Tax Tip 123: Building on Pre-CGT Land

Building on Pre-CGT Land


Property acquired before 1985 is not subject to CGT. However where substantial changes are introduced to the buildings on that land or new buildings are erected then the building works itself can be subject to CGT.


Example

Mohammed Adler bought his investment property in 1984. It is therefore not subject to CGT. Mohammed decides to build a new granny flat out the back of this house, one the same land.


The new granny flat will be treated as a separate asset to the land for CGT purposes. Mohammed will get the 50% CGT discount on the house if he sells it more than 12 months after commencing construction. Any gain in the land value will not be taxed.


A valuer should be able to apportion the values between the land and the house as of the date sold.

 

The separate asset threshold is a indexed amount which is approx $140K and if that threshold is exceeded then an improvement or new construction is considered a separate asset to the original. GFs are interesting as the improvement cost can often be under the threshold but to the extent its depreciable it is a separate asset in any event. The asset threshold is often evident in improvements to a pre-CGT asset. ie a older house.

Examples :
1. Spend $132K to renovate a pre-CGT asset. The improvement is less than threshold and no separate asset exists. The reno is also considered pre-CGT.
2. Spend $155K to reno a pre-CGT asset. A seperate asset exists and when the pre-CGT asset is sold the reno have its own cost base and apportioning the property sold will be required. This issue will also affect costbase for beneficiaries on death.

The above ATO link indicates a matter that has concerned me for a while. Where a GF exceeds the threshold this rule appears to EXCLUDE the land from the GF costbase. Its a reason I consider the land may retain a 100% main residence exemption. I just havent found time to seek a ruling.

Quote : A building, structure or other capital improvement on land that you acquired on or after 20 September 1985 is a separate CGT asset, not part of the land, if a balancing adjustment provision applies to it