Subdivide and Conquer
Many mortgage holders have been skimping and saving hard all their life to realise the Australian dream of owning their own home.
Subdividing your land can be a smart wealth creation strategy. However, there are a few key considerations such as how to get started and the question that makes many of us cringe; what will the taxman say about the subdivision plans?
For tax purposes, the subdivision of a block of land into separate blocks will not constitute a Capital Gains Tax (CGT) event and will therefore not trigger any liability to tax. Each separate block will be a new CGT asset deemed to have been acquired when the original block of land was acquired and the cost base of the original block of land will be apportioned over the different subdivided blocks.
This means that separate blocks resulting from a subdivision of a pre-CGT block of land will retain their pre-CGT status.
The way in which you hold a block of land will determine how the taxman will tax your profits on the subsequent sale of the subdivided block.
But let me explain
Intention, intention, intention
Your intention with which you hold a block of land usually indicates whether the block of land is held on a capital or revenue account.
This distinction is important because profits made on revenue account will be taxed at your full marginal tax rate while profits made on capital account may be:
- Tax exempt - if the block of land was acquired before 20 September 1985 (pre-CGT); or
- Only be taxed at a 50% discount to your marginal rate if the block of land is held for longer than a year (and held by individuals or by a trust).
Do you hold a block of land on revenue or capital account?
If you bought the land to subdivide and sell it for a profit as part of a business venture or as a once-off profit making undertaking (property speculator) the land will be considered as a revenue account
In contrast, a block of land is considered on capital account if you bought it to hold it as an investment property (property investor) and the subdivision is merely a realisation of the block of land.
Examples of where a block of land will be held on capital account is where farm land is progressively subdivided and sold over an extended period while still using the remaining land for faming purposes or instances where a property investor, unable to find a tenant for his investment property, subdivides the land and sells the blocks separately.
On the other hand, if you subdivide the block of land on which you have your main residence, and then sell the block that does not contain the house, you can either be taxed on revenue (property speculator) or capital account depending on whether the sale of the block of land was a once-off profit making undertaking or a mere realisation of the block of land.
Keep in mind that you will not qualify for the CGT main residence exemption on the sale of this block of land because there is no house on this land if you had sold the block with the house on (and the area of the land was 2 hectares or less), you may have qualified for the main residence exemption.
How is the taxpayer’s subjective intention determined?
Subjective intention is determined by weighing up various objective factors, and the weight given to each factor will vary with individual circumstances. The answers to the following questions can assist in determining how the block of land is held: <table border="1" cellspacing="0" cellpadding="0">
- Is the subdivision part of your business, a once-off profit making undertaking or the mere realisation of assets?
- What is the scale of the subdivision (e.g. amount of money involved in the subdivision, necessity of construction of new roads and infrastructure)?
- Has the owner of the land undertaken other subdivision projects before?
- Which entity undertakes the subdivision (e.g. a company with substantial assets or a family trust or individual)?
- How long after the property was bought was the subdivision done?
</table> Issues to consider
Subdivision by itself does not create any tax consequences it is only the profit on the subsequent sale of the subdivided land that can be taxed as either a revenue or capital gain.
It is also important to remember that even if you are not registered for GST purposes, you may be subject to a GST liability when you subdivide and sell a block of land.
This depends on many factors, including your intention and what is on the subdivided land when you sell it.
A word of caution
If you are looking at subdividing land and subsequently selling the subdivided land, you should consult your tax advisor to understand the possible tax and GST implications.
For more information on subdividing, please contact Pitcher Partners on (03) 8610 5000.