• Major capital improvements to a dwelling acquired before 20 September 1985

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    If you acquired a dwelling before 20 September 1985 and you make major capital improvements after that date, part of any capital gain you make when a CGT event happens in relation to the dwelling could be taxable. Even though you acquired the dwelling before CGT started, major capital improvements are considered to be separate CGT assets from the original asset and may therefore be subject to CGT in their own right if they are made on or after 20 September 1985.

    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 used the improvements to produce income for any period, the part of any gain that is attributable to the improvements for that period is taxable.

    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 dwelling and the improvement is also over a certain threshold. The threshold increases every year to take account of inflation.

    Improvement thresholds for 1985-86 to 2001-02

    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

    $92,082

    2001-02

    $97,721

    Example

    Improvement on land acquired before 20 September 1985

    Martin bought a home in 1984. On 1 December 1993, he undertook major capital improvements worth $85,000. He sold the home for $500,000 under a contract that was settled on 1 December 2001. At the date of sale, the indexed cost base of the improvements was $98,370.

    Of the $500,000 he received for the home, $100,000 could be attributed to the improvements. The improvements were used by Martin to produce income from the time they were finished until the time they were sold with the home.

    The home first used to produce income rule (explained on page 47) does not apply to the improvements because they were first used to produce income before 21 August 1996.

    Test 1

    Is the cost base of the improvements more than 5 per cent of $500,000; that is, $25,000?

    Yes

    Test 2

    Is the cost base of the improvements more than the 2001-02 threshold of $97,721?

    Yes

    As the answer to both questions is Yes and the improvements were used to produce income, the capital gain on the improvements is taxable. The capital gain is calculated as follows:

    Amount of proceeds attributable to the improvements

    $100,000

    less cost base of improvements indexed for inflation

    $98,370

    Taxable capital gain

    $1,630

    If the improvements had been used as part of Martin's main residence, this gain would be exempt. However, if the home (including the improvements) had been rented out for one-third of the period, one-third of the capital gain made on the improvements would have been taxable.

    As Martin acquired the improvements before 11.45 am on 21 September 1999 and sold the home after that time, and had held the improvements for at least 12 months, he could use either the indexation method (as in the calculation above) or the discount method to calculate his capital gain on the improvements.

    When you dispose of the dwelling, the capital gain or capital loss on the major improvements is calculated by taking away the cost base of the improvements from the proceeds of the sale that are reasonably attributable to the improvements:

    Capital gain on major improvements

    =

    proceeds of sale attributable to improvements

    -

    cost base of improvements

    You can choose to calculate the capital gain made on the improvements using either the indexation or the discount method if:

    • the improvements were made under a contract entered into before 11.45 am on 21 September 1999
    • the dwelling was sold after that time
    • you owned the improvements for at least 12 months.

    If you entered into the contract to make the improvements after 11.45 am on 21 September 1999, you calculate your capital gain using the CGT discount of 50 per cent.

    In calculating the amount of capital proceeds to be attributed to the improvements, you must take whatever steps are appropriate to work out their value. If you make an estimate of this amount, it must be reasonable and you must be able to show how you arrived at the estimated amount.

    Last modified: 06 Oct 2009QC 27417