By Alisa Sainoski

It is becoming increasingly popular for people who own a large block of land to subdivide and either sell the subdivided land or build a house on each of the subdivided blocks and then sell one or both houses.  The attraction of doing so can be the often large profits which can be made.  However, where large profits are expected, so too are tax consequences and it’s important to be aware of them before signing on the dotted line.

First and foremost, don’t assume the Capital Gains Tax (‘CGT’) main-residence exemption will eliminate the tax liability.  In order to access the exemption, the bit of land which housed the main residence needs to be sold.  There will be no main-residence exemption if the house lived in is kept and the subdivided land or new build is sold.

The subdivision and disposal of land acquired as a pre-CGT asset (i.e. purchased before 20 September 1985) will only have CGT implications if capital improvements have been undertaken subsequently and are considered separate assets.  Any building or other structure created post-CGT would be a separate asset under these rules.  In the case of other capital improvements, the cost base of the improvement at the time of disposal must exceed certain limits if the improvement is to be deemed to be a separate asset.

For land acquired later, the CGT provisions are likely to apply to the disposal of the subdivided lots.  The Commissioner’s view is the disposal of a subdivided block is the disposal of an asset in its own right, and is not a part of the original parcel of land.

Because subdivided block of land is registered with it’s own separate title and is thus considered to be two or more separate assets for CGT purposes.

The subdivision of land in itself is not generally considered to be an event which would be subject to CGT.  The CGT taxing point is usually considered to be when the subdivided blocks are sold (whether it’s as vacant land or otherwise).

For example:

Img Vba Subdivision Pic Ab15 7 2020

Dwelling A is likely to be considered the main residence based on it’s historial existence as the main dwelling of the property.  In the event Dwelling A is sold, and Dwelling B becomes the main residence, it is likely the main residence exemption would apply to the sale of Dwelling A, but may need to be apportioned to Dwelling B based on the period of habitation.

In the event the original residence is demolished and a new house built, CGT is unlikely to apply however, the new residence must be constructed within a period of four years, and it must become the main residence on completion.

Where newly vacant land is sold as a development site, or is subdivided into vacant lots CGT may apply.  A common trap in this event is to assume the main residence exemption will apply based on the previous use of the property, however, the main residence needs to remain in existence for the exemption to apply.

Where a taxpayer is considered to be a land developer any profit as a result of subdivision is treated as ordinary income (as opposed to a capital gain) where the intention or purpose of entering into the transaction was to make a profit or gain.  In addition, it is likely Goods and Service (‘GST’) will apply in this scenario.

[gravityform id=”1″ title=”true” description=”true”]