Example 54 shows how you would calculate your capital gain on the sale of your rental property.
The sample worksheet (PDF, 101KB)This link will download a file shows how you would complete the Capital gain or capital loss worksheet for this example.
Example 54: Sale of a rental property
Brett purchased a residential rental property, on 1 July 1997. The price he paid was $150,000, of which $6,000 was attributable to depreciating assets. He also paid $20,000 in total for pest and building inspections, stamp duty and solicitor’s fees.
In the next few years, Brett incurred the following expenses on the property:
interest on money borrowed |
$10,000 |
rates and land tax |
$8,000 |
deductible (non-capital) repairs |
$15,000 |
Total |
$33,000 |
Brett cannot include the expenses of $33,000 in the cost base, as he was able to claim a deduction for them.
When Brett decided to sell the property, a real estate agent advised him that if he spent around $30,000 on major structural improvements, the property would be valued at around $500,000. The major structural improvements were completed on 1 October 2016 at a cost of $30,000.
On 1 February 2017, he sold the property for $500,000 (of which $4,000 was attributable to depreciating assets).
Brett could not claim any capital works deductions for the original construction costs, as construction of the property began before 18 July 1985. However, he could claim a capital works deduction of $255 ($30,000 × 2.5% × 124 ÷ 365) for the major structural improvements.
For information about capital works that qualify for a deduction, see Rental properties 2017 (NAT 1729). For information about how capital works deductions affect the CGT cost base, see Cost base adjustments for capital works deductions.
This is Brett’s only capital gain for the year, and he has no capital losses to offset from this income year or previous years.
Brett works out his cost base as follows:
purchase price of property (not including depreciating assets) |
$144,000 |
Plus pest and building inspections, stamp duty and solicitors fees on purchase of the property |
$20,000 |
capital expenditure (major structural improvements) $30,000 less capital works deduction ($255) |
$29,745 |
real estate agent’s fees and solicitor’s fees on sale of the property |
$12,500 |
Cost base unindexed |
$206,245 |
Brett deducts his cost base from his capital proceeds (sale price):
proceeds from selling the house (not including depreciating assets) |
$496,000 |
Less cost base unindexed |
$206,245 |
Equals |
$289,755 |
He decides the discount method will give him the best result, so he uses this method to calculate his capital gain:
$289,755 × 50% = $144,877
Brett writes $144,877 at A item 18 on his tax return (supplementary section).
Brett writes $289,755 at H Total current year capital gains item 18 on his tax return (supplementary section). Brett must also make balancing adjustment calculations for his depreciating assets. Because he used the property 100% for taxable purposes, he will not make a capital gain or capital loss from the depreciating assets.
End of exampleOther CGT events affecting real estate
CGT event B1 happens to real estate if you enter into an agreement where the new owner is entitled to possession of the land or the receipt of rents and profits before becoming entitled to a transfer or conveyance of the land.
Where this happens under a contract, it is known as a ‘terms contract’ and the new owner usually completes the purchase by paying the balance of the purchase price and receiving the instrument of transfer and title deeds.
It may also happen where an agreement is made with a relative or other party to use and enjoy the property for a specified period, after which title to the property passes to them. It will not happen where, under an arrangement, title to a property may pass at an unspecified time in the future.
CGT event B1 happens when use and enjoyment of the land is first obtained by the new owner. Use and enjoyment of the land from a practical point of view takes place at the time the new owner gets possession of the land or the date the new owner becomes entitled to the receipt of rents and profits.
If the agreement falls through before completion and title to the land does not pass to the new owner, you may be entitled to amend your assessment for the year in which CGT event B1 happened.
CGT event C1 happens if an asset is lost or destroyed. This event may happen if, for example, a building on your land is destroyed by fire. Your capital proceeds for CGT event C1 happening include any insurance proceeds you may receive for the loss or destruction. The market value substitution rule for capital proceeds that generally applies if you receive no capital proceeds does not apply if CGT event C1 happens. For more information, see Loss, destruction or compulsory acquisition of an asset.
CGT event D1 happens if you give someone a right to reside in a dwelling. The capital proceeds include money (but not rent) and the value of any property you receive.
The market value substitution rule for capital proceeds (see Definitions) applies if:
- the amount of capital proceeds you receive is more or less than the market value of the right, and
- you and the person you granted the right to were not dealing with each other at arm’s length in connection with the event.
CGT event D2 happens if you grant an option to a person or an entity, or renew or extend an option that you had granted.
The amount of your capital gain or capital loss from CGT event D2 is the difference between what you receive for granting the right and any expenditure you incurred on it. The CGT discount does not apply to CGT event D2.
Example 55: Granting of an option
You were approached by Colleen, who was interested in buying your land. On 30 June 2016, you granted her an option to purchase your land within 12 months for $200,000. Colleen pays you $10,000 for the grant of the option. You incur legal fees of $500. You made a capital gain in the 2015–16 income year of $9,500.
End of exampleExercise of an option
If the option you granted is later exercised, you ignore any capital gain or capital loss you made from the grant, renewal or extension. You may have to amend your income tax assessment for an earlier income year.
Similarly, any capital gain or capital loss that the grantee would otherwise make from the exercise of the option is disregarded.
The effect of the exercise of an option depends on whether the option was a ‘call option’ or a ‘put option’. A call option is one that binds the grantor to dispose of an asset. A put option binds the grantor to acquire an asset.
Example 56: Granting of an option (continued)
On 1 February 2017, Colleen exercised the option you granted her. You disregard the capital gain that you made in 2015–16 income year and you request an amendment of your income tax assessment to exclude that amount. The $10,000 you received for the grant of the option is considered to be part of the capital proceeds for the sale of your property in the 2016–17 income year. Your capital gain or capital loss from the property is the difference between its cost base/reduced cost base and $210,000.
End of exampleCGT event D4 happens if you enter into a conservation covenant after 15 June 2000 over land that you own and if you receive capital proceeds for entering into the covenant.
From 1 July 2002, CGT event D4 also happens if you receive no capital proceeds for entering into the covenant and you can claim a tax deduction for entering into the covenant. One of the conditions for a tax deduction is that the covenant is entered into with a deductible gift recipient or an Australian Government agency (that is, the Commonwealth, a state, a territory or one of their authorities).
A ‘conservation covenant’ is a covenant that:
- restricts or prohibits certain activities on the land that could degrade the environmental value of the land
- is permanent and binding on current and future land owners (by way of registration on the title to the land where possible), and
- is approved by the Environment Minister (including those entered into under a program approved by that Minister).
If CGT event D4 happens, you calculate your capital gain by comparing your capital proceeds from entering into the covenant with the portion of the cost base of the land that is attributable to the covenant.
Similarly, you calculate your capital loss by comparing your capital proceeds from entering into the covenant with the portion of the reduced cost base of the land that is attributable to the covenant.
The market value substitution rule for capital proceeds that generally applies if you receive no consideration for a CGT event does not apply if CGT event D4 happens. Instead, the capital proceeds are equal to the amount you can claim as a tax deduction for entering into the covenant.
Calculate the relevant portion of the cost base and reduced cost base attributable to the covenant using this formula:
- Cost base (reduced cost base) multiplied by
(Capital proceeds from entering into the covenant over land ÷ those capital proceeds plus the market value of the land just after you enter into the covenant)
As the conservation covenant will affect the value of the entire land you must use the cost base of the entire land in calculating the cost base apportioned to the covenant. This is the case even if the covenant specifically states within its terms that the restrictions as to use only apply to part of the land.
CGT event D4 will not happen if you receive no capital proceeds and the conditions for a tax deduction for entering into the covenant are not satisfied. In this case, CGT event D1 will apply.
CGT events involving leases
There are a number of CGT events that may apply to the lease of land.
CGT event F1 happens if you grant a lease to a person or entity or if you extend or renew a lease that you had previously granted. In the case of a long-term lease (one that may be expected to continue for at least 50 years), you can choose to treat the grant (renewal or extension) of the lease as a part disposal of the underlying leased property.
Example 57: Receiving an amount for granting a lease
Elisabeth operates a profitable footwear retailing business, and wishes to lease some shop space in a prestigious location in the Sydney CBD. However, the demand for shop space in the locality is great, and competition between prospective tenants is fierce. In order to ensure that she secures the lease of the particular shop space that she wants, Elisabeth pays John (the owner of the shop space) a premium of $6,000 in consideration for the grant of that particular lease.
She enters into the lease on 6 September 2008, and John incurs stamp duty of $300 and solicitor’s fees of $500 on the grant of the lease.
John makes a capital gain of $5,200 from CGT event F1
capital proceeds: |
$6,000 |
less incidental costs: (that is, stamp duty of $300 and solicitors fees of $500) |
$800 |
capital gain |
$5,200 |
For Elisabeth, this transaction results in CGT event C2 when the lease expires.
End of exampleThe amount of your capital gain or capital loss from CGT event F1 is the difference between any premium you got for granting the lease and the expenditure you incurred in granting it. The CGT discount does not apply to CGT event F1. The market value substitution rule for capital proceeds that generally applies if you receive no consideration for a CGT event does not apply if CGT event F1 happens.
CGT event F2 You can choose for CGT event F2 to apply (rather than CGT event F1) when you grant, renew or extend a long-term lease. It can apply if you are the owner of the underlying land or if you grant a sub-lease.
Your capital proceeds if CGT event F2 happens are the greatest of:
- the market value of the freehold or head lease (at the time you grant, renew or extend the lease)
- the market value if you had not granted, renewed or extended the lease
- any premium from the grant, renewal or extension.
There are special cost base rules that apply if you choose for CGT event F2 to apply.
For any later CGT event that happens to the land or the lessor’s lease of it, its cost base and reduced cost base (including the cost base and reduced cost base of any building, part of a building, structure or improvement that is treated as a separate CGT asset) excludes:
- any expenditure incurred before CGT event F2 happens
- the cost of any depreciating asset for which the lessor has deducted or can deduct an amount for its decline in value.
The fourth element of the property’s cost base and reduced cost base includes any payment by the lessor to the lessee to vary or waive a term of the lease or for the forfeiture or surrender of the lease, reduced by the amount of any input tax credit to which the lessor is entitled for the variation or waiver.
CGT event F3 happens if you make a payment to a lessee to vary a lease. You can only make a capital loss from this CGT event. Your capital loss is equal to the expenditure you incurred to change the lease.
CGT event F4 happens if you (as lessee) receive a payment from the lessor for agreeing to vary or waive a term of the lease.
You cannot make a capital loss from this CGT event. You will only make a capital gain from CGT event F4 if the amount of the payment you received exceeds the cost base of your lease at the time when the term is varied. In other cases, you will be required to adjust the cost base of your lease.
The market value substitution rule for capital proceeds that applies if you do not receive market value for a CGT event does not apply if CGT event F4 happens.
Example 58: Payment to lessee for change in lease
Sam is the lessor of a commercial property. His tenant, Peter, currently holds a three-year lease over the property, which has another 26 months to run. A business associate of Sam’s wishes to lease the property from Sam for a 10-year period, beginning in six months’ time, for twice the rent that Peter is currently paying. Sam approaches Peter with an offer of $5,000 cash for Peter to agree to vary the terms of the lease so that the lease will expire in six months’ time. Peter agrees to vary the terms on 10 August 2016.
Sam will make a capital loss of $5,000 from CGT event F3 happening:
capital proceeds: |
$0 |
less incidental costs and expenditure incurred: |
$5,000 |
Capital gain or loss |
−$5,000 |
For Peter, this transaction results in CGT event F4 happening. The cost base of Peter’s lease at the time of the variation was $500. He makes a capital gain of $4,500 ($5,000 − $500).
End of exampleYou disregard any capital loss you make from the expiry, forfeiture, surrender or assignment of a lease (except one granted for 99 years or more) if you did not use it solely or mainly for the purpose of producing assessable income, for example, if you used it for private purposes.
CGT event F5 happens if you, as lessor, receive a payment for changing a lease.
The amount of your capital gain or capital loss from CGT event F5 is the difference between what you receive for changing the lease and any expenditure you incurred on it. The CGT discount does not apply to CGT event F5.
Subdivision of land
If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.
However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.
For more information on what is considered 'a reasonable basis' read Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?
When the profit is ordinary income
You may have made a profit from the subdivision and sale of land which occurred in the ordinary course of your business or which involved a commercial transaction or business operation entered into with the purpose of making a profit. In this case, the profit is ordinary income (see Taxation Ruling TR 92/3– Income tax: whether profits on isolated transactions are income). You reduce any capital gain from the land by the amount otherwise included in your assessable income.
Example 59: Land purchased before 20 September 1985, land subdivided after that date and house built on subdivided land
In 1983, Mike bought a block of land that was less than two hectares. He subdivided the land into two blocks in May 2016 and began building a house on the rear block, which he finished in August 2016 and did not use as his main residence. He sold the rear block (including the house) in October 2016 for $650,000. Mike got a valuation from a qualified valuer who valued the rear block at $550,000 and the house at $100,000. The construction cost of the house was $85,000.
Mike acquired the rear block before 20 September 1985, so it is not subject to CGT. As the new house was constructed after 20 September 1985 on land purchased before that date, the house is taken to be a separate asset from the land. Mike is taken to have acquired the house in May 2016, when he began building it. Mike made a capital gain of $15,000 ($100,000 − $85,000) when he sold the house because he did not use it as his main residence.
As Mike had owned the house for less than 12 months, he used the 'other' method to calculate his capital gain.
End of example
Example 60: Dwelling purchased on or after 20 September 1985 and land subdivided after that date
Kym bought a house on a 0.2 hectare block of land in June 2008 for $350,000. The house was valued at $120,000 and the land at $230,000. Kym lived in the house as her main residence. She incurred $12,000 in stamp duty and legal fees purchasing the property.
Kym found the block was too big for her to maintain. In January 2009, she subdivided the land into two blocks of equal size – the front one with the house on it. She incurred $10,000 in survey, legal and subdivision application fees, and $1,000 to connect water and drainage to the rear block. In March 2009, she sold the rear block for $130,000.
As Kym sold the rear block of land separately, the main residence exemption does not apply to that land. She contacted several local real estate agents who advised her that the value of the front block was $15,000 higher than the rear block. Kym apportioned the $230,000 original cost base into $107,500 for the rear block (46.7%) and $122,500 for the front block (53.3%). Kym incurred $3,000 legal fees on the sale.
The cost base of the rear block is calculated as follows:
cost of the land |
$107,500 |
Plus |
$5,604 |
Plus |
$4,670 |
Plus |
$1,000 |
Plus |
$3,000 |
Total |
$121,774 |
The capital gain on the sale of the rear block is $8,226. She calculates this by subtracting the cost base ($121,774) from the sale price ($130,000). As Kym had owned the land for less than 12 months, she uses the 'other' method to calculate her capital gain.
Kym will get the full exemption for her house and the front block if she uses them as her main residence for the full period she owns them.
End of example