For most Australians, a property asset will be acquired and disposed of within their lifetime. These property assets can range from their primary place of residence (main residence), investment properties, commercial properties, subdivided land, vacant land and other types of property.
Depending on the type of asset being sold, there can be varying Capital Gain Tax (CGT) consequences.
When buying and selling property assets, the ATO will recognize the activity of selling the assets under two concepts, one being a sale on revenue account and the other being a sale on capital account. Revenue is usually taxed at marginal tax rates with no access to CGT discounts or concessions. In contrast, capital is generally taxed under the capital gains tax regime (benefits identified below).
This article focuses on property assets being sold on a capital account and CGT consequences selling subdivided and vacant land.
Additionally, this article doesn’t discuss the potential GST consequences of selling CGT property assets.
Capital Gains Tax and the 50% Discount
For most property assets purchased or inherited prior to 20 September 1985 which are sold after this date, the property asset will be exempt from CGT.
For Property assets purchased after 20 September 1985, when you sell or dispose of these assets, you will make either a capital gain or loss. This gain or loss is calculated by:
- Sale proceeds of the asset (less selling costs)
- Less: original cost of the asset (plus purchasing costs and improvement costs)
- Equals: Capital gain or loss
If a gain is made on an asset, this gain will be reduced by a CGT discount if the asset being sold:
- Was owned by an individual, superfund or trust entity; and
- Was owned for at least 12 months prior to selling.
The net capital gain (after discount) will generally be included in the taxpayer’s taxable income and tax paid at marginal tax rates (for trusts and individuals). The discount percentage is 50% for individuals or trust entities and 33% for superfunds.
Main Residence Exemption
When a property asset being sold is your main residence (your home), it is generally exempt from CGT if you are an Australian resident and the home:
- has been the home/dwelling of you, your partner and other dependents for the whole period you have owned it;
- has not been used to produce income – that is, you have not run a business from it, rented it out or ‘flipped’ it (bought it to renovate and sell at a profit);
- is on land of 2 hectares or less.
Subdividing my property
If you subdivide a parcel of land, a single titled block of land will be divided into two or more parcels with a separate registered title attached to each new block.
In a subdivided property, although the original parcel of land is divided into two or more blocks, the underlying ownership of all the subdivided blocks remains unchanged. This means that if you held the original piece of land jointly with your partner, the new multiple parcels of land will also be held jointly by each of you.
Importantly, the mere subdivision of a parcel of land will not trigger a CGT event in its own right. The CGT event will be triggered when one or more of the subdivided blocks are sold at a future date.
For CGT purposes, the date you acquired the subdivided blocks is the same date you acquired the original parcel of land. The cost base of the original land (inclusive of subdivision costs) is divided between the subdivided blocks on a ‘reasonable basis’. This following link provides guidance what a ‘reasonable basis’ is: ATO TD 97/3
As mentioned above, when a property asset being sold is your main residence, it will generally be exempt from CGT. However, should you choose to subdivide a parcel of land off your main residence and sell the vacant block separately, the sale of the vacant block will be subject to CGT. Only land sold with the home can receive the main residence exemption.
Vacant land will generally be treated as a capital asset and is subject to CGT, even if the land was used for private purposes.
From 1 July 2019, ATO legislation changed to prevent taxpayers from claiming holding costs as tax deductions in their own right. From this time vacant land holding costs incurred by taxpayers are now added to the original purchase price of the land and included in the asset cost base.
These vacant land holding costs include:
- ongoing borrowing costs, including interest payments on money borrowed for the acquisition of land
- land taxes
- council rates
- maintenance costs.
Some taxpayers will still be able to claim deductions for these costs incurred. This will include situations where the land is used in a business by the taxpayer or where the taxpayer is a company.
The sale of vacant land on capital account will trigger CGT. Application of the general 50% discount may reduce the taxable gain where eligibility to apply the concession, as summarized above, exists.
There are many factors that should be considered when acquiring and selling property assets. Ensuring appropriate structures and understanding the timing of when your CGT liability is triggered and incurred can result in significant taxation savings or costly mistakes.
Davidsons are CGT property experts who can point you in the right direction and ensure you understand the tax consequences of purchasing and selling your property assets.
This article was written by Michael Rebula, a Tax and Business Services Manager. Michael can provide you with expert advice in relation to acquiring and selling property assets. To make an appointment or speak to Michael, please call our office on 5261 2029 or email Michael at firstname.lastname@example.org.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.