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.

NOTE: this question require answer in ILAC ESSAY format which should include the tax law applicable as per AUSTRALIAN TAXATION LAW in various situation mentioned in question along with appropriate example of cases. no calculation required. this question is related to the Taxation Law subject

Answer 1

‘Main residence’ is generally exempt from capital gains tax (CGT). To get the exemption, the property must have a dwelling on it and one must have lived in it. One is not entitled to the exemption for a vacant block.

Generally, a dwelling is considered to be your main residence if:

• you and your family live in it
• your personal belongings are in it
• it's the address your mail is delivered to
• it's your address on the electoral roll
• services such as gas and power are connected.

The main residence exemption is not based on one factor alone. The weight given to each varies depending on individual circumstances. The length of time you stay there and your intention in occupying it may also be relevant.

You're eligible for a full main residence exemption if the dwelling:

• has been the home of you, your partner and other dependants for the whole period you've owned it
• has not been used to produce assessable income – that is, you've not run a business from it, rented it out or flipped it
• is on land of two hectares or less.

If the full exemption applies, your capital gain or loss is disregarded. You don’t pay tax on any capital gain, and you can't use any capital loss to reduce your assessable income.

Land is adjacent to a dwelling if it is close to, near, adjoining or neighbouring the dwelling. The land a dwelling is actually on is included as part of the dwelling and is not part of adjacent land.

Land adjacent to a dwelling may also qualify for the main residence exemption if it and the dwelling are sold together and both of the following apply:

• during the period you owned it, you used the land mainly for private and domestic purposes in association with the dwelling, and
• the total area of the adjacent land and the land on which the dwelling stands is not more than two hectares (4.94 acres).

If the adjacent land is used for private purposes and is greater than two hectares, you can choose which two hectares are exempt. The remainder is subject to CGT.

Accordingly Luke and Sara can claim exemption of "main resident" as they are qualifying all condition as mentioned above for "main resident" Further they can select 2 hecters of land (other than used for horse assignment business) which can also be claimed as exempt. The sale of balance land will be subject to Capitla gain tax.

Further the property developed for horse assingment will be subject to capital gain tax.