Treatment of Taxpayer's Principal Residence
23.57. The taxpayer's principal residence should be considered in a different light to his other assets, particularly in a society such as ours where home ownership is so highly valued and encouraged. A home is regarded as more than simply an investment and it must be remembered that any capital gain on a home will usually be in a sense illusory since the taxpayer will normally have to use all the proceeds of sale to purchase another house of comparable size, comfort and location. To tax the gain would have serious effects on the mobility of the work force. A person might be unwilling to accept a job in another city if the gain on the sale of his house is to be taxed, thus reducing the amount available for purchase of a new house and forcing him to accept a house of a lower standard than the one he has left. In addition, the administrative problems of levying tax upon the gains on the taxpayer's principal residence would be unacceptable. Apart from the task of valuing all houses on the date of commencement of the tax, there would be a continuing problem of determining the costbase of the house. All expenditures on repairs, alterations and extensions would need to be accounted for and dissected into those that enhanced the value of the property (and would thus be taken into account in determining the cost-base and hence the gain) and those that were related only to the use or enjoyment of the property. In addition, homes are commonly owned for very long periods, and records of expenditure on the taxpayer's home are likely to be scanty or non-existent.
23.58. The Committee accepts that it would be possible to adopt provisions giving a ‘roll-over’ (explained in paragraph 23.69) instead of an exemption or confining the proposed exemption to houses below a certain value. If either alternative were adopted, the tendency for resources to be diverted into overlarge houses would be corrected. The former alternative would, if anything, increase the administrative problems. Under the second alternative the administrative problems would be less: only a small number of houses need be outside the exemption. The administrative difficulties would nonetheless still be considerable.
23.59. Accordingly, the Committee recommends that capital gains on the taxpayer's principal residence should in general be exempt from tax. But there is a need to ensure that this exemption is not abused and the Committee favours limiting the exemption to the house together with a reasonable amount of the land on which it is situated. It is recommended that the amount of land qualifying for exemption should be such amount as is reasonably necessary for the enjoyment of the house having regard to its location. The appropriate limits might be:
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- (a) in the case of land zoned residential, industrial or commercial: two-tenths of a hectare (approximately half an acre) or such greater area not exceeding four-tenths of a hectare (approximately one acre) as may be reasonably necessary for the enjoyment of the house;
- (b) in the case of rural land: one hectare (approximately two-and-a-half acres).
The Committee recognises that any arbitrary limits such as these will produce inequities and anomalies. Four-tenths of a hectare of land in a densely populated inner city suburb may be an excessive amount of land to exempt, whereas a similar amount on the outskirts of a country town may be unreasonably small. Nonetheless the advantages of certainty in this matter outweigh the possible inequities. Where the amount of land on which the principal residence is situated exceeds the exempt amount, the gain would have to be apportioned between the house and exempt amount on the one hand, and the remainder of the land on the other and the latter will be subject to tax. This would give rise to some administrative difficulties and disputes but these should not be numerous having regard to the fact that the vast majority of homes are situated on areas of land below the suggested exemption level.
23.60. The Budget proposals envisage an exemption of the taxpayer's principal residence together with such area of surrounding land (not exceeding four-tenths of a hectare) as may be reasonably necessary for enjoyment of the house.