So, you find yourself possessing a prime piece of land, perfect for a subdivision. You’ve done your homework, discussed the details with the Council, and builders, and secured financing from the bank. But, a critical aspect often goes overlooked – the tax implications.

1. Tax Treatment of the Subdivision: It’s Not Always Simple

The tax implications of a subdivision project can be more intricate than they initially seem. Refrain from assuming that your eventual profit will automatically qualify for capital gains tax (CGT) concessions because it’s a small development.

Generally, capital gains tax is likely to apply if you’ve owned a property for personal use over an extended period, then subdivide and sell the newly created lot. The gain is calculated from when you first acquired the land. However, you must apportion the property’s cost between the subdivided lots.

If you’re subdividing a property that includes your home, the main residence exemption may not apply when you sell a subdivided block separately from the block containing your home, even if it’s only been used for private purposes related to your home.

When a jointly-owned property is subdivided, even before selling it to an unrelated party, this typically triggers immediate tax implications. Such arrangements, known as partitioning, can be complex from a tax perspective.

2. Developing the Property: A Different Tax Ballgame

But what if you decide to develop the land by building on it? It’s not uncommon for individuals to subdivide and then develop their block by constructing a house or duplex to sell.

When someone develops a property to sell it for a profit in the short term, there’s a risk that it will be treated as income rather than falling under CGT rules. This can limit the availability of CGT concessions, like the 50% CGT discount, and often expose you to GST liabilities, even for one-off developments.

 Let’s illustrate this with an example: Claude. He bought his home in July 2001 for $300,000. In July 2020, Claude began exploring the idea of subdividing his property by conducting a registered valuer’s report. It revealed the original property and land were now worth $360,000, with the subdivided lot valued at $240,000. Claude decided to build on the subdivided lot, taking a $400,000 loan, intending to repay it upon selling the house.

In July 2021, Claude sold the subdivided block and the new home for $1,210,000 (GST-inclusive).

Here’s how the tax works for Claude:

  • Claude calculated an overall economic gain of $580,000 based on various factors.
  • A capital gain of $120,000 is attributable to the newly created subdivided lot.
  • Claude is entitled to a 50% CGT discount, resulting in a discounted capital gain of $60,000.
  • The increase in the value of the subdivided lot from the time of profit-making activities to the sale is treated as ordinary income.

 If Claude isn’t running a business, he can’t claim deductions for development expenses as they occur; they factor into the net profit upon sale.

3. Do I Need to Register for GST?

Whether or not you need to register for GST when subdividing land depends on your specific situation. It may not be necessary for individuals subdividing land held for private use. However, GST registration is more likely if you’re engaging in property development as a business or in a business-like manner.

In Claude’s case, since the projected sale price exceeded the $75,000 GST threshold, he’ll likely need to register for GST. This involves specific obligations:

  • A ‘default’ GST liability on the sale price (although it might be reduced with the GST margin scheme).
  • Notifying the purchaser about the amount to be withheld and paid to the ATO at settlement.
  • Claiming GST credits for development expenses.
  • Reporting these transactions through business activity statements.

The tax implications of subdivisions and property projects can be intricate. If you’re contemplating such a venture, don’t hesitate to reach out to us. We can help you navigate the scenarios and understand the tax impact, ensuring a financially sound project.