Capital Gains Tax in Subdivision of House Land

There is a misconception that the sale of a subdivided land of your home is not subject to a capital gain because it is seen as part of your main residence and therefore enjoys the benefit of the main residence exemption. However, this is not correct. The sale of land can be partially and fully exempt from capital gains tax if the land (up to 2 hectares) is sold together with the dwelling attached to it. This means the capital gain on the sale of a subdivided vacant land which is part of your home cannot be reduced by the main residence exemption because the exemption requires the land to be sold together with the dwelling. The disposal of a vacant land (up to a maximum of two hectares) without a dwelling can be exempt if the disposal is related to a dwelling that is accidentally destroyed or a compulsory acquisition by the government.

Is capital gains tax payable when the land of your house is subdivided?

A subdivision of land is not a Capital Gains Tax Event, thus there is no capital gains tax payable when the land is subdivided. When a land is subdivided, the land is split into two separate blocks, and each of those blocks is considered a new asset under section 112.25 of the Income Tax Assessment Act 1997.

What is the cost for each block?

As the property is split into two properties, the cost base of the land must be apportioned reasonably to the two blocks. In Taxation Determination 97/3, the ATO states that they would accept any approach that is appropriate to the circumstances of the particular case, such as an area basis or a relative market value basis. A reasonable apportionment of the cost of the land can be achieved on an area basis if all the land is of a similar market value. However, the market value apportionment basis should be used if different blocks of the land have different market values, such as when one block offers a scenic view.

What are the tax implications of subdividing the land of your house? 

The profit on land subdivision can be taxed either as ordinary income or capital gain. When the ATO views the profit on the sale of the subdivided land as part of a profit-making scheme, the profit is taxed as ordinary income instead of capital gain. The profit-making scheme is generally indicated by the intention to subdivide the land and sell it. Factors that can indicate a profit-making scheme include previous experience in land subdivisions, the taxpayer being a builder, or involvement in the building industry.

However, the sale of a subdivided land is taxed as capital gain if the gain is treated as a mere realisation of a capital asset. The property must be acquired with no profit-making intention. To demonstrate that there was no profit-making intention, any subdivision activities on the land should be limited to complying with council requirements such as water, sewerage, and roads.

What are the tax implications if a new dwelling is constructed on the subdivided land?

The profit on the sale of a new house constructed on the same land as your main residence will be taxable as ordinary income. This is because the construction constitutes an ‘enterprise’ in the context of GST.  The meaning of enterprise under s 9-20 of the GST Act includes an activity or a series of activities in the form of a business or the form of an adventure or concern in the nature of trade. Therefore, a one-off transaction that has a commercial nature constitutes an enterprise. As the construction on a subdivided land is considered a profit-making scheme, the sale of the new residential property will be also subject to GST.

In conclusion, the decision to subdivide and sell land from your main residence should not be taken lightly. In addition, the construction of a new dwelling on the subdivided land introduces another layer of implications under GST. Therefore, it is imperative for homeowners to fully understand the tax implications and consult with a tax consultant, before embarking on a subdivision.

The information presented in this article is not intended to serve as tax advice. It is for general information purposes. Consultations with a qualified tax consultant are highly recommended before undertaking actions based on the information provided in this article. The author and publisher bear no responsibility for any loss, damage, or disruption caused by decisions made based on this article’s content.

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