August 22, 2023 By Gavin Weller

Subdividing land? The tax implications of small-scale subdivisions


So, you've got yourself a block of land that's perfect for a subdivision. You’ve crossed all the t’s with the Council, building plans are spot on, and the bank's on board. One thing that can sneak up on you when subdividing property, though, is the tax implications.

A subdivision project can represent an exciting opportunity for financial gain and property maximisation. But amidst all this, the tax implications are a crucial beast we must tackle head-on.

Here, we take a look at some of the leading issues.

Tax treatment of the subdivision

Subdividing Land

When it comes to subdividing a block of land, tax treatments might seem confusing. We're here to simplify this process and make sure you don't miss out on the essential aspects of small land developments and related tax implications.

In this informative blog, we'll cover:

  • Why tax treatment complexities arise in small developments
  • Instances in which capital gains tax is applicable
  • How your home might be affected in this process
  • The tax implications of partitioning

Navigating Tax Complexities in Small Subdivisions

When dealing with small land subdivisions, it's easy to fall into the trap of assuming profits will naturally be taxed as capital gains and qualify for Capital Gains Tax concessions. However, tax treatments can become complex very quickly, varying significantly based on circumstances.

The Role of Capital Gains Tax

If you own property that has been held and used privately over an extended period, and you decide to subdivide and sell the newly created block, capital gains tax might apply to any profits you make. In such cases, the original land's cost base must be apportioned between the subdivided lots, commencing from the point you first acquired the land.

The Impact on Your Home

When subdividing a property that contains your home, it's essential to understand that the main residence exemption (MRE) won't generally be available if you sell the subdivided block separately from the block containing your home. This rule persists even if the land has been used solely for private purposes in connection with your residence.

Understanding Partitioning and Its Tax Consequences

Partitioning can create tax complexities when properties are jointly owned and later subdivided, with lots split between the owners. In this situation, upfront tax implications may arise, even if the land hasn't been sold to an unrelated party. This unique arrangement demands careful attention from a tax perspective.

The world of land subdividing might feel like a challenging maze, but rest assured, we at Trekk Advisory are here to guide you every step of the way. Our combination of casual, relatable language and expert knowledge makes us an ideal partner for all your business needs. With innovation and human connection at the core of our values, we're dedicated to helping your business thrive. If you have any questions or concerns, don't hesitate to reach out. 

birds eye view of new suburb and roads

Developing a property

Taking that bold leap to subdivide and develop your land can be an exhilarating move. Whether you choose to erect a single house or go all out with a duplex, this venture might offer bright prospects of selling the new dwelling for a promising return. Such an initiative is becoming increasingly popular among innovative landowners like you.

However, it's crucial to be aware of the fine line between property development and tax obligations. If the intention driving your development project is making a short-term profit, it could possibly be taxed as income rather than under the capital gains tax (CGT) rules. This situation might limit the availability of CGT concessions. The 50% CGT discount, which is often viewed as a significant benefit, might not be accessible in this context.

Moreover, moving in this direction could potentially expose the property owners to liabilities related to Goods and Services Tax (GST). Navigating through the labyrinth of tax implications is vitally important when it comes to property development. This holds true even if you're carrying out a one-off property development project.

Let's look at an example

Let's dive into Johnny's exciting journey into the world of property development and explore the tax implications along the way.

Johnny purchased his dream home on 1 July 2001 for $300,000. Fast forward to July 2020, he started toying with the idea of subdividing his block, building a new house, and selling it for a sweet profit.

Before kicking things off, he got in touch with a registered valuer whose report indicated that his original house and land had increased in value to $360,000, while the subdivided lot was worth $240,000. Johnny was keen to proceed with the project, taking out a $400,000 loan for the development and hoping to pay it off once the newfangled house was sold.

Jump to July 2021, Johnny sells his newly-built masterpiece on the subdivided block for a cool $1,210,000 (GST-inclusive).

Now, let's break down Johnny's tax scenario in a relatable way:

  • Johnny's overall economic gain was a whopping $580,000.

  • That gain was calculated based on the GST exclusive sale proceeds ($1,100,000) minus the GST exclusive development expenses ($400,000), and the original cost that can be attributed to the subdivided lot ($120,000, which is 40% of $300,000).

  • The value increase for the new lot from the time Johnny acquired it until he started his profit-making activities should be considered a capital gain.

  • The lot's value was $240,000 when Johnny launched his visionary project. Back in 2001, the original cost for this lot was only $120,000. That means Johnny scored a capital gain of $120,000.

  • Since Johnny held onto the lot for more than 12 months, he's eligible for a 50% CGT discount, bringing his discounted capital gain to $60,000.

  • The lot's value increase starting from the profit-making activities until the sale should be treated as ordinary income.

  • Johnny's net profit ($460,000) is based on GST exclusive sale proceeds ($1,100,000) minus both the GST exclusive development expenses ($400,000) and the subdivided lot's value ($240,000).

If Johnny isn't running a business, he can't claim deductions for those development expenses as they happen. Instead, they'll be considered when determining the net profit on sale.

And just a heads-up: if Johnny finished the development but chose not to sell the property, this could complicate income tax and GST treatments. We'd have to take a closer look at what Johnny plans to do with the property.

Equipment used to clear and develop land for new buildings

Do I need to register for GST?

If you are planning on subdividing a parcel of land primarily kept for personal use, you may not require to register for GST, although this is situation-dependent. However, if the venture into property development is a part of your business or executed like a one-off project in a systematic, business-like operation, it's likely that GST registration might be a requisite.

Let's review our hypothetical character, Johnny's case as a reference. Seeing that Johnny's projected sale price of the developed property surpassed the GST threshold of $75,000, he would likely need to register for GST. Here's what it would entail:

Johnny might face an initial 'default' GST liability of $110,000, contingent on the sale price of the developed block. However, the GST margin scheme could possibly reduce this liability.

He is obligated to inform the purchaser about the amount to be withheld at settlement for forwarding to the ATO.

He has the potential opportunity to claim GST credits worth $40,000 included in the development expenses, following standard GST rules.

Lastly, he needs to record these transactions by completing business activity statements.

Wrapping it all up

In the realm of property projects and subdivision, tax-related complexities are a common occurrence. If you're considering embarking on a venture involving subdivision or other real estate development activities, the prospect can seem perplexingly daunting.

We encourage you to reach out to us at Trekk Advisory. Our team is committed to unravel these complexities and provide you with a comprehensive walkthrough of potential scenarios and the respective tax implications tied to your project.

Our promise to you is straightforward advice, unwavering support, and a genuine commitment to seeing your business thrive. Reach out to us, and let's make your property development ambitions a tangible reality together!

About Author

Gavin Weller

Gav is a Director of Trekk and operates from our Brisbane office - helping his client's in the advisory space in planning, strategy, structure, and taxation. He loves being able to work closely with both his clients and his team to help them achieve their goals. The best part of his job is that each new day is interesting, challenging and rewarding because of the great people he gets to work with. He is a massive fan of all sports and no doubt wishes he could have been a sports star or commentator. Unfortunately for him, he’s not good enough or impartial enough for either but he very much enjoys continuing to play soccer and tennis in the meantime. There's more to him than sports though... He loves music and going to gigs and theatre with his wife. Gav goes by the saying "Life is short – enjoy and appreciate this moment" and "Back yourself – some days you kick and some days you get kicked – that’s rugby". This metaphor for strength and resilience helps him get the best out of each day.

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