Maybe you have a block of land that you want to subdivide. The council, the builders and the bank are all on board but, one important aspect you may have overlooked is tax.
The tax treatment of a subdivision project can significantly impact cash flow and the project’s financial viability. This new guidance from the ATO walks through everything you need to know about the tax implications of small-scale subdivision projects.
Subdividing land:
- Small developments will not automatically be taxed as a capital gain with Capital Gains Tax (CGT) concessions.
- If you own a property used for private purposes, over an extended period and subdivide it for sale, capital gains tax may still apply.
- The gain is calculated from the time you acquired the land, with the need to allocate the property’s purchase price among the subdivided lots.
- If you subdivide a property that includes your home, you may not qualify for the main residence exemption, even if the land was solely used for private purposes related to your home.
- Jointly owned properties that are subdivided and distributed among owners can trigger upfront tax implications, even before selling to an unrelated party. These arrangements, known as “partitioning,” can pose tax complexities.
Developing a property: What happens if you develop the land?
- If you develop a property to sell the finished product at a profit in the short term, there is a risk that this will be taxed as income rather than under the capital gains tax rules.
- This limits the availability of CGT concessions (such as the 50% CGT discount) and may also expose the owners to GST liabilities. This can be the case even for one-off property developments.
If you’re subdividing your block this financial year, contact the Walker Hill Finance team to find out more about the tax implications and pitfalls of small-scale subdivisions.
