First Home Owner Transfer Duty Exemption, PPoR, CGT and a Lodger

Hi all,

I hope this is a simple question - but in my research it has become increasingly complicated...

My situation is this:
- Bought first home (a 2 bedroom appartment) 01/02/2011
- Claimed FHOG
- Claimed First Home Transfer Duty Exemption
- I have lived in the property since 28/03/2011 when the previous owners tenant moved out (allowed under Transfer Duty Exemption)
- The appartment is my PPoR
- I want to take in a lodger to help with the cost of living

I have three main questions:
1) Am I correct that having a lodger does not trigger reassessment of the Transfer Duty Exemption (Duties Act 2001, Section 153), since it is not a transfer, lease or a grant of exclusive possession?
2) How should I handle the money coming from the lodger? Is this income non-assessable (and not declare it) since it is contributing to the running of the household and not a source of income (how to justify this if so?). If not, can I declare this income and claim back a proportion of the mortgage repayments without triggering a reassessment for the Transfer Duty Exemption.
3) Depending on the answer to (2): What are the CGT implications for having a lodger? Since the home is my PPoR does the 6 year rule for PPoR CGT exemption still apply if I live in the property and have a lodger?

Very confused about the rulings and what I can/cannot legally do.

In a perfect situation I would like to keep the Transfer Duty Exemption as well as be CGT exempt when I go to sell the property.

Please help,
Thanks!
--Dan
 
1) Yes
2) You should be honest, declare the income, and claim legitimate expenses based on the percentage of the property you are renting.
3) GCT is calculated on the portion of the property rented, or used for income producing purcposes on a proportional basis. So , if you kick the lodger out after a year, and sell in 19 years time, you would be eligible for 5% (1/20th) of the capital gain to be added to your taxable income for that year.

Im not sure if you could use the 6 year rule in the case of a lodger, to get out of CGT entirely, however, Id assume not.

PS, I am not an accountnants bootlace.
 
WRT (3) - If the lodger only uses, say, 50% of the floor space of the house, does that 5% in your example become 2.5%? Or is CGT on "income-producing" based on time instead?
 
1) Am I correct that having a lodger does not trigger reassessment of the Transfer Duty Exemption (Duties Act 2001, Section 153), since it is not a transfer, lease or a grant of exclusive possession?
Correct

2) How should I handle the money coming from the lodger? Is this income non-assessable (and not declare it) since it is contributing to the running of the household and not a source of income (how to justify this if so?). If not, can I declare this income and claim back a proportion of the mortgage repayments without triggering a reassessment for the Transfer Duty Exemption.
Don't declare it and don't claim expenses associated with it either.
You are not running a "boarding house" which would be a business and therefore you'd declare income & expenses. But taking in 1 boarder on a casual basis is not a business.

3) Depending on the answer to (2): What are the CGT implications for having a lodger? Since the home is my PPoR does the 6 year rule for PPoR CGT exemption still apply if I live in the property and have a lodger?
No CGT implications, it is a private arrangement to have a boarder in to help with the costs of running a household.

http://law.ato.gov.au/atolaw/view.htm?docid=ITR/IT2167/NAT/ATO/00001
Point 18. in the above pretty much clears it up for you :)

This same topic was also discussed here:
http://www.somersoft.com/forums/showthread.php?t=49165
 
The 6 year rule (s118-145) only applies to absences.

I think with Q2 you are asking if you can treat the payment from the tenant as 'board' and therefore not income. I think for this to be the case the payment they make must only be for general bills such as food, electricity etc. Not interest or loan repayments. So it would depend on who much rent you charged as to whether this was board or rent.
 
Thanks - I had read that thread but it was mainly the CGT implications that had me worried.

I completely agree with you that I'm not running a business - in fact I could easily use the lodger for negative gearing but I'd rather keep it easy and CGT free. I just need a lodger to share the cost of living.

My worry, of course, is in being assessed etc. Does lodging a bond with the RTA put up red flags? Should I avoid having the payments deposited into my bank account?

Finally, does the 6 year rule (one I don't fully understand) only apply if you do not live in the house? Next year I may have to go overseas for work - and when I am gone will rent the house out to a proper tenant. When I return (possibly ~3 years later) and if I sell, am I correct that there will be no CGT? However if I rent out a room while I am there (to a proper tenant, after the 1 year period for Transfer Duty Exemption), I am liable for CGT? This doesn't make sense to me...
 
Yes, you cannot be there and claim the 6 year rule.

If you rent out your house while absent you could claim the exemption from CGT if you are not claiming any other property, the land is less than 2 hectares etc.

If you rent out a room while living there then that portion of the house will lose the exemption.

I imagine lodging a rental bond would mean you are receiving rent.
 
To Terryw - for the Transfer Duty Exemption I need a lodger not a tenant on the basis of "exclusive possession". If I can, I want to do this completely above-board. From the Duties Act, I know I can take a lodger as they do not have exclusive possession. Once I do that, I want to be able to rent to them with as little CGT impact as possible.

Like I said, I could use the lodger for negative gearing (who knows... maybe I should??). But I'm almost certain this would trigger reassessment of the Transfer Duty Exemption (would it?).

For simplicity's sake, I'd much rather know the best way to have money from a lodger, above-board, and not have it impact CGT (is this possible?).

The 6 year rule is confising me since I could do this if I wasn't physically in the house... why does it matter if I am there or not?
 
Hmm, I think my confusion comes from this: The 6 year rule allows you to keep a property as your PPoR when you are not there. Then when you sell, you claim CGT exemption due to it being your PPoR... My confusion is here: 6 year rule grants PPoR which in turn grants full CGT exemption (is this correct), so if, with a lodger, the place is my PPoR, why does this not grant full CGT exemption?

Or does the 6 year rule DIRECTLY grant full CGT exemption on the proviso that it is your only PPoR? If the latter... why not extend this to people having a renter while they are also in the house themselves?

By the way, thanks for your help. Sorry if I'm asking too many questions - I just wish this situation were as simple as I had hoped.
 
Also, a question for Propertunity - Point 18 on that link, where is the line drawn?

If I were asking $200/week, plus food, electricity etc... Point 18 says I need not claim the "plus food, electricity etc.", but what of the $200?
 
Hmm, I think my confusion comes from this: The 6 year rule allows you to keep a property as your PPoR when you are not there. Then when you sell, you claim CGT exemption due to it being your PPoR... My confusion is here: 6 year rule grants PPoR which in turn grants full CGT exemption (is this correct), so if, with a lodger, the place is my PPoR, why does this not grant full CGT exemption?

Or does the 6 year rule DIRECTLY grant full CGT exemption on the proviso that it is your only PPoR? If the latter... why not extend this to people having a renter while they are also in the house themselves?

By the way, thanks for your help. Sorry if I'm asking too many questions - I just wish this situation were as simple as I had hoped.

Dan, that is confusing!

see 118-145(1)
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. "

Note the word ceases.
 
Also, a question for Propertunity - Point 18 on that link, where is the line drawn?

If I were asking $200/week, plus food, electricity etc... Point 18 says I need not claim the "plus food, electricity etc.", but what of the $200?

Look at para 19

19. Care should be taken to ensure, however, that what may be termed ordinary tenancy arrangements are not dressed up in the form represented by the above heading. If the owner were not party to the sharing arrangements or if the occupants made a fixed contribution to the owner for household costs, there would be a presumption that the payments made by the occupants contained an element of reward to the owner for the occupancy of the residence. Enquiries will be necessary in these cases to establish the extent of the benefit to the owner which should be included in his assessable income. Income tax deductions for losses and outgoings attributable to the residence would be determined on the same basis as applies under the heading "arms length letting of an identified part of a residence, e.g. a bedroom, with access to general living areas of the residence".
 
"...you may choose to continue to treat is as your main residence."

I treat my current house as my main residence. Why can I not therefore take a tenant and be CGT exempt? People who leave their main residence but treat it as their main residence can.
 
So Paragraph 19 says I MUST declare the income from the lodger - this conflicts with Propertunity's response.

If I'm going to do that, I may as well offset with expenses too. If I do that, am I forgoing CGT exemption, and possibly triggering a reassessment of my Transfer Duty Exemption?

Could the ATO / OSR argue that they are not a lodger, but are a tenant?
 
So Paragraph 19 says I MUST declare the income from the lodger - this conflicts with Propertunity's response.

If I'm going to do that, I may as well offset with expenses too. If I do that, am I forgoing CGT exemption, and possibly triggering a reassessment of my Transfer Duty Exemption?

Could the ATO / OSR argue that they are not a lodger, but are a tenant?

Propertyunity referred to para 18

18. What will be decisive in cases of this nature will be the characterization of the arrangements, i.e., do they produce assessable income. Situations arise where the owner of a residence permits persons to share the residence on the basis that all the occupants, including the owner, bear an appropriate proportion of the costs actually incurred on food, electricity, etc. Arrangements of this nature are not considered to confer any benefit on the owner. There is no assessable income and the question of allowable deductions does not arise.

I understand this to mean that if you charge any more than for basic expenses such as food and electricity then you are producing assessable income.
 
Because if you use your residence to produce assessable income then you lose the full exemption under s118-190 ITAA 1997
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.190.html

Thanks, this clarifies the ruling a lot.

"Also, you ignore any use of the * dwelling for the * purpose of producing assessable income during any period that you treat it as your main residence under section 118-147 (about absences) to the extent that any part of the old dwelling mentioned in that section was not used for that purpose just before the old dwelling last ceased to be your main residence."

What do they mean by "just before"? It I go overseas for work, can I not have a renter in the weeks before I leave?
 
I disagree with Propertunity.

Ordinarily, where a taxpayer grants a lease or licence of property, whether wholly or in part, whether at arms length or otherwise, the amount received as rent or in respect of the licence is assessable income. It is necessary to make the qualification 'ordinarily' because some cases may arise, particularly where the arrangements are not at arm's length, where an amount described as or said to be rent is not of income nature and, therefore, not assessable income.

Taxation Ruling IT 2167 deals with the treatment of rental properties. It states in paragraph 4 that:

'(4)….where a taxpayer grants a lease or licence of property, whether wholly or in part, whether at arms length or otherwise, the amount received as rent or in respect of the licence is assessable income. This is illustrated by the decision in FCT v Kowal'

Paragraph 9 in IT 2167 describes "Arms length letting of an identified part of a residence, eg. a bedroom, with access to general living areas"

'(9) The rent payable may cover variable or running costs such as electricity, heating, etc. or the arrangements may require the tenant to pay, in addition to rent, a separate amount towards variable or running costs. The heading would also cover situations where board and lodging is provided….'

In applying IT 2167 to the type of payments envisaged in your case (if at arms length) I think that they will fall within the category of "arms length letting of an identified part of a residence, eg. a bedroom with access to general living areas, and accordingly, the amounts received by you will be assessable income.
 
Okay, I agree with that. Any income would be assessable.

Does having assessable income from a property trigger a reassessment of the Transfer Duty Concession? As far as I can tell (Duties Act, Section 153) it does not.
 
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