Private ruling: Main residence exemption
Date of advice: 23 May 2017
Published: September 2017
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Will any partial main residence exemption on the sale of your property be determined with reference to the number of days the property was actually rented? | A1: Yes.

Relevant facts and circumstances: You acquired a property that became your main residence. The property later began to produce rental income when you started renting out of the property. During times when the property is available for rent, but vacant nonetheless, the space revers to private, family usage and the usage is as a family home.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 Section 118-190

Reasons for decision: Summary: Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a capital gain or capital loss results from a CGT event occurring. The most common CGT event, A1, occurs when you dispose of a CGT asset to someone else. You will trigger CGT event A1 when you sell your property. Under section 118-110 of the ITAA 1997, you can generally disregard any 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 when: ● the dwelling was your home for the whole period you owned it; ● the dwelling was not used to produce assessable income; and ● any land on which the dwelling is situated is not more than two hectares. In your case, you advise that the dwelling has been your main residence for your entire ownership period but it has also been used to produce assessable income. Accordingly, you are only eligible for a partial main residence exemption (section 118-190 of the ITAA 1997). In calculating your capital gain, subsection 118-190(2) of the ITAA 1997 states that the capital gain or capital loss that you would have made apart from this section from the CGT event is increased by an amount that is reasonable having regard to the extent to which you would have been able to deduct interest. This is referred to as the 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. As a general guide, you should apportion expenses on a floor-area basis based on the area solely occupied by the renter (user), and add that to a reasonable amount based on their access to common areas. You can only claim expenses for when the room was rented to a client. If you use the room in any capacity, for example for storage or as an office when you do not have guests staying, then you cannot claim deductions for expenses when the room is not occupied. In your situation, you will need to apportion the area within your dwelling used for the income producing purposes. As the portion of your property that is available for rent reverts to private usage when it is not being rented, only the days your property is actually rented will be included when calculating the percentage of the period of ownership when the property was not being used as your main residence. The formula for apportionment is as follows: Capital gain x Percentage of floor area not used as main residence x Percentage of period of ownership that that part of the home was not used as a main residence = Taxable portion The formula to calculate the percentage of period of ownership that that part of the home was not used as a main residence is as follows: Number of days part of the property was actually rented Total days of your ownership period