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An ex-partner and I jointly purchased a house on 6 September 1979 for $48,000 , with the title registered in both our names.
On 12 March 1985, he transferred full ownership of the property to me via a conveyance, which was registered on 1 October 1985. A consideration was paid for the transfer of title.
The house was rented out from September 1979 until July 2000, at which point I moved in after completing renovations (approximately $150,000, excluding GST, as this was before its introduction). I have lived continuously at the property from that time to the present.
The property has appreciated significantly in value since then.
I would like to understand the capital gains tax (CGT) implications under the following scenarios:
- If I were to sell the property during my lifetime.
- If the property is sold after my death.
I currently have no partner and no dependants. It’s not yet clear whether I will leave the property to my non-dependant son or ask my executors to sell it as part of my estate.
I’d appreciate your guidance on what the capital gains tax consequences might be in either scenario, please.
Answer
The first question is whether this property is a pre CGT asset that is, was it acquired prior to the 20th September, 1985.
Now to the definition of acquired:
Now it seems that the contract was entered into on 12th March 1985 according to your question so it looks to me like the property is 100% a pre CGT asset. Further, there is rollover relief when a property is transferred as part of a binding financial arrangement on a marriage breakdown, if that was the case. If you are unsure of whether the agreement on the 12th March 1985 was a contract to transfer the asset, for CGT purposes, you will need to consult a solicitor.
Based on the above the house and land will certainly always be considered a pre 1985 asset but if you build another home on the land after 19th September 1985 that is treated as a separate asset from the land and CGT applies to any capital gain on that building that is not otherwise covered by your main residence exemption. Fortunately, you have only undertaken improvements. There are two possibilities to have these improvements ignored for CGT purposes.
- The cost base of the improvements is less than 5% of the sale price, in other words the sale price is more than $3mil or
- The improvement’s cost base is less than the improvement threshold for the year the property is sold.
Now the cost base would be the original $150,000 spent plus and further expenditure to the area that has not been claimed as a tax deduction such as repairs, share of insurance on the area, interest etc. We don’t know what this threshold will be when you sell (btw that is what is meant by when the CGT event happens) but I think there is a very good chance you will be under the improvements threshold. It is a bit odd but when this was written the cost base used to be indexed for inflation and the threshold was and still is adjusted for inflation. So it made a lot more sense back then, now it is a bit of a mismatch. Here are the recent thresholds:
So now you have a lot of information about how not to get caught. In particular, you can do more improvements just keep them low and split them over a few years so that all of the property remains CGT free. As each improvement is tested against the threshold individually.
Note if you do something that does partially expose something on the property to CGT, all is not lost. If you don’t sell but instead pass the property onto your heirs they will receive a cost base reset for the whole property to market value at the date of your death.
So in answer to your two questions there will be no CGT consequences if the property is sold within 2 years of your death. Firstly because of the reset to market value on your death and then section 118-195 ITAA 1997 gives your heir’s two years to sell without any CGT applying. If they miss out on the 2 years they are still starting with the market value at the date of your death so all the capital gains in your life time is forgotten. If the property is sold in your life time then I am pretty certain that you will be under that threshold so all of the property will be treated as a pre CGT asset but of course I do not know the threshold for the year you will sell.
Note all of this advice applies whether the property is your main residence or not. If it is your main residence when you sell and has been since the improvements in 2000 then there will be no CGT when you sell anyway, even if the improvements are over the threshold, because the improvements will be protected by your main residence exemption.
It is still important that you keep your records for those improvements.
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.
Feedback
Thank you so much. You are an absolute legend, as they say!
You have no idea how grateful I am for your advice. I am very impressed with the thoroughness and clarity of the explanation and the promptness of your response. Your professionalism as a whole.
Have a wonderful day! ❤️❤️❤️
