• What is an ownership interest?

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    In the case of a flat or home unit, you have an ownership interest if you have:

    • a legal or equitable interest in a strata title in the flat or home unit, or
    • a licence or right to occupy the flat or home unit, or
    • a share in a company that owns a legal or equitable interest in the land on which the flat or home unit is constructed and that share gives you a right to occupy the flat or home unit.

    In the case of a dwelling that is not a flat or home unit, you have an ownership interest if you have:

    • a legal or equitable interest in the land on which it is constructed, or
    • a licence or right to occupy it.

    In the case of land, you have an ownership interest if you have:

    • a legal or equitable interest in it, or
    • a right to occupy it.

    An equitable interest may include life tenancy of a dwelling that you acquire, for example, under a deceased's will. This is known as a life interest.

    When do you acquire an ownership interest?

    For the purposes of the main residence exemption, you have an ownership interest in a dwelling or land you acquire under a contract from the time you obtain legal ownership (unless you have a right to occupy it at an earlier time).

    You have legal ownership of a dwelling or land from the date of settlement of the contract of purchase (unless you have a right to occupy it at an earlier time) until the date of settlement of the contract of sale. This period is called your ownership period. If the home is your main residence for the whole of the ownership period, and you do not use it to produce assessable income, the home is fully exempt.

    Example
    Full exemption

    Frank signed a contract on 14 August 1998 to purchase land from a developer and to have a house constructed on the land. Under the contract, settlement did not occur until construction was completed on 26 October 1999.

    Frank moved into the house immediately upon settlement of the contract he had with the developer, that is, 26 October 1999. He did not have a right to occupy the house at an earlier time under the purchase contract. He signed the contract to sell it on 25 May 2001 and settlement occurred on 20 July 2001. The house was Frank's main residence for the full period he owned it and he did not use any part of it to produce income.

    For capital gains tax purposes, Frank is taken to have acquired the land on which the house was constructed on the date he entered into the contract-14 August 1998. However, because the house was Frank's main residence for the whole period between settlement of the purchase contract and settlement of the sale contract, it is fully exempt.

    The period between when Frank entered into the purchase contract and actually lived in the house - 14 August 1998 to 25 October 1999-is ignored. This is because the relevant dates for the main residence exemption are the settlement dates or, if you had a right under the purchase contract to occupy the dwelling at an earlier time, that time until settlement of the sale contract.

    Relevant dates in applying the part exemption

    If your main residence is not fully exempt, the dates you enter into the purchase and sale contracts are important. You enter into a contract when you exchange or otherwise execute the contract.

    The dates you enter into the contracts are relevant for a number of reasons, as outlined below.

    1. A CGT event occurs when you enter into the sale contract, and any capital gain is included in your tax return for the year of income in which the CGT event occurs.
    2. If the sale contract was entered into before 11.45am on 21 September 1999 and you held the dwelling for at least 12 months, you can use the indexation method to calculate any capital gain. To do this, you index the cost base of the property from the date you entered into the purchase contract until the date you entered into the sale contract. If you make a capital loss, you cannot index the cost base.
    3. If the purchase contract was entered into after 11.45am on 21 September 1999 and you held the dwelling for at least 12 months, you reduce your capital gain by the CGT discount of 50%, after applying any capital losses.
    4. If the purchase contract was entered into before 11.45am on 21 September 1999 and the sale contract was entered into after this time-and you held the dwelling for at least 12 months-you can use either the indexation or the discount method to calculate your capital gain. To use the discount method, you reduce your capital gain by the CGT discount of 50% after applying any capital losses. To use the indexation method, you index the cost base of the property from the date you entered into the purchase contract until 30 September 1999, or until the date you entered into the sale contract if this was earlier than 30 September 1999. If you make a capital loss, you cannot index the cost base.

    The settlement dates are still used to calculate the period for which the main residence exemption applies.

    Example
    Part exemption

    The facts are the same as in the previous example except that Frank rented out the house from 26 October 1999-the date of settlement of the purchase contract-until 2 March 2000.

    Frank makes a capital gain of $30 000 on the house. To work out the part of the capital gain that is exempt, Frank must determine how many days in his ownership period the dwelling was not his main residence.

    Frank had an ownership interest in the property from settlement of the purchase contract (26 October 1999) until settlement of the sale contract (20 July 2001)-a total of 634 days.

    The period between the dates the purchase contract was signed (14 August 1998) and settled (25 October 1999) is ignored. Because the house was not Frank's main residence from 26 October 1999 to 2 March 2000 (129 days), he does not obtain the exemption for this period.

    Frank calculates his net capital gain as follows:

    Capital gain $30 000 X

    129 days
    634 days

    = taxable portion   $6 104

    Because Frank entered into the purchase contract before 11.45am on 21 September 1999 and entered into the sale contract after this time (and he owned the house for at least 12 months), he can choose either the indexation or the discount method to calculate his capital gain. Frank decides to reduce his gain by the CGT discount of 50% after applying any capital losses.

    Because Frank signed the sale contract on 25 May 2001, the CGT event occurred in the 2000-01 income year, even though settlement occurred in the next income year. Frank shows the capital gain in his 2000-01 income tax return.

    Last modified: 31 Aug 2010QC 16195