Ask Margaret: Is CGT based on contract of sale date or on settlement date?

Hi Margaret,

We have a 1 acre or 4000 sq metre block of land , zoned farming in country Victoria. We bought it in July 2014 as an investment to develop it as a future home site.

If I sell a block of land with contract of sale dated in 2017 financial year, but settlement is in 2018 financial year, is CGT based on contract of sale date or on settlement date? It will make a difference as we will be retired in 2018 financial year and will be in  a different tax bracket.

The block of land, zoned farming, did not have a planning permit to build a dwelling or shed and has generated no income while we have owned it but we have made improvements. Are the cost of the improvements deductible? We have planted 600 trees at a cost of $1100.

We have drawn up a set of house plans and successfully applied for a planning permit to build a dwelling and shed at a cost of $1400. Are maintenance costs deductible?

E.g. 100 trips to the block of land to mow lawns, water trees, earth moving costs to remove dead trees, loan costs and purchase costs and selling cost.

Can we deduct stamp duty on purchase? Legal costs on purchase? Loan borrowing costs? Loan interest from date of purchase to date of sale? Loan discharge costs? Legal costs on sale of land? Council rates from purchase date to sale date? Break fees on a fixed loan for the land purchase if I sell before the 4 year fixed term is completed?

Thanks for your suggestions

Regards

Kevin

Hi Kevin,

According to the Australian tax office:

When you sell or otherwise dispose of real estate, the time of the event (when you make a capital gain or capital loss) is usually:

• when you enter into the contract (generally the date on the contract), not when you settle – the fact that a contract is subject to a condition, such as finance approval, generally doesn't affect this date
• when the change of ownership occurs if there is no contract (such as when a property passes to a beneficiary), or
• if the real estate is compulsorily acquired – the earliest of
• when you receive compensation from the acquiring entity
• when the entity became the property's owner
• when the entity enters the property under a power of compulsory acquisition, or
• when the entity takes possession under that power.

In your case this means the event occurs in 2017 and this is the year the tax becomes due and payable.  If you have already lodged your tax return before settlement and the receipt of the proceeds, you would need to request an amendment to the prior year’s return. 

As for the remainder of your questions, you do need specific advice which takes into account all of your circumstances, including the purpose for which you originally bought the property and your intentions at the time.  Generally speaking though, I can tell you that:

1.   If this is not a working farm the zoning should not impact deducibility of any bona fide investment property related deductions.  You will need to get some specific advice around the planting of the trees, though, as they may not be deductible, unless such planting was required for the purposes of earning property related income.  

2.   Improvements to a rental property are deductible as long as the purpose for the block was to build an investment, and not to build future own home. 

3.   Once a property becomes income producing, maintenance costs are deductible.  If your intention was to build a property to rent out but instead you sell, some of your costs may become capital costs, but again this one would have to be determined by your accountant.

4.  You have a large list of other costs and again, their deductibility depends upon the reason you bought the block – if it was for an investment some may be considered capital costs (and so add to your cost base for the purposes of determining capital gains tax) and others, as long as the property was income producing, may be deductible as yearly expenses.  Even some costs which are normally yearly expenses can be added to the cost base in certain circumstances.  

It is critical that you consult with a highly skilled accountant who has experience in this area to be sure that you get the right advice.  Remember, regardless of what any one tells you, the responsibility for making the right claims rests with the tax payer.  Bad advice won’t get you out of trouble if you make an incorrect claim.

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