Frederic signed the contract to sell his home in April 2021 for $1,950,000. The property, 0.5 acres in size, was purchased in April 1999 for $185,000 for the purposes of making it his own residence. He moved in immediately having previously rented a home. Frederic paid $17,000 in interest relating to a loan for the original purchase. The loan was fully repaid by 2005. Attached to the house was a self-contained studio apartment. Despite being connected via a door in the main hallway of his residence, it has a separate front door along the side of the house. The studio apartment represented 1/3^rd of the total house. In 2008, Frederic decided to rent the studio apartment to a tenant via a real estate agent. This occurred in April 2008, when the property was valued at $680,000. He continued to rent the studio apartment until the property was sold. Prior to renting it out, he had used the space for daily exercising and for visitors, including family and friends. In 2015, he spent $3,000 on repairs to the studio apartment, which he claimed as an allowable deduction against the rental income, whilst a further $9,000 on improvements to the property were incurred during 2019. The latter have not been claimed against assessable income. Frederic has carried forward losses of $1,500 relating to the sale of a gold ring in a prior year. He also made a capital loss of $11,800 relating to the disposal of his sailing boat in January of the current tax year. Since breaking his ankle, he no longer enjoys sailing in his spare time.

Question 1)

Explain whether Frederic will be entitled to the main residence exemption, both in terms of his (i) rental activities; and, (ii) what constitutes a dwelling in respect of his place of residence (4 marks).

(Hint: Consider locating on the ATO Legal (Links to an external site.) database the following tax determination in considering the word dwelling: Tax Determination 1999/69 Income tax: capital gains: can the term dwelling as defined in section 118115 of the Income Tax Assessment Act 1997include more than one unit of accommodation?)