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

The sale of any immovable property attracts capital gains tax liability at the time of sale of said property. Capital gain is difference between the sale consideration recieved on sale of the property minus the indexed cost of purchase and improvements.

Cost of purchase usually includes the expenses incurred in building a immovable property until it becomes in habitable condition. In above case, Luke and Sarah shiftied to new home in 2014, total expenditures incurred was 410000+15000+30000+40000 = 495000. So this can be treated as cost of purchase.

Now cost of improvement on a residential property include material changes made which can alter the property itself ranging from construction of new floor or some marble work done which was earlier not there. Routine maintenance expens s like water, electricity or repairs do not fall in cost of improvement.

In the given case, both started horse agistment business in 2015, so $80000 expenses incurred do not qualify for cost of improvement with respect to residential property. Land of 20 acres and $80000 would qualify as business assets and must be separately treated. Usually income tax laws allow for depciation of business assets as deduction while computing business income of an entity. Since the property is sold in 2019, so written down value at that time is treated as cost price. So anything realised over and above said cost price will be counted as capital gains

One thing must also be noted that land is not depriciation usually. So depriciation will be allowed for construction portion only. For land part, indexation will be allowed normally as non business asset. Indexation is not allowed for business assets.

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