Whilst not a subject I would normally research or spend my time writing about, this article relates to an issue I am regularly reminded of – so I did:

A person I know owns a developed property on Kangaroo Island, gifted to him way back in 1985 – and he mentioned he’s holding onto it to avoid CGT! While that sounds logical on the surface, it made me wonder: What would happen if he decided to sell it today? Would he actually pay no CGT – or could he owe more than he realises?

After much research via the ATO and a few other related websites – I now finally understand CGT much better! Let me unpack this issue as best I can.

THE GOOD NEWS: PRE-CGT PROPERTIES ARE EXEMPT

Here’s a little-known fact that might help him breathe easier: properties acquired before 20 September 1985 are entirely exempt from CGT. This exemption applies to his house because it was a gift in 1985 – before CGT laws came into play. If the house hasn’t had major improvements since then, there’s no tax bill to worry about.

BUT WHAT ABOUT IMPROVEMENTS?

This is where it gets tricky. If significant upgrades – like extensions, rebuilds, or fancy renovations – were made after September 1985, those changes can attract CGT.

Essentially, the tax only applies to the value of the improvements. (The bonus section at the end of this article explains more about the impact of home improvements by the tenant.)

For example, let’s say his house was worth $100,000 in 1985, and he sells it today for $1,000,000. If he spent $200,000 on improvements after 1985, CGT would only apply to the proportionate value of those renovations, not the entire property.

FACTORING IN DISCOUNTS

Here’s the silver lining: if CGT applies, properties held for more than 12 months qualify for a 50% discount. That means only half the taxable gain is added to his income.

Let’s break it down:

Sale Price: $1,000,000
Cost Base (1985 value + improvements): $300,000
Taxable Gain: $1,000,000 – $300,000 = $700,000
After Discount: $700,000 × 50% = $350,000

The $350,000 would be added to his income and taxed at his marginal rate. If he’s a high-income earner (45% tax rate), the CGT owed could be $157,500 !!

SOLUTION: BUILD IT INTO THE SALE PRICE

Here’s the key takeaway: If he’s on the fence about selling, he could simply include the CGT cost in his sale price. By doing so, the buyer effectively covers the tax, and he still walks away with a solid profit.

FINAL THOUGHTS

If you’re in a similar situation, I’d recommend crunching the numbers or chatting with a tax advisor. In cases like this, CGT isn’t always the monster it’s made out to be. With the right planning, it’s possible to sell and still come out ahead.

REFERENCES

Here are some resources to explore CGT rules further:

By including tax in the sale price, you can turn what seems like a hurdle into just another part of the journey.

BONUS:

In the context of Australian Capital Gains Tax (CGT), improvements are generally considered enhancements that increase the value or utility of the property. According to the Australian Taxation Office (ATO), these are typically significant upgrades or additions, such as extensions, major renovations, or structural changes. Routine repairs and maintenance, like fixing broken windows, regular mowing, or planting trees, are not classified as capital improvements.

Here’s the distinction:

Repairs and Maintenance
These activities restore the property to its original condition or keep it functional. They are considered ongoing expenses and can often be deducted as part of annual income tax (if the property is rented out). Fixing broken windows, regular lawn care, and replacing like-for-like fixtures fall into this category.
Capital Improvements
These are changes that add value to the property or extend its useful life. For example, if tenants added a landscaped garden with new features, installed solar panels, or built a deck, these might qualify as improvements.
Tenant Contributions
If tenants perform work that increases the property’s value and there’s a clear agreement (e.g., rent reduction in exchange for landscaping), the work may be treated as a contribution to the property’s cost base. Documentation proving this arrangement is critical for tax purposes.

In short, basic repairs and upkeep by tenants aren’t treated as improvements under CGT. However, enhancements or new additions initiated by tenants could qualify, depending on their impact on the property’s value and how they are documented. For clarity, consulting a tax professional would help align these nuances with your friend’s specific scenario.

For further details, see:

Now even I understand how CGT works.

If I was the owner of the property, I would sell the property while the tenants can still live in it. Since it has no running cold water other than the bathroom, the pipe to the washing machine in the laundry is gravity fed, and the tenants can feel cold air coming through the brickwork, and many of the window-frames are either hollow or deteriorating – IT IS TIME TO SELL! At least for the land value.