Question

Luke and Sarah lived in a house in Albury where they both had permanent jobs. In July 2012 they purchased a rural block of 30 acres for $160,000 with the intention of building a house and moving out of town. In September 2012 they listed their house in Albury for sale at $570,000, however given a downturn in the market the house remained unsold until March 2014 when they finally accepted an offer of $460,000. Settlement took place in April 2014 and they commenced construction on the new house in May 2014. Whilst the house was being built Luke and Sarah rented the Albury house back from the new owners at an amount of $480 per week.

In November 2014 the new house was completed at a cost of $410,000 and Luke and Sarah moved in. Additional costs incurred by them included construction of a road for $15,000, sinking a dam at a cost of $30,000 and connection of electricity at a cost of $40,000. They financed the new property with a home loan of $450,000 payable over 30 years at a rate of 4.20%.

Luke and Sarah began a horse agistment business in January 2015 to which they allocated 20 acres of their property. They constructed fencing to create smaller paddocks, built shade shelters and installed water troughs at a total cost of $80,000. To fund the cost of the improvements they took out a small business loan for $80,000 payable over 10 years at a rate of 5.30%.

In October 2019, Luke was offered a promotion in his job which required them to re-locate to Queensland. They listed the rural property for sale and in December 2019 it sold for an amount of $850,000 with settlement occurring in January 2020 at which time Luke and Sarah moved to Queensland.

Required

Advise Luke and Sarah of the taxation consequences of selling the rural property including whether any taxation exemptions or concessions may apply. You do not need to calculate the amount of any resulting capital gain or loss .

Answer 1

Sale of the immpovable property attract capital gain tax. Capital gain is the difference between consideratoin received on sale less the indexed cost of purchase and improvements.

Cost of purchase includes all expense until it become useable. As In above case, Luke and Sarah shiftied to new home in 2014, total expenditures incurred was 410000+15000+30000+40000 = 495000 which is cost of purchase.

Cost of improvement are any material changes that can alter the property itself ranging from construction of new floor or any other improvements which was not there before. Routine maintenance expens s like water, electricity, small repairs are not part of improvement costs.

As in above case, both started horse agistment business in 2015, so $80000 expenses incurred do not qualify for cost of improvement on residential property. Land of 20 acres and $80000 would qualify as business assets and neeeds to be treated separately. Usually income tax laws allow deduction for depreciation of business assets while calculating business income. Since the property got sold in 2019, written down value is treated as cost price at that time. So any consideratoinover and above this cost price will be capital gains.

Land is not depriciated, so depreciation will be allowed for construction portion only. For land, indexation will be allowed normally as non business asset. Indexation is not allowed for business assets.

Indexation are inflation adjusted cost. It accounts for the effect of inflation from date of acquisition till the date of sale of an immovable property.