Smart ways John can minimise tax

Noel Whittaker explains the capital gains tax implications of John’s residence and his block of land now that council rules have changed to allow for sub-division.

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Q. John
YourLifeChoices recently had an article on the repercussions for the Age Pension of owning a house on several hectares. I’d like to know the tax repercussions.

About 26 years ago, we bought 20 hectares and built a house on it. We have lived in it ever since. When we bought it, council rules did not allow it to be subdivided. When I inquired last year I was told it can now be divided in half. Can you explain the tax liabilities?

A: Julia Hartman, of National Accountants Group Ban Tacs, says that you are only allowed to cover two hectares with your main residence exemption so the capital gain on the rest of the property will be subject to capital gains tax (CGT).

The costs associated with the property and the selling price will need to be apportioned. Other than the land under the dwelling, you are allowed to choose what pieces of the land you cover with the main residence exemption providing the area has been used for private purposes.

This is where some planning comes in. A segment of the property might be a flood-prone swamp that may have been worthless when you bought the property and still is. Put that in the 18 hectares that is exposed to CGT.

A valuer could find parts of the land to have gone up in value more than the rest because, for example, a neighbour has cleared their land and you now have views from there. Consider that for your main residence exemption.

Expose to CGT an area that you have wasted a lot of money on, such as stables you built that have now fallen into disrepair. Include these in the area exposed to CGT and add the cost of the stables to the cost base.

Fortunately, it sounds like you bought the property after 20 August 1991, so you will be entitled to increase the cost base by holding costs under section 110-25(4) ITAA 1997. This could even include slashing costs, rates, interest, etc.

Don’t let the fact that you do not have receipts put you off. A record is what is required and under section 121-30(1) ITAA 1997, you could try to argue for exemption: that it was reasonable for you to expect that the gain was going to be ‘disregarded’ under the main residence exemption. 

If you would like to know more, here is an article I wrote on this subject several years ago. Please note that if you decide to subdivide and sell off half the block, there is a lot more to consider. You need to get advice first.

Do you have a question you’d like Noel to tackle? Email us at [email protected]

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature, and readers should seek their own professional advice before making any financial decisions.

Written by Noel Whittaker

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