Selling Subdivided Property? Here’s What the ATO Wants You to Know

As urban sprawl continues in major Australian cities and regional centres, we’re increasingly asked about the tax treatment of subdivision projects. Before you commit to a project, it’s vital to understand the potential tax liabilities that may come with it.

Many people mistakenly assume that subdividing a block and selling the lots will have minimal tax impact. But in reality, several tax rules could significantly affect the overall profitability of your project.

For example, if you purchase a property with the intention of subdividing and selling off smaller lots quickly, the profit is generally taxed as ordinary income. This means the profit won’t be subject to the Capital Gains Tax (CGT) discount, even if the property is held for more than 12 months. And you won’t be able to use any capital losses to reduce this taxable income.

On top of this, Goods and Services Tax (GST) may apply to the sale of subdivided lots-a cost that’s often overlooked and can seriously reduce your after-tax return.

We find that many people underestimate the income tax and GST consequences involved in subdivision projects. That oversight can lead to unpleasant surprises, and in some cases, render a project economically unviable.

ATO Guidance & Examples (2024)

To bring further clarity, the Australian Taxation Office (ATO) has recently updated its guidance, including several detailed examples that help illustrate how income tax and GST rules apply to various property transactions. These include property flipping, subdivision and sale, and small-scale developments.

One example focuses on a taxpayer who regularly buys, renovates, and sells properties. They take out business loans, do market research, and seek professional advice. Their activities reflect a business-like operation where the intention is clearly to generate a profit.

In this case, the profits are taxed as ordinary income on revenue account, and the CGT rules don’t apply. The properties are considered trading stock. However, GST is only applicable if the renovations are considered “substantial”—a threshold that must be assessed carefully.

Another example highlights a taxpayer who subdivides land at the back of their main residence due to financial stress and health issues. Their intention wasn’t to run a business or make a profit, and their involvement was limited to basic council approvals. Because the activity was small in scale and non-commercial in nature, the sale is treated as a capital transaction.

In this case, the general CGT discount applies (assuming the land was held for more than 12 months), but the main residence exemption does not because the land was sold separately from the house.

These examples show how the intention, scale, and conduct of the project can dramatically change your tax outcome.

You can view the ATO’s full guide and updated examples here.

How Does This Compare to Last Year?

This updated guidance builds upon the themes covered in our 2023 blog post, "Tax Implications of Subdividing Land", which still remains relevant for general understanding. However, the ATO’s new examples go deeper into nuance and reflect more current case studies that could influence your planning in 2024 and beyond.

Don’t Guess. Get Advice.

Tax on subdivision projects isn’t one-size-fits-all. Your intentions, level of involvement, and the complexity of your project all matter.

If you’re planning to subdivide, sell, or develop a property, speak to the Trekk Advisory team before you act.

We’ll help you structure your project properly, avoid unexpected tax bills, and understand the real after-tax profit potential.

Contact Trekk Advisory today to get expert guidance that aligns with your project goals and tax position.