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If you acquired a dwelling before 20 September 1985 and you make major capital improvements after that date, part of any capital gain made when a CGT event happens in relation to the dwelling could be subject t capital gains tax. Even though you acquired the dwelling before the operation of capital gains tax, major capital improvements are taken to be separate CGT assets from the original asset and are subject to capital gains tax in their own right.
If the dwelling is your main residence and the improvements are used as part of your home, they are still exempt. This includes improvements on land adjacent to the dwelling - for example, installing a swimming pool - if the total land including the land on which the home stands is 2 hectares or less.
However, if the dwelling is not your main residence or you put the improvements to some income producing use, you may have to pay capital gains tax on any gain that is attributable to the improvements.
A capital improvement is taken to be major if its original cost - indexed for inflation - is more than 5 per cent of the amount you receive when you dispose of the asset and is also over a certain threshold. The threshold increases every year to take account of inflation.
Last modified: 18 Sep 2009QC 18323