How to subdivide your property without falling into the tax trap
With high property prices in many capital cities, it’s becoming increasingly popular for people who are lucky enough to own a large block to subdivide it and either sell off the surplus land or even build another house on it and then sell.
Big profits can be made but first you need to be aware of the tax consequences.
Don’t assume that the main-residence exemption from capital gains tax will eliminate your tax liability. It won’t.
To claim the exemption, you need to sell the bit of land that actually has your house on it.
If you subdivide, keep the house but sell the surplus land, that doesn’t count as part of your main residence, so you can’t apply the exemption.
Even if you can’t claim the exemption, you might assume you can claim the 50% CGT discount, which in effect halves your taxable gain if you’ve owned the land for more than 12 months.
That’s not necessarily the case.
If the tax office believes you have sold the surplus land with a view to making a profit and that the transaction has the character of a business operation or a commercial transaction, CGT won’t apply but you’ll be hit with an income tax bill on the entire profit (less costs).
Even a single transaction can be regarded as a business operation.
You might also have GST obligations. That’s particularly the case if you decide to build a new house on the surplus land before selling it.