As land around urban centres becomes more and more scarce, many people who own homes on large blocks are looking into the idea of subdividing their land as a one-off project in order to make money. However there are some property tax related issues to keep in mind.
Now the general rule is that once you have subdivided land from your block, the subdivided blocks can no longer be treated as your main residence. Unfortunately, that means sale of this land will generally be subject to property tax. However, the manner in which any profits made are taxed depends on your individual circumstances.
The key question in determining the tax treatment of a subdivision and development project is whether any gain or loss you make will face property tax as a capital gain or income.
Generally speaking, any gains made from the mere realisation of a capital asset is taxed as a capital gain. When the property has been held for at least 12 months by an individual or a trust before being sold, the capital gain will be eligible for the 50% CGT discount – which effectively halves the tax liability on the gain.
In contrast, if the gain you make constitutes a one-off profit-making undertaking, it will be fully taxed as income without any CGT discount. So, how do you work out if your arrangement is a mere realisation of a capital asset or is considered a “one-off profit-making undertaking”?
This can be a difficult question to answer but luckily, there are various tax cases in the past to provide some guidance on where the line is drawn, which are supported by a taxation ruling issued by the Commissioner of Taxation. The indications to look out for include the following:
• What do you intend to use the subdivision for?
Without a motive for profit (eg, you subdivide the land to reduce it to a manageable size), it may be questioned whether or not the project is a proﬁt-making undertaking, but the presence of a profit motive does not by default preclude the possibility that the project represents a mere realisation of a capital asset
• How much work has been done?
The less you physically do in subdividing and developing the property before it is eventually sold, the less likely that it will be treated as a profit-making undertaking, even if professional advice has been sought
• How professionally managed is the project?
The more systematic and business-like the project is conducted (eg, selling the property under an elaborate sales campaign through a project marketer as opposed to using a local real estate agent), the more likely it is treated as a profit-making undertaking
• Who is involved?
The more contractors and professionals involved in the project, the more likely that it would be seen as a profit-making undertaking
• How big is the project?
The larger the scale and complexity of the development (eg, a property development that involves multiple stages), the more likely it is treated as an isolated profit-making arrangement
• Is the project funded by borrowed money?
The more borrowed funds are committed to the project, which means that you are exposing yourself to more risks, the more likely that you are carrying on a one-off proﬁt-making undertaking
• How long have you owned the property?
The longer a property is owned, the more believable the argument is that the sale only constitutes a mere realisation of a capital asset
• Is there a history of development work?
The more extensive your history of developing properties in the past, the more likely it is that you will be seen to be undertaking a one-off profit-making undertaking; in fact, if you continuously undertake one project after another, you may be treated as carrying on a recurrent property development business.
So, simply put, if you find yourself in a bit of a grey area with these questions, we suggest reaching out to our team of experts. This can reduce the risk of potential penalties and the chance of the ATO successfully challenging your tax treatment of the property and project.