Find out if the payment you receive for compulsory acquisition of your home is exempt from CGT.
How CGT applies when your home is compulsorily acquired
If all or part of your home is compulsorily acquired, you can apply the main residence exemption to any money or other compensation you receive.
If your home is compulsorily acquired and you are entitled to the full main residence exemption, you ignore any capital gain or loss.
You are also covered by the main residence exemption if only part of your property is compulsorily acquired, such as:
- land adjacent to your home
- a structure associated with your home, such as a garage.
You can apply the main residence exemption to a maximum of 2 hectares of your property during your ownership.
To be exempt the land must be used for private purposes.
If the land you use for private purposes is larger than 2 hectares, you can nominate which part the exemption will apply to. However, the 2-hectare total must always include the land underneath your dwelling.
This limit may be reached in stages through multiple capital gains tax (CGT) events.
You also ignore a capital gain or loss from the compulsory acquisition of land adjacent to an inherited dwelling.
Example: compulsory acquisition and main residence exemption
Rene and Vidia live in a house on a 10-hectare block. It is their main residence. The land underneath the house is 0.03 hectares of the block.
The Department of Roads compulsorily acquired a 1.2 hectare strip of their land.
Rene and Vidia chose to treat the 1.2 hectare strip as part of their main residence. The money they received from the acquisition was therefore exempt from CGT.
A few years later, Rene and Vidia had a second compulsory acquisition. The Water Company purchased one hectare of their remaining land.
This time the couple could not claim a full exemption from CGT.
Their home still qualified as their main residence, but the main residence exemption is limited to 2 hectares during their ownership.
As they had previously used the exemption for 1.2 hectares, and their house occupies 0.03 hectares, the maximum they can claim for the second acquisition is:
2 hectares − 1.2 hectares − 0.03 hectares = 0.77 hectares
Since 0.77 hectares is 77% of the one hectare that was compulsorily acquired, Rene and Vidia could only treat this percentage of the proceeds as exempt from CGT.
What is compulsory acquisition?
Compulsory acquisition is when a government agency takes possession of all or part of your property.
It may also be done by an entity acting on behalf of government.
Records you need to keep
You must keep records when you claim the main residence exemption from CGT.
The ATO sometimes requests evidence (for a review or audit) to support your income tax self-assessment.
The records you may be asked to provide include, but are not limited to:
- proof of the compulsory acquisition arrangement
- evidence of how your property qualifies as a main residence
- calculations of your capital gain or loss
- site plans or other documents showing that the total compulsorily acquired land during your ownership is 2 hectares or less.