A selection of advertisements and promotions was tendered in evidence. These included display advertisements inserted in newspapers, such as The Land and Open Road , as well as in the daily newspapers and in specialised journals, such as Qantas News . There were also tendered letters which the husband had written to companies associated with the proposed aluminium and power developments in an endeavour to interest those companies in taking block bookings for their employees. The property was also listed with several real estate agents. Over the period of two years after the house was built, evidence was given that approximately $2,000 had been spent in advertising. In your case we acknowledge that you have undertaken some efforts to rent out your property by obtaining an appraisal letter from a real estate agent, advertising to friends and families, and asking people to find the ideal potential candidate. However, it is considered that you have not made active and bona fide efforts to rent out the property. The means of advertising you adopted meant that the property was made available for rent only to a small section of the general public as in Inglis and Anor's Case and not to a large section of the general public as in Case V133 . Therefore as the property is not been made available for rent any expenses incurred in relation to the property are not deductible under section 8-1 of the ITAA 1997. Main residence exemption The main residence exemption under subdivision 118-B of the ITAA 1997 may allow a taxpayer to disregard all or part of any capital gain or capital loss they made from a capital gains tax (CGT) event that happens to their ownership interest in a dwelling where the dwelling was their main residence. The main residence exemption allows the capital gain or loss from the disposal of a dwelling to be disregarded for CGT purposes if the taxpayer is an individual, the dwelling was the taxpayers main residence throughout the ownership period and the interest did not pass to the taxpayer as a beneficiary in, or as the trustee of, the estate of a deceased person. However, subject to the absence rule, a taxpayer will only get a partial exemption for a CGT event that happens in relation to their ownership interest in a property if the dwelling was their main residence for only part of their ownership period. The absence rule The absence rule allows a taxpayer to choose to treat a dwelling as their main residence even though they no longer live in it. A taxpayer cannot make this choice for a period before a dwelling first becomes their main residence. If a taxpayer does not use their dwelling to produce income, for example, it is left vacant or used as a holiday home then they can treat the dwelling as their main residence for an unlimited period after they stop living in it. If a taxpayer does use their dwelling to produce income, for example, they rent it out or it is available for rent, they can choose to treat it as their main residence for up to six years after they stop living in it. In your case you purchased a property that became your main residence. You then moved out of the property and it was left vacant. You are therefore able to apply the absence rule for the period the property was vacant.