Your investment property, or your home if you live on over two hectares (five acres) of rural land, may be subject to CGT. Of course, your accountant will be able to tell you more specific details. But on what property values should the CGT be calculated?
More importantly, how do you ensure that you don’t pay more tax than is appropriate or correct? Our experience (see example below) indicates that your CGT bill could be more than halved if you follow good valuation practice.
For simple CGT issues, the actual purchase and sale prices make the two ends of the equation – easy! But what happens in special cases, such as when you decided to rent out the family home or you have an exempt two hectare portion?
The first problem of a change of taxable circumstances, such as renting the family home, can be solved with a relatively straightforward valuation process. It is preferable to get your valuation at the time of change, but this is not something that you may have realised you needed until later on. A professional valuer will have the tools and databases to look back in time and provide you with a retrospective valuation which will solve this problem.
The second issue regarding rural lifestyle land over two hectares is more complex. You have just sold your little piece of rural paradise in the bush and then you are informed that you need to pay CGT on the area outside the principle two hectares (five acres). How do you know what that portion of the site is worth? What is more, what was it worth when you first purchased the property many years ago?
So, how do you value it? It would be so easy and reasonably logical to use a pro rata approach. For example, you have a four hectare site of which two hectares or half is exempt from CGT. The land component might reasonably sell for $400,000 at the time you sold the property. As half the site is exempt, then the value by pro rata at a 50% ratio would give a value for the taxable land of $200,000. You perform the same exercise for when you originally purchased the site many years ago, considering the land component might have reasonably sold for $200,000, giving us a value for the taxable land of $100,000. You would be required to pay tax on the growth in value on the taxable land over the time you owned it.
|Valuation of taxable land at date of sale (50% of full land value)||$200,000|
|Less valuation of taxable land at date of original purchase (50% of full land value)||($100,000)|
|Capital Gain (Taxable value)||$100,000|
If you accepted this simplistic approach, you would pay too much tax!
Although the principle area of two hectares has no defined boundary, it is definable as the part of the site on which you built your house and associated sheds and gazebos, and all those lovely things that make your life in the country so much more enjoyable. This means that the taxable portion of your land is the bit that you can’t build on (planning laws usually allow only one house to be built on a site) or is not suitable to build on. It is the part that gives you a bit of a buffer from the neighbours. And it is the part that has the least utility – it may be bush, rocky, steep or just somewhere to put a horse, or other farm animal.
So, surely it should be worth less than the principle land? Yes, it is, and usually by a substantial amount. Because it is worth less, your taxation burden will also be less.
You can check out the rules with the ATO (Australian Taxation Office)
It can be determined as a proportion of the value of the two hectares, including all buildings to the full sale price. This ratio will then be applied to the original purchase price and the difference will be the capital gain. This appears to be the ATO’s preferred approach. This approach does not take into account that this ratio may vary over time as buyer sentiments do change. For example:
|Current Sale||Original Purchase|
|Sale price incl buildings||$700,000||$400,000|
|Valuation of 2ha incl buildings (Exempt Land)||$600,000|
|Ratio of exempt land||86%||Applied 86%|
|Value of Taxable land||$100,000||$56,000|
|Capital Gain (Taxable Value)||$44,000|
Alternatively, a valuer can look at the land component at each of the relevant dates of valuation, the value of the taxable land being the difference between the value of the whole site (land only) and the value of the exempt two hectare portion. One benefit of this approach is that the valuer does not need to inspect the buildings which are likely to have been sold and, as such, access is no longer available. For example:
|Current Sale||Original Purchase|
|Valuation of whole site excl buildings||$400,000||$200,000|
|Valuation of principle 2ha excl buildings (Exempt Land)||$300,000||$140,000|
|Value of Taxable Land||$100,000||$60,000|
|Capital Gain (Taxable Value)||$40,000|
Do yourself a favour, have your taxable land valued by a competent valuer who has experience with CGT issues. The savings could be substantial. And do talk to your accountant – they are the taxation experts and can help you when dealing with the ATO.
IVWA is happy to travel to your location anywhere in WA – we have lots of experience across Metro and most country areas. If you have any questions, please contact one of our property experts for advice. We love to talk property!