CGT on Rural Property
I bought an 85 acre block of land in 2001 and lived in a shed on it until I built a house on it 5 years ago. It is my primary place of residence. I am 57 years of age and have a defacto partner.
I have bought and sold cattle since 2001 but only started primary producer trading as sole trader 7 years ago. This will continue. I work full time outside of the farm and will likely retire in 9 years. I am also starting a side business (again as a sole trader) using the same ABN as the primary production business. This new business will not be related to primary production but will have my primary place of residence as it’s office.
How will this new business affect the CGT on the future sale of the property? Does the farm business reduce my CGT liability?
Homework Reading – https://bantacs.com.au/Jblog/cgt-when-your-home-is-on-acreage/#more-21 on how the farm can wonderfully reduce your CGT liability and allocating the main residence exemption.
Similarly, if you run a business from your home for half the time you own it or 7.5 years which ever is the shortest, you can cover the business area with the small business concessions because it will not be covered by your main residence exemption. The trap for that new business is you might not get up to the 7.5 years then you have a gap, an area that for some period less than 7.5 years is not covered by your main residence exemption or the small business concessions. So it is important to know whether it is a home office or place of business as a home office can still be covered by your main residence exemption. This fine line turns on whether you see the public there, signage and whether the area is easily adaptable to be used for private purposes when it is not used in the business. You need to get this right from the start because what you claim for the house over the years, while not the final say on the matter will certainly make it difficult to argue differently when you sell. If you see the public there you really can’t avoid it being considered a place of business. If the area is a place of business then you can claim occupancy costs such as a portion of rates, insurance, interest each year against the income. The down side being if the business doesn’t run for 7.5 years you are exposing part of your house to CGT. If it is only a home office then you can only claim expenses that increase because you are working from home ie electricity, furniture, carpet, paint the area. This blog is a good example of what they are https://bantacs.com.au/Jblog/tax-deductions-when-working-from-home/#more-503
Now back to the farm, I will assume that somehow this new business qualifies as just a home office and that the property is only held in your name. Summers case made it clear that your home is whatever you call home just as long as you are living there so a shed can certainly be covered with your main residence exemption. So you have up to 5 acres free of CGT under your main residence exemption providing you were not covering another property with your main residence exemption during that time. The first blog I gave you a link to talks about how you can choose where that 5 acres is, except of course the land under the house has to be covered within the main residence exemption. Note that you can only cover the portion of the property with your main residence exemption that is being used for private purposes ie not cattle. There may not be a full 5 acres you can cover but 5 acres is the maximum. For the other 80 acres you are relying on the fact it is an active business asset. This means that not only does it get the 50% CGT discount but it gets another 50% reduction after that because it has been used in a business. This leaves you with just 25% of the capital gain that is taxable. If this amount is under $500,000 you can use the retirement exemption to make it tax free too. No need to retire and as you are over 55 no need to put the money into super though you can if you want to. In fact there are some great concessions to help you get all of these sale proceeds into super. Note the $500,000 threshold is a life time threshold so reduce this amount if you have already used it or some of it up. Now if the remaining 25% is more than $500,000 you have to either roll the excess over into another business asset or pay the tax. But you get 2 years to decide, possibly bringing that portion of the capital gain forward into a lower tax year.
Be very careful to get advice on the wording of the contract when you sell regarding the GST clauses. I have just read a contract where the client will be paying over $400k in GST simply because the solicitor put a margin scheme clause in it when it was not necessary.