The taxation of capital gains on property recently passed its 40th anniversary.
Record keeping
The ATO requires owners to keep records for CGT purposes relating to:
- the acquisition of the property and related expenses, such as stamp duty and legal fees;
- the disposal of the property and related expenses, such as sales commission and legal fees;
- the costs of owning the property; and
- any improvements and alterations to the property.
Records for buying, owning and selling property need to be kept for at least five years after the disposal of the property.
CGT for land that is subdivided
For CGT purposes, subdividing land results in a single block of land becoming two or more separate CGT assets, but does not cause a CGT event to happen.
When the subdivided land is sold, CGT is calculated for each parcel based on the date on which the original land was acquired.
The cost base of the original land is divided between the subdivided blocks on a reasonable basis.
Subdividing a main residence
Where property on which a main residence is situated (the dwelling) is subdivided, and the vacant block of land is then sold, the sale of the vacant block is not eligible for the Main Residence Exemption.
This is the case even if the vacant land was only ever used for private purposes. This is because vacant land is exempt under the Main Residence Exemption only if it falls within one of the rules that extend the Main Residence Exemption. For example, under the adjacent land rule, the sale of an adjacent block of up to two hectares can be exempt from CGT if it was used primarily for private or domestic purposes in association with the dwelling and the same CGT event happens to the adjacent land as the dwelling (i.e. sold to the same purchaser at the same time).
The sale of the subdivided block containing the dwelling may be eligible for the Main Residence Exemption.
Importantly, if the original dwelling is removed or demolished in order to do the subdivision, the Main Residence Exemption will be lost and normal CGT rules will apply to the sale unless a brand new dwelling is constructed and moved back into. CGT is always complex and every situation has its own facts therefor it is important to engage early so that we can provide assistance and avoid any unintended tax consequences.
