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Subdividing and Building on the Family Property – What are the CGT Implications?
Have you ever thought about subdividing your family property, rather than buying another piece of land to do the same? Make sure you’re aware of all of the Capital Gains Tax (CGT) implications of taking this route.
CGT can already be a complex area for the uninitiated, and this is certainly no different when it comes to subdividing the family property. Homeowners may see the potential in the land they have and look to subdivide; to increase wealth, enhance their property portfolio or even downsize for retirement. With the growth in popularity in this particular area, it’s worth a quick look at some common scenarios and what the CGT implications are.
Imagine you have a house on a large block, and then demolish it to subdivide. After this you build 2 home units on the two resulting smaller blocks and live in one whilst selling the other. In this case, each block gets its own title and the subdivision itself has no CGT consequences, provided you remain the owner of the property. What it does do, however, is create 2 new CGT assets, and the cost base of the land is apportioned to each block in a “reasonable way”, usually by block size or professional valuation. The house in which you choose to live in this scenario can still qualify for the main residence CGT exemption, whereas the other cannot.
Another important consideration when looking at this scenario is that if you are living in a dwelling that you eventually demolish and proceed as above, the main residence CGT exemption can be extended up to 4 years. This time period starts when you cease to occupy the demolished house, and ends when the replacement house/unit becomes your main residence.
Another typical scenario is subdividing a block, keeping the original dwelling, and building & selling a new unit on the vacant portion. This is particularly attractive for those who like the house they’re in, but have the space to develop on the block. Another reason people may go for this option is that they may not want the hassle of having to find alternative accommodation while two new units are being built. Subdividing to go down this route also does not trigger a CGT liability.
The cost base of the land is calculated on a reasonable basis, as the two separate blocks. If you consider that you were to do this yourself, your original dwelling’s cost base would obviously decrease, as the block that it is on has reduced in size; whilst also remaining exempt from CGT as it continues your main residence. It is noteworthy, though, that the rear unit does not qualify for the main residence CGT exemption.
A third common occurrence in subdivision that you may see in property development is one in which a homeowner subdivides their block, keeps the new block vacant, and then later sells it. For the purposes of this scenario, envisage yourself as the owner of a dwelling, which you purchased 20 years ago for $400,000. In 2012, you subdivided into two blocks, containing the front half (with the dwelling on it), and the back half (left vacant). The legal costs for the subdivision were $10,000, and you continued to be the owner of both blocks. Let’s say that the cost base for each block would be 50% the value of the original larger block each. A breakdown of the cost base for each block is as follows:
- Acquisition cost: (50% of $400,000) = $200,000; plus
- Legal Fees (50% of $100,000) = $5,000
- COST BASE PER BLOCK = $205,000
In cases such as this, the Australian Taxation Office (ATO) has often ruled that situations similar to this would not necessarily result in an “enterprise” for GST purposes. For income tax purposes, the ATO would generally consider that selling the vacant block is a “mere realisation” rather than realising a gain from a purely profit-making undertaking.
With this in mind, the sale of the vacant block would be on capital account and the CGT general discount would be available (as the asset has been owned for 12 months). The capital gain is calculated as follows:
- Sale Price = $500,000; less
- Cost base = $205,000; then multiplied by
- 50% general discount
- NET CAPITAL GAIN = $147,500
It is important to note that in this particular scenario, the net capital gain on the sale of the vacant land would not attract the operation of the main residence exemption. As a general rule, adjacent land would only qualify if the owners of the dwelling used it for private and domestic purposes. Even in that criteria is satisfied, the exemption only applies if the land and dwelling are sold together.
Navigating the maze of taxation, particularly CGT and property-related tax, can be overwhelming and time consuming. As such, if you are thinking about investing in property or developing where you are now, it pays to partner with dedicated property specialists and tax accountants.
Contact McKinley Plowman today to see how we can help you, at www.mckinleyplowman.com.au or call 9301 2200.
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