Follow-up Notes for CPDS Training Accountants Seminar
Become an Investment Property Tax Expert Seminar Notes

Training - Ownership Interests
Having examined the Sections 110, 118 and 128 of the CGT Act you would be well aware of the relevance of the definition of ownership interests

Section 995 - the definitions section of the Act Provides the following:
Note italics denotes extracts from the Act

ownership interest: an ownership interest:

(a) in land or a *dwelling - has the meaning given by section 118-130; and
(b) in a company or trust - has the meaning given by section 125-60.
ownership period of a *dwelling has the meaning given by section 118-125.

The sections referred to above:
SECTION 118-125
118-125 Meaning of ownership period

Your ownership period of a *dwelling is the period on or after 20 September 1985 when you had an *ownership interest in:
(a) the dwelling; or
(b) land (*acquired on or after 20 September 1985) on which the dwelling is later built.

SECTION 118-130 Meaning of ownership interest in land or a dwelling
118-130(1)
You have an ownership interest in land or a *dwelling if:
(a) for land - you have a legal or equitable interest in it or a right to occupy it; or
(b) for a dwelling that is not a flat or home unit - you have a legal or equitable interest in the land on which it is erected, or a licence or right to occupy it; or
(c) for a flat or home unit - you have:
(i) a legal or equitable interest in a *stratum unit in it; or
(ii) a licence or right to occupy it; or
(iii) a *share in a company that owns a legal or equitable interest in the land on which the flat or home unit is erected and that gives you to a right to occupy it.

118-130(2)
For land or a *dwelling that you *acquire under a contract, you have an ownership interest in it from:
(a) the time when you obtain legal ownership of it; or
(b) if the contract or a related contract gives you a right to occupy it at an earlier time - the earlier time.

118-130(3)
For land or a *dwelling where you have a contract for the happening of the *CGT event, you have an ownership interest in it until your legal ownership of it ends.

Still confused? Yes so am I, let's just take hold of the last point:

For land or a dwelling that you acquire under a contract, you have an ownership interest in it from the time when you obtained legal ownership of it or if the contract or a related contract gives you a right to occupy it at an earlier time - the earlier time.

For land or a dwelling where you have a contract for the happening of the CGT event, you have an ownership interest in it until your legal ownership of it ends.

So it looks to me that ownership interest is settlement to settlement unless you move in before settlement.

It also appears that ownership interest and legal ownership interest mean the same thing except if you move into the property before settlement. Note this discussion only applies to land and dwellings.

Section 104 covers all types of CGT assets and CGT events and when that event is take to have happened. It calls this the time of the event not the ownership period. We are usually only considering event A1

SECTION 104-5 Summary of the CGT events

Event number and descriptionTime of event is:Capital gain is:Capital loss is:
A1 Disposal of a CGT assetwhen disposal contract is entered into or, if none, when entity stops being asset's ownercapital proceeds from disposal less asset's cost baseasset's reduced cost base less capital proceeds
[See section 104-10]

B1 Use and enjoyment before title passeswhen use of CGT asset passescapital proceeds less asset's cost baseasset's reduced cost base less capital proceeds
[See section 104-15]

C1 Loss or destruction of a CGT assetwhen compensation is first received or, if none, when loss discovered or destruction occurredcapital proceeds less asset's cost baseasset's reduced cost base less capital proceeds
[See section 104-20]



Let's just look at CGT event A1 and bear in mind that if the purchaser moves in before settlement then you need to consider B1. The table above refers to section 104-10 this is just an extract, just the part that covers the basic case

104-10(3)          ITAA 36
The time of the event is:
(a) when you enter into the contract for the *disposal; or
(b) if there is no contract - when the change of ownership occurs.

Example:
In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.
The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place).

Note 1:
If the contract falls through before completion, this event does not happen because no change in ownership occurs.

Note 2:
If the asset was compulsorily acquired from you: see subsection (6).

The above makes no reference at all to ownership interest. So when reading all the CGT laws where it talks about ownership interest we are talking settlement date unless the purchaser moves in before settlement. The fact that the CGT event is taken to have happened at contract date is to be considered in isolation. So what does this mean in regard to the 4 year rule? Which states:

Subdivision 118-B - Main residence
Rules that may extend the exemption

SECTION 118-150 If you build, repair or renovate a dwelling ITAA36

118-150(1)
This section applies to land in which you have an *ownership interest (except a life interest) if you build a *dwelling on the land, or repair, renovate or finish building a dwelling on the land. 118-150(2)
You can choose to apply this Subdivision as if the *dwelling that you are building, repairing or renovating on the land were your main residence from the time you *acquired the *ownership interest. 118-150(3)
You can make the choice only if:

(a) a *dwelling on the land that you construct, repair or renovate becomes your main residence as soon as practicable after the work is finished; and
(b) it continues to be your main residence for at least 3 months.

118-150(4)
There is a time limit during which the choice can operate. This is the shorter of:
(a) 4 years before the *dwelling becomes your main residence; or
(b) the period starting when you *acquired your *ownership interest in the land and ending when the dwelling becomes your main residence.

118-150(5)
If there was already a *dwelling on the land when you *acquired your *ownership interest and you or someone else occupied it after that time, the period in subsection (2) and paragraph (4)(b) starts when the dwelling ceased to be occupied.

118-150(6)
Once you make the choice, no other *dwelling can be treated as your main residence during the period referred to in subsection (4), except if section 118-140 (about changing main residences) applies.

Subsection (5) is the area we were concerned about. As long as the previous owner or their tenant vacates on or before settlement day you don’t have to move in for up to 4 years if you are intending to renovate. This very relevant for people who for one reason or another did not move in as soon as practical after settlement. Providing the house is empty from settlement and they renovate before moving in and live there for at least 3 months before selling then they can cover it with their main residence exemption from the date of settlement.

Subdivision 118-B - Main residence
Rules that may extend the exemption
SECTION 118-135           [No equivalent]
118-135 Moving into a dwelling
 If a *dwelling becomes your main residence by the time it was first practicable for you to move into it after you *acquired your *ownership interest in it, the dwelling is treated as your main residence from when you acquired the interest until it actually became your main residence.

As soon as practical does mean after settlement but doesn't mean after a sitting tenant moves out.