Central to any discussion on CGT for homeowners is the concept of the main residence exemption. This provision allows individuals claim the main residence exemption from Capital Gains Tax (CGT) for up to 2 hectares of the land it occupies when they sell their home.
Should your property exceed 2 hectares and be used for private purposes, you have the liberty to select which 2 hectares will be exempt from CGT. The remainder of the land will be subject to CGT.
It's important to note that if any portion of your property is utilised for income generation, that area cannot be exempted from CGT. This rule applies regardless of whether your total land area is under 2 hectares.
Navigating the 2-hectare rule
If your property extends beyond the 2-hectare mark, you are afforded the discretion to select which segment of your land is exempt from Capital Gains Tax (CGT) upon sale.
This decision is critical, as it directly influences the amount of capital gains tax you will need to pay.
However, in choosing the land exempt from CGT, you must include the area beneath your dwelling. Importantly, this exemption encompasses the dwelling itself along with any ancillary structures, such as garages or separate laundry facilities, that are part and parcel of the home.
Example:
Imagine Jasmine, who has a 12-hectare property in Esperance. She's set aside 8 hectares for her lavender farm and the remaining 4 hectares serve as her private residence and garden space. When Jasmine decides to sell, she can apply the main residence exemption to her dwelling and any 2 hectares of her choosing within the 4 hectares used for her personal enjoyment. Suppose the area she selects represents half the property's value, then Jasmine would be able to claim an exemption from CGT on half of the capital gain from the sale.
The sale of land separate from the dwelling
Selling off land independently from the dwelling complicates matters, typically triggering CGT liabilities, barring a few exceptions like accidental destruction of the dwelling or compulsory acquisition of the land. If you are considering selling off land independently, we encourage you to reach out to your accountant for advice to navigate the potential tax implications effectively.
The importance of meticulous planning and record-keeping
We encourage owners of properties larger than 2 hectares to engage in rigorous record-keeping from the outset. This involves not only financial records but also a detailed mapping of the property to delineate areas dedicated to private use, business operations, or left untouched. Such comprehensive documentation supports the optimisation of CGT exemptions and the strategic use of other tax concessions, such as those for small businesses.
The value of professional guidance
Given the complexities surrounding CGT exemptions for larger private properties, early and strategic planning, complimented by professional tax advice, is invaluable. Whether it's selecting the most advantageous 2 hectares for exemption or navigating the nuances of small business concessions, expert guidance can significantly impact your tax planning strategy.
Do you have a question about CGT on a property greater than 2 hectares? Get in touch with us below.
