Capital Gains Tax on Rural Lifestyle Properties
An often ignored issue and an almost Taboo subject in Real Estate circles is the issue of Capital Gains Tax (CGT) associated with the ownership of a property larger than 2 hectares. Since the mid 1980s the Australian Tax Office (ATO) has had a ruling that land in excess of 2 hectares and the improvements and is your principal place of residence is subject to Capital Gains Tax calculations.
Whilst this may seem alarming to most lifestyle property owners who automatically assume the CGT is applied to the growth in value from the purchase price to the sale price the reality is somewhat different provided the valuation approach is adopted.
Typically once a property is sold the vendors accountant will instruct a valuer to derive the value of the 2 hectares and improvements and deduct this value from the sale price to determine the value of the land outside of the 2 hectares – the residual land. The following example takes you through the accountants approach.
Property – 20 hectares
Purchased for $300,000 in 2001
Recently sold for $1,000,000
Valuation determines that 2 hectares of the property, dwelling and ancillary improvements is valued at $800,000. This results in the residual 18 hectares having a value of $200,000 or 20% of the sale price. Using the ratio approach the accountant will apply the 20% to the purchase price of the property to determine the value of the residual land, known as the Cost Base in order for CGT to be calculated. This results in the following equation:
20% x $300,000 = $60,000 – Cost Base
Value of 18 hectares at time of sale is $200,000.
CGT= $200,000 – $60,000 = $140,000.
As valuers, we apply the logic of determining the value of the 2 hectares at the time of sale to the purchase period. This then picks up the movement in value of the 2 hectares and improvements more accurately and takes into account extensions, renovations or additions carried out during the term of ownership within the 2 hectares excluded from CGT calculations.
Comparable sales data of 2 hectare properties is analysed retrospectively as at 2001. In this example it is determined that the 2 hectares and improvements was valued at $120,000. Deducting this value from the purchase price results in:
Purchase
$300,000 – $120,000 = $180,000 Cost base of 18 hectares
Sale
$1,000,000 – $800,000 = $200,000 – Gain value of residual land
$200,000 – $180,000 = $20,000 Capital Gain
Using the example above the valuation approach results in a Capital Gain of $20,000 as opposed to the accountants ratio approach of $140,000. This is the correct way to approach the subject as it reflects the changes in value over time of the smaller property element which tends to change at a more profound rate than a larger property and takes into account capital improvements within the 2 hectares.
For a video explanation please refer to our services tab at the top of the web page and click on the Capital Gains Tax explained link.
If you would like to discuss your individual situation please contact Steve Noonan on 0408 989567.
