I was recently asked to advise on the application of the pre and post Capital Gains Tax (CGT) rules to the sale of a property.

By way of background, CGT was introduced to apply from 20 September 1985.

What this means is that any property purchased prior to 20 September 1985 is not subject to CGT and nothing but the change of ownership will change that. 

However, what is not uncommon is for land that was purchased before 20 September 1985 to have a building constructed on it after this date.

According to the Tax Act, the building is considered to be a separate asset to the land and is subject to CGT

If there is already a building on the land and you have simply made some improvements to it – unless those improvements are “significant” – the land and building will not be considered as separate assets. 

If there were significant improvements then only the improvements would be subject to CGT.

Let’s look at an example.

A property was purchased in 1984 with a machinery shed constructed in 1988 and a house constructed in 1992.  The property was not eligible for the main residence exemption.

The easiest way to look at this situation for CGT purposes is that there are effectively three  separate assets – land, machinery shed and the house. 

When the property is subsequently sold, the three assets need to be considered separately.

The first step is to apportion the selling price between the assets. 

It is advisable to have a registered valuer undertake the apportionment as this will limit any potential “disagreement” with the Tax Office.

Once you have obtained the valuation you can then ignore the portion of the sale relating to the land.

However, because of the differing CGT rules that apply, you need to undertake separate CGT calculations for both the machinery shed and the house.

The Tax Act allows you to increase the cost base of an asset by the expenses associated with the asset that haven’t otherwise been claimed as a tax deduction. This includes expenses such as repairs, insurance, interest, rates, etc.

This concession only applies to assets purchased after 20 August 1991.

As the machinery shed was purchased before this date, none of these expenses can be applied to increase the cost base and therefore reduce any CGT.

However, the cost base of the house can be increased by expenses such as repairs, interest, insurance, interest, rates, etc.

You are also entitled to increase the cost base of the machinery shed and house by their share of the selling costs.

If you have any questions regarding the application of the pre and post CGT rules, please contact Ellingsen Partners.