CGT calculation on vacant land received in divorce

Question

Hi,
Background:
I purchased a vacant residential block of land in 2018 with my then partner – the land (mortgage) was in both of our names (equally). We couldn’t decide on what to build, then COVID hit and building became harder. We then separated in 2020 and our financially binding agreement was complete in 2022. As a part of this FBA – I took out a loan in 2022 to take over the vacant land – as per the FBA settlement/split of assets.

Key dates:

• Purchase of vacant land – 2018
• Separation – 2020
• Financially binding agreement (FBA) finalised – 2022

Questions:
I am now looking to sell the vacant land and need to work out CGT. My questions are:

• What will be considered the acquisition date for CGT purposes – will this be 2018 at initial purchase or 2022 when I took over the land?
• Can I claim expenses (such as the interest, rates, water and maintenance (mowing)) for the land from 2018 or will this be from 2022?
• If the acquisition date is 2022 – will the value of the property be – the bank valuation at FBA or the original sale price back in 2018?
• Do I pay GST on the sale?

I am keen to understand the impacts of the above, as paying tax on the non-discounted 50% of the gain will be significant, depending on how many years of costs I can claim to offset my tax liability, will guide if I sell or not.

My basic understanding of CGT is:

• Sale price (current day) minus purchase price = gain
• If held for over 12 months then 50% CGT discount applies
• On the remaining 50% (non discounted gain) this can be reduced by the costs associated with the asset (stamp duty, agent fees, loan interest, rates, water, maintenance)
• What is left I then add to my person income and pay tax on this at my individual income tax rate

Thank you in advance for your help.

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Answer

You need to work out the capital gain before you apply the 50% CGT discount so the cost base items are only worth half their value effectively

I attach a spreadsheet to help you collate the cost base, it has detailed explanations of the elements of the cost base.  On the left hand side it lets you do an estimate of the capital gain and if you put in your tax bracket the actual tax you will pay.

Certainly, includes lawn mowing, rates and maintenance under subsection 110-25 (4) ITAA 1997.  Agent fees and stamp duty qualify under section 110-25(3) ITAA 1997

Water is contentious below is the relevant section.  Now normally I would consider the word include to be for example but on querying this with the ATO they interpret it as limited to.  And water is not mentioned there though I would argue that water was a maintenance cost so the grass would not die.   So yes quite possibly water.

Interest – Sure as it says interest on money borrowed to finance the purchase or re finance.  So taking over the original loan or refinancing to pay out the original loan is fine but have a look at the BFA.  Did you borrow extra money because when everything was divvied up there was a short fall in the value your ex got so you had to give them a cash amount?  This isn’t necessarily a cost of acquiring the land.  It could be considered a cost of the property settlement in general, not connected with the land.

There is a roll over under section 126-5 ITAA 1997 that is compulsory.  Basically, your Ex is completely out of the picture.  You are considered to have purchased the whole property back in 2018.  Your CGT calculation goes back that far and you can increase your cost base by expenses going back that far, even by items your Ex paid for. 

Tip – if you do not have another property that you have been covering with your main residence exemption and you decide to build a home on this land to live in (long term else lots of other problems) section 118-150 ITAA 1997 will let you back date your main residence exemption on this land for 4 years back from the time of completion of the house if you move in asap. 

So in answer to your questions:

• What will be considered the acquisition date for CGT purposes – will this be 2018 at initial purchase or 2022 when I took over the land?   100% in 2018
• Can I claim expenses (such as the interest, rates, water and maintenance (mowing)) for the land from 2018 or will this be from 2022?   Since 2018 but only interest to buy the land not to balance the property settlement.  If the land was the only thing settled in the FBA then consider an ATO ruling.
• If the acquisition date is 2022 – will the value of the property be – the bank valuation at FBA or the original sale price back in 2018?   N/A
• Do I pay GST on the sale?  It depends whether you bought the property as part of a business plan ie to profit from subdividing and selling off lots.  Otherwise no GST because it is not part of an enterprise.  Make sure the sale contract does not include a margin scheme clause or going concern clause or state that the price includes GST or that you the seller are registered for GST.