Subdividing your main residence – Tricks & Traps

Generally, in Australia, you are not taxed on gains from the sale of your home (including up to 2 hectares of adjoining land). This is because of the ‘main residence exemption’ within the Capital Gains Tax (‘CGT’) part of the tax law. However, when you subdivide the land on which your main residence stands, this can create tax risks that people often don’t foresee and which can result in major tax liabilities, including:

• New Asset created
  Each subdivided block constitutes a new asset for CGT purposes, with the original cost base of the main residence being apportioned between those new assets on a ‘reasonable basis’ – which can be quite complicated to determine.
• Need to live in ‘main residence’
  You can only claim the CGT ‘main residence exemption’ for a dwelling that you have actually lived in – so if you build more than one dwelling on the subdivided land, then you will end up paying tax on the sale of those other dwellings that were not your ‘main residence’.
• Part periods
  If you have not lived in the dwelling as your ‘main residence’ for more than six years in total of the period that you have owned it (such as renting it out for part of the time), then you may need to apportion the capital gain that you may make in selling the property.
• Demolitions, Replacements & Roll-overs
  There are further complications if you have to demolish your existing main residence building as part of the subdivision process, because you can’t live in that building after it has been demolished – so there are some further rules in the CGT system that may allow you to:
  • continue with the ‘main residence exemption’ on a replacement dwelling (if you move in ‘as soon as practicable’ after construction and live in it for at least three months), and/or
  • ‘roll-over’ the cost of constructing a replacement dwelling after the demolition/destruction of your previous main residence (if consideration is received for the replacement dwelling within 12 months of the demolition/destruction).
• Immediate sales
  If you do sell the new blocks immediately after subdivision or at the same time as your existing main residence, then you may be able to qualify for CGT treatment on those new blocks, including claiming the 50% CGT discount on the net profits.
• Business or ‘profit-making schemes’
  However, if you engage in a business activity or have a ‘profit-making intention’ to re-develop the subdivided blocks (like constructing new dwelling/s on the new blocks), you may instead be taxed on your profits on a revenue basis – with no CGT ‘main residence exemption’ and no 50% CGT discount applying – meaning you pay full tax on the net profit as ‘ordinary income’.
• New housing stock & GST
  Further, if you construct a new dwelling on one of the subdivided blocks and then sell it immediately after it is finished (before anyone has lived in it for an extended period), then you will be selling ‘new housing stock’ subject to Goods & Services Tax (1/11^th) chargeable out of the sale price – paid by the purchaser directly to the ATO from the settlement figure.
• Development Agreements (or Joint Ventures)
  Some people engage with a builder/developer to manage the project and there are different sorts of agreements that may be used to run that project:
  • some (called Sales Agreements) where the developer buys blocks in advance (paying stamp duty at that time) and then builds a dwelling on them before selling to purchasers and distributing a set share of the profits to the original owner of the land, or
  • others (called Services Agreements) where the developer provides building, development and marketing services to the original owner of the land to build the new dwelling/s, who then sells the dwelling/s to the purchaser/s and distributes a set share of profits to the developer.

Given the complexity of these issues and the varying treatment of different periods of time and use of the dwelling/s, it is easy for people to unintentionally trigger potentially significant adverse tax consequences, if they are not properly advised on how best to proceed right from the outset.

Our lawyers here at Waterhouse Lawyers are experienced in providing advice on tax issues for property development, subdividing land and CGT main residence exemption claims, so we are here to help manage these risks. Please contact us on 02 9252 8746, tax@waterhouselawyers.com.au or through our contact page.