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  • Property improvements and additions

    If you acquired a property before 20 September 1985 and later make major capital improvements, the improvements may be subject to capital gains tax (CGT).

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    How it works

    A building and the land it is on are usually treated as a single asset. However, there are situations where they are treated as separate assets for CGT purposes.

    The most common situation is when you acquire a property before CGT started in 1985 and make major capital improvements after CGT started.

    The improvements are then treated as separate assets that are subject to CGT.

    This rule does not affect you if you acquired the property on or after 20 September 1985. In this case, CGT applies as usual.

    Main residence exemption

    If the property is your main residence and you use the improvements as part of your home, they are still exempt.

    This includes improvements on land adjacent to the dwelling (for example, a swimming pool) if the total land is 2 hectares or less.

    The improvements are not exempt if you use them to produce income.

    What is a major capital improvement?

    An addition or improvement, such as renovating a house, is a major capital improvement if its original cost is both:

    • more than 5% of the amount you receive when you dispose of the asset
    • more than the improvement threshold for the income year in which you dispose of the asset.

    If you began the improvements before 21 September 1999, you index the original cost for inflation.

    If there was a contract to construct the improvements, the date you began the improvements is the date of the contract.

    Improvement thresholds

    The improvement threshold takes inflation into account.

    Income year

    Threshold

    1985–86

    $50,000

    1986–87

    $53,950

    1987–88

    $58,859

    1988–89

    $63,450

    1989–90

    $68,018

    1990–91

    $73,459

    1991–92

    $78,160

    1992–93

    $80,036

    1993–94

    $80,756

    1994–95

    $82,290

    1995–96

    $84,347

    1996–97

    $88,227

    1997–98

    $89,992

    1998–99

    $89,992

    1999–2000

    $91,072

    2000–01

    $92,802

    2001–02

    $97,721

    2002–03

    $101,239

    2003–04

    $104,377

    2004–05

    $106,882

    2005–06

    $109,447

    2006–07

    $112,512

    2007–08

    $116,337

    2008–09

    $119,594

    2009–10

    $124,258

    2010–11

    $126,619

    2011–12

    $130,418

    2012–13

    $134,200

    2013–14

    $136,884

    2014–15

    $140,443

    2015–16

    $143,392

    2016–17

    $145,401

    2017–18

    $147,582

    2018–19

    $150,386

    2019–20

    $153,093

    2020–21

    $155,849

    2021–22

    $156,784

    Calculating your capital gain or loss on major improvements

    You only need to do this calculation if all of the following are true:

    • you acquired property before 20 September 1985
    • you made capital improvements to it on or after that date
    • the improvements are not exempt under the main residence exemption.

    When you sell the property, you calculate your capital gain or loss on a major capital improvement as follows.

    Step 1: Determine the cost base of the improvement.

    Step 2: Is the cost base of the improvement (step 1) more than 5% of the capital proceeds from the sale of the property?

    • No – it is not a major capital improvement and there is no CGT.
    • Yes – go to step 3.

    Step 3: Is the cost base of the improvement (step 1) more than the threshold amount for the year in which you sold the property?

    • No – it is not a major capital improvement and there is no CGT.
    • Yes – go to step 4.

    Step 4: Work out how much of the sale proceeds are attributable to the improvement.

    • You could ask a professional valuer to work this out. If you work it out yourself, your estimate must be reasonable and you must be able to show how you arrived at the estimated amount.

    Step 5: Subtract the cost base (step 1) of the improvement from the proceeds attributable to the improvement (step 4).

    • This is your capital gain or loss.
    • If you will be using the CGT discount, do not index the cost base for inflation at this step.

    Example: improvements to property acquired before 20 September 1985

    Martin bought a home in 1984.

    • On 1 December 1993, he undertook major renovations to his home costing $150,000. He used these renovations to earn rental income from the time they were finished until he sold his home.
    • On 1 December 2018, he sold his home for $500,000.

    The 'home first used to produce income' rule does not apply because the renovations were first used to produce income before 21 August 1996.

    Using the steps above, Martin works out his capital gain as follows:

    1. The unindexed cost base of the improvements is $150,000.
      • Because the improvements were made before 21 September 1999, Martin also needs to work out the indexed cost base. This is $168,450.
    2. The indexed cost base is more than 5% of the $500,000 Martin received for his home (5% × $500,000 = $25,000).
    3. The indexed cost base is more than the 2018–19 threshold of $150,386. The renovations are therefore subject to CGT.
    4. Martin obtained a valuation that attributed $200,000 of the $500,000 sale proceeds to the renovations.
    5. As Martin did the renovations before 21 September 1999 and owned them for at least 12 months, he can use either the indexation method or the CGT discount to calculate his capital gain.

    Indexation method

    Sale proceeds attributable to the improvements

    $200,000

    less cost base of improvements indexed for inflation

    $168,450

    Taxable capital gain

    $31,550

    Discount method

    If Martin has any capital losses, he must use these before applying the discount. Assuming Martin has no capital losses, he can apply the discount to the entire capital gain.

    Sale proceeds attributable to the improvements

    $200,000

    less cost base of improvements (without indexation)

    $150,000

    Capital gain

    $50,000

    less 50% discount

    $25,000

    Net capital gain

    $25,000

    Martin would choose the discount method because this gives him a smaller capital gain.

    If construction of the renovations had started after 13 May 1997, Martin would also reduce the cost base by the amount of any capital works deductions he could claim.

    If Martin made a capital loss, the reduced cost base of the improvements would be reduced by the amount of any capital works deductions no matter when construction started.

    End of example

    Other situations where assets are separate for CGT

    As well as the major capital improvements discussed above, there are other situations where land and other assets are treated as separate assets for CGT purposes.

    Relocation of buildings

    A building is treated as part of new land if you:

    • acquired the building and land before CGT started on 20 September 1985
    • later relocate the building to new land you acquired on or after this date.

    The building becomes part of a single post-CGT asset.

    The cost base and reduced cost base of the building are added to the cost base and reduced cost base of the new land.

    Adjacent land

    If you acquire land on or after 20 September 1985 that is adjacent to land you already owned before that date, it is treated as a separate CGT asset from the original land.

    This is the case even if you amalgamate the 2 titles.

    Example: adjacent land treated as separate CGT asset

    On 1 April 1984, Dani bought a block of land.

    On 1 June 2019, she bought an adjacent block.

    Dani amalgamated the titles of the 2 blocks into one title.

    The second block is treated as a separate CGT asset acquired on or after 20 September 1985. It is subject to CGT.

    End of example

    Assets subject to a balancing adjustment

    A building, structure or other capital improvement becomes a separate CGT asset from the land it is on if both the following are true:

    • you acquired the land on or after 20 September 1985
    • a ‘balancing adjustment provision’ applies to the asset.

    For example, a timber mill building is subject to a balancing adjustment if it is sold or destroyed, so it is treated as a separate asset from the land it is on.

    Depreciating asset that is part of a building

    A depreciating asset that is part of a building is a separate CGT asset from the building.

    For detailed information about depreciating assets, see the Guide to depreciating assets.

    Last modified: 04 Aug 2021QC 66043