Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Capital Gains Tax - Principal Residence Exemption
Summary of proposed amendments
Purpose of amendment: New subsection 160ZZQ(1AB) will apply in circumstances where a legal interest in a dwelling is to pass under an executed contract. Where the contract or a collateral contract confers on the purchaser a right or licence to occupy the dwelling prior to the passing of legal ownership, the period of ownership of the dwelling by the purchaser for the purposes of section 160ZZQ shall be taken to have commenced at the time when the purchaser first occupies the dwelling following the execution of the contract for sale.
Date of effect: The amendment proposed by Clause 57 will apply to the disposal of assets after 19 September 1985.
Subsection 160ZZQ(1AA) makes it clear that the period of ownership of a dwelling for the purposes of the CGT principal residence exemption will commence at the time that legal ownership commences; that is, at the time when the contract for the purchase of the dwelling is settled, rather than the time at which it is executed. This provision therefore excludes the period prior to the settlement of the contract from consideration in determining the period of ownership for the purposes of the application of the principal residence exemption. This was considered appropriate because a purchaser is generally not entitled to occupy a dwelling during this period, and where this is the case the principal residence exemption would otherwise be lost in respect of gains attributable to this period.
It has become apparent that there are limited circumstances in which this provision may not operate appropriately. Certain home ownership schemes may require the acquisition by a purchaser of a legal interest in land to be delayed. For example, a contract for sale may be executed at a particular time, however no registrable interest will pass to the purchaser until an agreed principal amount is paid to the vendor.
A common feature of this sort of arrangement is that the purchaser is entitled under the purchase contract or a collateral contract to occupy the dwelling prior to the acquisition of the legal interest in it. This may be for a period of many years.
Explanation of proposed amendments
New subsection 160ZZQ(1AB) [Clause 57] proposes that where a dwelling is acquired under a contract entered into at a particular time, and legal ownership does not pass until a later time, the period of ownership of the dwelling for the purposes of the CGT principal residence exemption will be taken to commence at the time that the purchaser is first entitled to occupy the dwelling, where that entitlement arises under the contract itself or under a collateral contract.