Question

Question 3: 10 marks, 10% of the subject. Use complete sentences. In April 2016 Norman, a hairdresser, bought his main residence in Melbourne for $700,000. Legal and stamp duty costs associated with the purchase were $70,000. The home had six rooms. In April 2017 Norman spent $100,000 in making part of his home suitable for his hairdressing business. The business used two of the rooms and he started working from home in May 2017. 3 Advise Norman of the capital gains tax implications of the above facts for the 201617 year. To support the analysis in your answers refer where appropriate to the ITAA 1936, ITAA 1997, Tax Rulings and/or case law.

Answer 1

As per the Australian tax law, capital gains tax is fully exempted on the sale of real estate that serves as the seller's family home. But, if a part of the family home is being used for other purposes e.g. put up on rent, business purpose etc then full exemption from capital gains tax is not available. In such a case, partial exemption from capital gains tax is available. The amount of exemption available is proprotional to the percentage of total house area being used exclusively for residential purpose. In this case, out of the six rooms, four are being used exclusively for residential use and two for hairdressing business. Which means that about 67% of the house is being used for residential purpose. Partial exemption on capital gains is also dependent on the percentage of ownership period that the home was used exclusively for residential purpose. In this case it is one year. In case Norman decides to sell his house in future, he will have to pay capital gains tax at the following rate- Capital gains tax = capital gain x percentage of house not used as residence x percentage of period of ownership that part of the house was not used as a main residence.