As house prices continue to remain high in a competitive market, for those with a significant portion of land, the attraction of subdividing the family block may appeal as a source to increase wealth, build a property portfolio, or downsize for retirement.
Whilst many people know that the family home is generally exempt from Capital Gains Tax (CGT) under the 'Main Residence Exemption', questions often arise in relation to how subdividing the family home property could affect your entitlement to the Exemption.
As such, we've detailed the implications surrounding general and Capital Gains Tax involved in subdividing land related to the family home throughout the article below:
Overview & Tax Implications
In understanding the implications of land subdivision of the family home property, it is important to first determine the ATO's stance on the matter - which can be complicated. In subdividing a property, the ATO will need to consider whether any gain or loss will be treated as a 'Capital Gain' (subject to CGT) or as ordinary income.
Profit from a subdivision of privately owned land on which the family home was constructed is often treated as a capital gain subject to CGT, however this is not always the case. If your purpose in subdividing was to make a profit and that profit was made while carrying on a business, business operation, or commercial transaction then the profit would be ordinary income.
The extent of the work done to subdivide the property is also a factor in determining if the profit will be capital or ordinary income. If you do the bare minimum to subdivide the family home property, it is more likely to be on capital account. However, if you do more than this (e.g. if you apply for a development application, or build a new dwelling on the subdivided land), the subdivision is more likely to be treated as ordinary income.
If the transaction is treated as ordinary income, there may also be a requirement to register for GST.
It is important to note that, in subdividing a block of land, each resulting new land block will be registered with a separate title. Therefore, for the purposes of CGT, this means you have two or more different/new assets.
In determining Capital Gains implications and the ATO's position, the matter is further complicated due to different subdivision strategies a landowner can undertake - each resulting in potentially different tax treatments and outcomes.
Such subdivision strategies can include whether you're planning to sell the part with the house, or the vacant land, or build and move in, or build and sell straight away.
CGT Tax Implications for Subdividing Land with the House
In situations where you are subdividing land containing the already-owned family home which you are still living in, you generally won’t be liable for Capital Gains Tax on the block of land containing the family home because of the Main Residence Exemption, with the property deemed the Principal Place of Residence.
If you are selling the subdivided block that does not include the family home, the Main Residence Exemption won’t apply, and you would need to determine if the land sold was subject to ordinary income or capital gains tax.
If it is subject to capital gains tax, CGT will be payable based on the difference between the sale proceeds and the cost-base. If the property has been held for more than 12 months by an Individual or Trust by the time it is sold, the Capital Gain incurred will be eligible for the 50% Capital Gains Tax discount, halving the tax liability of the gain.
Please note, the date you originally acquired the property is the date that the ATO will use to calculate when you acquired the subdivided land, not the date of the subdivisions.
What happens where I purchased my property prior to 1985?
Where a main residence property is purchased prior to 20 September 1985, there are no CGT consequences when subdivided. The ruling applies to both the Main Residence block and the investment block.
However, if you purchased the land prior to 1985 but build your home after 1985, you may be required to pay a proportionate amount of tax on the investment block when sold. Capital Gains Tax or Income Tax may be payable on the second/investment block from the date of subdivision depending on the length of time it is held after the subdivision.
What Should You Do If Considering a Subdivision Project?
Given the complex tax nature of subdividing the family block, it is important to first speak with an accountant (such as Archer Gowland Redshaw) to discuss the project and your overall intention.
Whilst every situation is different, your adviser can outline the most likely tax outcomes as well as provide a tax scope for your project.
For More Information
For more information on the tax implications on any land subdivision you are considering, please contact the Archer Gowland Redshaw advisers on (07) 3002 2699 | info@agredshaw.com.au
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