The proposed extension of the CGT main residence exemption would apply where part of a taxpayer's land has been compulsorily acquired or resumed, but not the dwelling.
The Federal Government is proposing to extend the capital gains tax (CGT) main residence exemption so that it provides meaningful relief where compulsory acquisition of land or structures that adjacent to a taxpayer's main residence occurs, without an acquisition of the dwelling itself.
If this extension proceeds, it will assist taxpayers where part of their land has been compulsorily acquired or resumed but the resumption has not directly resumed the dwelling. Constructing authorities undertaking resumptions will then need to advise claimants to seek advice from their legal representatives to ensure that any claim takes account of the proposed change.
The change may also facilitate negotiations for compensation on the basis that home owners will be less exposed to tax.
Under the current legislation, there is a main residence exemption which exempts home owners from CGT if their dwelling is compulsorily acquired. The exposure draft legislation seeks to ensure that any adjacent land or structure that is compulsorily acquired, but without contemporaneous acquisition of the dwelling, is treated in the same way.
This change will operate in precedence to the existing compulsory acquisition CGT rollover, which generally requires a landowner to acquire a replacement asset (which is often impossible in the case of a compulsory acquisition of land adjacent to a dwelling).
The new legislation seeks to correct an inappropriate tax outcome which has arisen in cases of partial resumption.
"Adjacent land or structure"
The new legislation defines the terms "adjacent land" and "adjacent structure". These new definitions are similar to the old definitions, but are presented in a different way, allowing them to be defined terms.
"Adjacent land" is defined to mean land that was used primarily for private or domestic purposes in association with the dwelling, up to 2 hectares in total.
"Adjacent structure" is defined to mean a garage, storeroom or other structure associated with a flat or home unit to the extent the structure was used primarily for private or domestic purposes in association with the flat or home unit.
Claiming the CGT exemption under the new legislation
Under the proposed legislation, a taxpayer may access the CGT exemption where there is a compulsory acquisition or similar arrangement, of part of the taxpayer's main residence that resumption does not extend to the dwelling itself. In order to access the CGT exemption for compulsory acquisition of adjacent land only, certain conditions must be met, namely:
- the taxpayer is an individual;
- the exempt land is all or part of a dwelling's adjacent land at the time of the CGT event;
- the CGT event does not happen in relation to the dwelling;
- one of the following applies:
- the dwelling was the taxpayer's main residence during some or all of the period they owned it;
- the taxpayer's ownership interest in the dwelling passed to them as beneficiary in a deceased estate; or
- the taxpayer owns the ownership interest in the dwelling as the trustee of a deceased estate;
- the sum of the following is 2 hectares or less:
- the area of all of the dwelling's adjacent land;
- the area of land on which the dwelling is built; and
- any earlier exempt adjacent land.
If the 2 hectare limit is exceeded, the taxpayer can choose to access the CGT exemption in relation to part of the land that does not exceed the limit.
In addition, this two hectare limit also operates to prevent "double dipping" of the 2 hectares by a home owner - the resumption of a 1 ha parcel of land means that on sale or resumption of the home, only an additional 1 ha of land may be claimed as subject to the main residence exception.
Claiming a partial CGT exemption under the new legislation
If there is a compulsory acquisition of adjoining land and the dwelling was not always used as a main residence or was used for income-producing purposes then the taxpayer may be able to claim a partial CGT exemption, based on the degree of relevant use.
The new legislation will operate from the date that it receives Royal Assent. However (once enacted), taxpayers may choose to apply the legislation to CGT events occurring after the start of the 2004-05 income year and before the date of Royal Assent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.