Ask Ban Tacs Question
Related to CGT.
Bought a farm in 2016 500 acres.
Paid $915K + Costs
Valued house and 2 hectares worth under $200K house was practically unliveable.
Was our PPOR form 2016 to 2019.
2019 a solar farm leased it off us so was generating an income but we moved our PPOR to another property.
From 2016 to 2019 while it was our PPOR we done significant updagrdes to house and house yards.( inside the 2ha)
Adding bedroom
Adding bathrooms
Full inertia exterior painting
Sheds
Deck
In total around $220K of work.
Question is now. I can get a retrospective valuation done by a licensed valuer and he believes the house and 2ha increased in price to be worth $800K alone in 2019.
Now 2025 in selling the whole farm for $2.1M privately no selling costs.
What’s my CGT to pay.
Bought with my wife
47% Personal tax brackets
Ai answers are these correct?
At 2016 purchase:
- Whole property: $915K
- Exempt portion (house + 2ha): let’s say $800K equivalent
- Taxable portion (farm land beyond 2ha): ≈ $115K
At 2025 sale:
- Whole property net: $2.06M
- If the same ratio applies (87% exempt, 13% taxable):
- Taxable portion of gain = 13% of $1.105M = $143,650
4. Apply 50% CGT Discount
• $143,650 ÷ 2 = $71,825 assessable gain
⸻
5. Apply Tax Rate
• $71,825 × 47% = $33,758 tax payable.
Only asking as my accountant moved our PPOR and we didn’t realise now he is saying he needs to look into it. He just doesn’t give me much confidence so wanted a second opinion before we liking at moving elsewhere.
Answer
Section 118-192 ITAA 1997 resets the cost base of the house and 5 acres (if the 5 acres are used for private purposes) to market value when first used to produce income because it was 100% protected by the main residence exemption up to that date. So yes you get the reset to market value of $800,000 in 2019 for that section of the property. The rest of the property has a first element of its cost base of $715,000 (based on your figures). That is because the house and 5 acres was only valued at $200,000 when you purchased. So the costs to purchase, they are going to have to be apportioned 200,000:715,000.
This means that 200/915 = 22% of the purchase costs are associated with the CGT exempt house so are not included in the CGT calculation. Section 118-192 is not optional unless you had another house between 2016 and 2019 that qualifies also for you main residence exemption. Not that I think you should try to get around section 118-192 because it results in a pretty good outcome in my opinion.
The $220,000 in improvements to the main residence are not included either because that area is not subject to CGT for that period of time. This is not a bad thing as you are getting a much better outcome because the reset to market value of $800,000 in 2019 to replaces these costs.
In answer to your first question, yes you can get a retrospective valuation to start the CGT calculation on the main residence at its 2019 market value of $800,000. A valuer to support your apportionment of the original purchase price ie 200,000:715,000 is important as well as verifying that market value in 2019 of $800,000 of the house alone with just 5 acres. The valuer’s fee is tax deductible as a cost of managing your tax affairs.
Your CGT calculation would look something like this.
| Cost base of house and 5 acres | $800,000 |
| Cost base of remaining land | $715,000 |
| Purchase costs | ? |
| Holding costs* not otherwise claimed but Not those relating to the house and 5 Acres between 2016-2019 | ? |
| Improvements (not to house before 2019) | ? |
| Selling cost (would at least need solicitor) | ? |
| Let’s say | $1.8mil |
| Sale proceeds | $2.1mil |
| Capital Gain | $300,000 |
| Less 50% CGT discount | $150,000 |
| Net Gain | $150,000 x 47% = $70,500 tax |
*Holding cost are rates, insurance, interest, repairs and maintenance that has not been claimed as a tax deduction, it includes while you were living there but not for the house and 5 acres during that time as it is exempt.
What begs the question here is, what were you doing with the other 495 acres? Have you read this blog? https://www.bantacs.com.au/Jblog/apportionment-when-your-home-is-on-more-than-2-hectares/
If for example you have been running your own cattle on the property (not agistment or just renting the house) for half the time you owned it and declaring that as business income/loss (even if quarantined by the non commercial loss rules) then you may be entitled to the small business CGT concessions. If this was the case that $150,000 net gain would qualify for another 50% CGT discount bringing it down to $75,000. You can also use the retirement concession to remove any tax on that $75,000. The retirement concession is a life time cap of $500,000 each for you and your spouse. If you have not already used this elsewhere, you effectively get the $75,000 tax free but if you are under 55 it has to go into super. It will not be taxed going into the super fund and it does not affect any of your concessional and non concessional caps.
I have attached a spreadsheet (CGT Record Keeping and Tricks, for Homes on more than 2 Hectares) that explains all the finer points of what goes into the cost base such as the holding costs and apportionment and allows you to do an actual tax estimate. Though it is designed for situations more complex than yours you may just want to review the instructions to make sure you have covered everything, and use my example above. The spreadsheet also has further information on the small business concessions if you have used it in a business at some time. It discusses what is actually a business ie rental or agistment does not qualify. Note it does not have had to be used in the business the whole time, just half the time you owned the property or 7.5 years whichever is the shortest time frame.
Ai appears to be thinking that the value of the house was $800,000 at purchase date but it was only $200,000 so the ratio of the purchase price is $200,000 house and 5 acres to $715,000 remaining 495 acres. It is also ignoring that you have exposed the house to CGT from 2019 by moving your main residence exemption to another property. The percentage ratio is not that simple either.
I think the calculation above gives you a pretty good outcome with the main residence moving to another property in 2019. But how did your Accountant do this? Have you since sold that other property covering it with your main residence exemption? If so, done and dusted but if not, then section 118-145 ITAA 1997 allows you the option of covering either property for up to 6 years. A choice you do not have to make until you sell one. So I am not sure you have lost that option. The 6 year rule could keep that 5 acres completely free of CGT if you sell in 2025. But at what cost? You would be exposing the new main residence. How much has that gone up in value? If you utilise section 118-145 ITAA 1997 to cover the farm house, the above calculation would change in that it would only apply to the other 495 acres, as follows:
| Cost base of remaining land | $715,000 |
| Purchase costs /915,000×715,000 | ? |
| Holding costs* not otherwise claimed Except in relation to the house and 5 acres | ? |
| Improvements (not to house and 5 acres) | ? |
| Selling cost (only 495 acre portion) | ? |
| Let’s say | $750,000 |
| Sale proceeds (need valuer’s apportionment of the $2.1mil) say | $1mil |
| Capital Gain | $250,000 |
| Less 50% CGT discount | $125,000 |
| Net Gain | $125,000 x 47% = $58,750 tax |
Personally I would rather pay the extra $12k in tax and have 6 years main residence exemption on the other home. But then these figures are not accurate.
You need to put the real figures in here but I suspect in the end it will show that it is not going to be worth exposing your new main residence to CGT for 6 years. Further, if the new residence becomes exposed to CGT there is no reset when you switch to covering it. It is just a pro rata calculation over the whole period of ownership, so you need to keep records for you whole period of ownership of that property. I attach a spreadsheet (Main Residence spreadsheet from Getting Your Affairs in Order), assuming the new residence is under 5 acres, that will allow you to do an estimate of the damage that exposure will do and will show you the amount of record keeping you will need to undertake for the rest of the time you own the property.
The $800,000 reset in 2019 is a real bonus in the calculation. Make sure you have that market value well documented. If the remaining 495 acres has been used in a business for half the time you have owned it you could end up paying not tax at all.
Please note this answer is limited by the information you have provided and should not be relied upon without further professional advice on your particular circumstances.
