Mapping Out Your Property to Make the Most of CGT Concessions

This blog was originally posted on Ban Tacs and written by Julia Hartman, founder of the Ban Tacs group and Chief Technical Tax Advisor for Empower Wealth Tax. 
This report is also referenced and expanded in our series, Talking Property Tax with Julia Hartman in Episode 4. Watch it here >>

If your home is on more than 2 hectares (5 acres) of land, you need to keep Capital Gains Tax (CGT) records right from day one. This not only takes discipline and hard work, but requires the right advice which covers your records right down to your lawn mowing fuel. Here’s how to do it:

The first step is to map out your property similar to the 7-acre property in the picture above. Google Earth Satellite Images will give you a bird’s eye view of your property. The snipping tool on windows will allow you to take a screenshot and draw in the boundaries.

Main Residence

In this example, the 3 acres in the middle will be only used for private purposes the whole time the property is owned, so it will be exempt from CGT as the main residence. You will need to apportion the expenses associated with this area in the same way so that they are not included in the area that will be subject to CGT. Seeing as you are going to that trouble you may as well record them in a spreadsheet just in case the main residence exemption is lost, for example selling the property while living overseas. Click here for Bantac’s proprietary spreadsheet that’s designed to help you easily and efficiently keep these records >>

Place of Business

The 1 acre outlined in green will be used as a mechanical workshop with cars and machinery scattered around. If this area is used in the business by the owner or an associate (ie trading trust) for at least half the time the property is owned or 7 1⁄2 years (whichever is the shortest) this 1 acre will qualify for the CGT small business concessions. This concession, with careful planning, can result in the capital gain on that area being tax-free and may even be able to be contributed to Super with no contribution tax and without interfering with the other super caps.

No Use at All

While the 1 acre outlined in pink is included in the land title, it cannot be built on because one day it will be acquired by the government to widen the road. Nevertheless, it could be considered used for private purposes if it is used to park cars or to grow veggie gardens and so far, only 3 of the 5 acres allowed have been used up. This is where the planning comes in from the start.

What if, for example, these owners had instead fenced that area off and said they were not going to use it in any way? Well, then it has not been used for private purposes so the main residence exemption does not apply. There is another option if caught in this situation; ask a valuer if this land is worthless. It might have been worthless when purchased, so none of the purchase costs was attributed to it and, by the same token, when the whole property is sold none of the sale proceeds are attributed to it either because it is still worthless, so while exposed to capital gains tax there is no capital gain.

Agistment

The 2 acres outlined in purple are going to be leased out on agistment to the neighbouring farmer. This makes the area income-producing so it is not used for private purposes and therefore it cannot be covered by the main residence exemption. Furthermore, it cannot be covered by the small business concessions either because agistment is not considered a business. As the whole 5 acres allowed under the main residence exemption have not been utilised, the loss of the CGT concession for a small amount of agistment fees may not be worth it. You can’t even negative gear agistment fees. This is all an example of why it is important to get advice and make a plan right from the start.

This property could end up completely CGT-free with the right planning. Here’s how.

Have a valuer report that the 1 acre at the front has worthless now and when it is sold. Keep all the capital gain to just 6 acres and cover the one acre with the workshop with the small business concessions leaving it as just 5 acres. All of these 5 acres can then be covered with the main residence exemption if they are used for private purposes and do not produce income, so there is also no agistment. Maybe keep the grass down with pet goats too.

As a side issue, you may be wondering what happens if the government does come along and acquire that one acre out the front. Well, our first problem would be if the government paid some money for it then it cannot be argued that the land was worthless when it was purchased and worthless when it was sold.

Section 118-250 ITAA 1997 does provide a concession when this happens to an area of land that is covered by the main residence exemption, in that even though it is not sold with the dwelling it can utilise the main residence exemption. But of course, you are left with the problem of another acre on the property not being able to be covered by the main residence exemption so it may still be worth exposing it to CGT depending on how your map works.

It might be worthwhile to argue that the value of the land was always what the government paid for, as there was no other option than to sell it to the government. That may help argue that the acre’s share of the purchase price is the same as what the government paid for it. That way you can expose it to CGT but when all is said and done, there is still no actual capital gain.

Once again, this highlights the importance of good advice and planning from the start.

If you’re looking for an experienced tax accountant that’ll give you good advice and planning from day one, book in a no-obligation initial consultation with us today! You can learn more about it here or simply fill in the form below and one of our qualified tax accountants will get in touch with you soon.