Land bought in 1984 may not be Pre CGT
It is usually assumed that if you bought a piece of land before 20 September 1985 it will be a pre Capital Gains Tax (‘CGT’) asset. However, this is not always the case, Division 149 of the Income Tax Assessment Act 1997 (Cth) can displace the operation of the usual rules and deem that block of land to be a post CGT asset where the majority underlying interests in the land have altered by more than half since 20 September 1985.
This happens in private companies or unit trusts. When considering whether the land held is pre CGT land or post CGT land, it is necessary to examine whether there has been a change in the ultimate economic ownership of that land. This means, for example, more than 50% of the shares in the land holding company are owned by different people from those who held those shares prior to 20 September 1985. If this happens the land may be deemed a post CGT asset even though it has been held by the same company since before 20 September 1985.
Additions or improvements made to land after 20 September 1985 will not alter the pre CGT status of the land itself. However, those buildings or improvements on the land constructed after 20 September 1985 may be considered separate post CGT assets.
Majority underlying interest
For tax purposes a block of land is deemed to be acquired as a post CGT asset with a cost base of its market value as at the earliest time when the majority underlying interests were not held by same the ultimate owners who held majority underlying interests prior to 20 September 1985.
This means that we have to consider who ultimately benefits from the shares in the landholding company or units in the land holding trust. If an individual holds the shares for his or her own benefit, he or she is the ultimate economic owner of an interest in the land held by the company. If the shares are held by another company or by the trustee of a trust we would need to look at the underlying beneficial interests in that company or trust to determine an ultimate economic owner for CGT purposes.
Transfer on Death
Where shares or units are transferred by inheritance there is a change in the shareholder but this type of change does not affect the majority underlying ownership for CGT purposes.
Transfer on Relationship Breakdown
Where shares or units are transferred on the breakdown of a marriage or relationship which meets the criteria for CGT concessions there is a change in the shareholder but this type of change does not affect the majority underlying ownership for CGT purposes.
Buildings and other Structures
Even if the land acquired before 20 September 1985 is itself considered a pre CGT asset, it is often the case that there are buildings and improvements on the land which were constructed after this date. Where pre CGT land is improved after 20 September 1985 the improvement will be considered a separate asset if it is a building or a structure which cost more than the improvement threshold for that year or more than 5% of the amount received when the land is transferred to another person. This is despite the fact that at law, quicquid plantatur solo, solo cedit, such a building or structure is clearly part of the land. The ATO has published an improvement threshold for each year starting at $50,000.00 in 1986. The amount is increased annually to take inflation into account and is $147,582.00 for the 2017/18 financial year.
If pre CGT land has post CGT buildings on it when the land is sold the proceeds received must be apportioned and the gains on the buildings must be accounted for separately from the land for tax purposes. The proceeds must be ‘reasonably’ apportioned between the land and each building and structure. There is no set means of apportionment but the methodology selected should be ‘reasonable’; one that can be justified should the ATO query its selection. In calculating tax due the cost base of that building or structure may be deducted from the apportioned share of proceeds to give a figure for the taxable gain.
In summary, if you are the Director of a company or the trustee of a trust selling land acquired before 20 September 1985 you cannot simply assume that there is no capital gain on the transaction. You should consider the underlying ownership of the land and the construction of the structures on it to ensure that you do not make a decision to sell without taking the tax costs of that transaction into account.