The tax treatment of even a small subdivision can become complex very quickly and tax applies according to the circumstances. You cannot
simply assume that just because it’s a small development, any profit from the eventual sale will be taxed as a capital gain and qualify for
In general, if you own a property personally, it has been held and used for private purposes over an extended period, you subdivide it and
sell the newly created block, then capital gains tax is likely to apply to any gain you make. The gain is recognised from the point you
first acquired the land, although you will ned to apportion the amount paid for the property between the subdivided lots.
If you are subdividing a property that contains your home – the main residence exemption will not generally be available if you sell
a subdivided block separately from the block containing your home, even if the land has only ever been used for private purposes in
connection with your home.
If a property is initially owned jointly but the property is subdivided and the lots split between the owners, then this will normally
trigger upfront tax implications even though the land hasn’t been sold to an unrelated party yet. Arrangements like this (referred to as
partitioning) can be complex to deal with from a tax perspective.
DEVELOPING A PROPERTY
But what happens if you develop the land? It’s not uncommon for people to decide to subdivide and develop their block by building a
house or duplex and then selling the new dwelling. When someone develops a property with the intention of selling 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 will often expose the owners to GST liabilities as well. This
can be the case even for one-off property developments. Let’s look at an example. Claude purchased his home on 1 July 2001 for $300,000.
In July 2020, Claude began investigating the idea of subdividing his block and building a new house, then selling it. A registered
valuers report on the subdivision says that the original house and land is now worth $360,000, and the subdivided lot is worth
$240,000 (the valuation is an important step before commencement to prevent any debates with the ATO). Claude decides to go ahead
and build a dwelling on the newly subdivided block and takes out a loan of $400,000 for the development. He intends to pay off the
loan as soon as the house sells. In July 2021, Claude sells the subdivided block and new home for $1,210,000 (GST-inclusive). Here
is how the tax works for Claude’s scenario:
Claude made an overall economic gain of $580,000.
The overall gain ($580,000) is based on the GST exclusive sale proceeds (
$1,100,000, although we are assuming that the GST margin scheme isn’t applied) minus the GST exclusive
development expenses ($400,000) and the original cost attributable to the newly subdivided lot of $120,000 ($300,000 × 40%).
The increase in the value of the newly created subdivided lot from when it was originally acquired (1 July 2001) up to when the
profit-making activities began (1 July 2020) should be treated as a capital gain.
The value of the newly created subdivided lot at the time Claude began to undertake profit-making activities on 1 July 2020 was
$240,000. The original cost, attributable to the newly created subdivided lot was $120,000 (40% × $300,000) on 1 July 2001. This
means that there is a capital gain of $120,000.
As Claude has held the subdivided block for greater than 12 months he is entitled to a 50% CGT discount, hence there is a discounted
capital gain of $60,000.
The increase in the value of the newly created subdivided lot from when the profit-making activities began up to the time of
sale should be treated as ordinary income.
The net profit ($460,000) will be based on the GST exclusive sale proceeds ($1,100,000) minus the GST exclusive development expenses
($400,000) and the value of the subdivided lot ($240,000).