16 Feb 2011 | Capital Gains Tax
Prior to the current capital gains tax regime tax was only paid on the sale of assets that had been bought with the intention of selling them at a profit. Under this rule the scales were tipped heavily in favour of taxpayers. When the new capital gains tax system was introduced on September 20, 1985 the laws became more complicated, and the scales swung back in favour of the ATO.
Q. Up to 1974 two of my great Aunts jointly owned and lived in a house in inner city Perth. In 1974 one Aunt died and left me her half share in the house. The other Auntie continued to live in the house until 1989 and then moved to an old people’s home. The house remained empty. She died in 1995 and left me her half share of the house. If I sell the property what will I pay capital gains tax on?
A. The amount of capital gains tax payable when an inherited asset is sold depends on when the original owner purchased it, and when the seller inherited it. Where an asset was purchased by the deceased before September 20, 1985 the cost of the asset for tax purposes is the value at the date of death. For assets purchased by the deceased after September 1985 the cost is that paid by the deceased.
Assets inherited before September 1985 will not be assessed for capital gains taxed when sold. For assets inherited after that date capital gains tax is payable on the excess of the selling proceeds over the cost.
The exception to this is where a principle place of residence is inherited. If the house meets all of the exemption conditions the former principle place of residence can be sold and no tax is payable on the gain, if the settlement takes place within two years of the deceased’s death.
In your situation half of the house was inherited by you before September 1985 and no tax will be payable on half of the gain. For the other half you will need to get a valuation of the house at the date of death of your Auntie in 1995. As you will be selling the house more than two years after she died tax will be payable.
The amount of capital gains tax payable is calculated by deducting half of the value of the house in 1995 from half of the net proceeds you receive. If there have been costs related to the house that were not tax deductible since 1995, such as renovations or other costs if the property was not being rented, these can be added to the 1995 value.
Tax will be payable by you, at your relevant marginal rate of tax, on half of the gain you make. Given that this gain will more than likely be substantial you should seek professional advice to see if there are any steps you can take to reduce your amount of tax payable.
Q. We have one principal place of residence which is CGT free upon sale. What are CGT implications if I sold my back yard to a third party for development purposes?
A. When a principle place of residence is sub-divided a taxpayer is left with two assets. The first is the land and the home on it that retains the CGT exemption. The second is the new piece of land created by the sub-division. If you sold a piece of your backyard tax would be payable on the excess of cost of that piece of land and the proceeds you receive.
Investment tax questions can be emailed to firstname.lastname@example.org