The subdivision of land has been a prominent topic throughout 2024, particularly with the increasing demand for housing in the Australian property market. A shortage of land in desirable locations, such as areas close to city centres, shopping hubs and popular schools, has led many property owners and investors to consider the option of subdividing land as a way to maximise the value of their properties.
However, subdivision of land in Australia can have tax implications in terms of both Capital Gains Tax (CGT) and Goods and Services Tax (GST), and understanding these tax consequences is important in making informed decision, whether you are owner-occupier, investor or developer.
Key factors to consider when subdividing land
When considering the tax implications, it is important to evaluate certain key factors that will determine the nature of the taxes payable. Different tax treatments may apply depending on the following:
The type of taxpayers:-
- owner-occupier - someone living in the property as their primary residence
- investor - someone holding the property for rental or long-term capital growth
- property developer - someone subdividing the land for profit with the intent to sell
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- family home - primary residence
- vacant land - land that has not been developed or is not being used
- subdivided land - property that has been divided into smaller lots, which may be sold separately
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- primary or main residence – if property continues to be used as the owner's primary residence, some CGT exemptions may apply
- rental property - if one or more subdivided lots are rented out, this could have different tax consequences
- developing land for sale – if the primary purpose is to develop and sell the land, it may be treated as a business activity, affecting both CGT and GST outcomes.
Capital Gains Tax (CGT) implications
Subdivision itself does not trigger a CGT event, but the sale of the subdivided land usually does. The CGT treatment depends on how the land will be used and what is the taxpayer's intention.
For instance, if the land includes your primary residence, you may be able to apply for a full or partial CGT exemption on the sale. However, the exemption is limited to land under 2 hectares, and any land developed and sold for profit may not qualify.
When you subdivide a property, you will need to apportion the original cost base (the amount paid to purchase the property) across the subdivided lots. This includes costs like legal fees, stamp duty, and subdivision expenses. The cost base will determine the capital gain or loss when the property is sold.
If the property has been held for more than 12 months, individuals and trusts may qualify for a 50% CGT discount on the capital gain. However, companies are not eligible for this discount.
In the event where subdivision is part of a larger plan to develop and sell the land for profit, the ATO may classify the activity as a business or isolated profit making scheme, which could result in the gains being treated as ordinary income, not subject to the CGT discount.
Goods and Services Tax (GST) implications
The GST implications largely depend on whether the taxpayer is carrying on an enterprise (a business) and if the sale exceeds the GST registration threshold of $75,000.
Once we determine that subdivision and sale of land are part of an enterprise, you may be required to register for GST. For example, if the taxpayer subdivides and sells multiple lots as part of a property development business, the sales may be subject to GST. However, an isolated subdivision by an individual, where the sale is not part of a business, may not attract GST.
The sale of each subdivided lot will normally attract GST at the rate of 10%. This applies primarily to sales of vacant land or new residential premises. However, sales of existing residential premises or land that is used for private purposes may be GST exempt.
The margin scheme can be applied by allowing you to calculate GST on the difference (or margin) between the sale price and the original purchase price, rather than on the full sale price. Both the buyer and seller must agree in writing to apply the margin scheme. You can read more about Margin Scheme in our recent article.
For More Information
Subdividing land provides an opportunity to increase property value, especially in Australia’s growing real estate market. To avoid unforeseen tax burdens, it’s essential to understand CGT and GST considerations. Whether you’re an owner-occupier, investor, or developer, seeking expert tax advice is crucial to stay compliant with Australian tax regulations.
If you would like more information regarding subdivision and how it can affect you or your business, please contact an Archer Gowland Redshaw adviser on (07) 3002 2699 | info@agredshaw.com.au
