I bought a house 15 months ago. It is a corner block and I will be able to subdivide it. I paid $455K ex SDuty for it. The house is 815 sqm. The subdivision will leave me with the house being 500 sqm and the new land 315sq. The subdivision will cost around $30K when ready to build on.
1) How is the value of the newly created land determined for tax purposes? I assume it must be worth x before the subdivision and y after the subdivision? I’m trying to ascertain the base value of the land for CGT purposes.
2) Do I need to hold onto the land for 12 months before I sell it to only pay 50% CGT on the profit.
1) The original purchase price and development costs are apportioned between the blocks on a reasonable basis. So you would probably split most of the development costs equally as they would be the cost of bringing into existence two new titles but there may be items that are particular to only one block such as the connection of water to the newly created block. You could get a valuer to apportion the original purchase price or you could consider taking the unimproved value from the rates and apportioning that on a square metre basis between the two blocks to get the cost base of the land. The balance of the purchase price would then be considered to belong to the house. The unimproved value on rates notices are generally low so this method will over value the house which could be a good if that is the one you expose to CGT but bad thing if it is the new house you expose to CGT if the latter is the case use a valuation, more on that later.
2) The answer here revolves around what your motives were for buying the property in the first place. If they were to sell at a profit then this is a business venture which will be taxed as normal income not as a capital gain so the 50% CGT discount cannot apply. Further the vacant land will be subject to GST. Because your turnover of sales subject to GST exceeds $75,000 you will be forced to register. The house on the bigger block will not be subject to GST reference GSTR 2003/3 paragraphs 32 to 34. My How not to be a developer booklet goes into this issue in great detail http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf
I can’t see how you could have any other reason for buying the whole block and cutting off the vacant land so soon other than to sell that land for profit. In MT 2006/1 there is an example of a taxpayer who buys a big block knowing he will have to subdivide (he actually builds a duplex) and sell off half so he can afford to live there. His primary purpose may have just been to obtain the remaining property but nevertheless he is caught for GST purposes because it was his intention right from the start to sell that half for profit.
On the other hand if you keep it for longer and maybe have a reason for reducing the land area you may be able to argue that it was not originally your intention to subdivide and sell when you purchased the property.
Note the 12 months starts from when you bought the original property. Subdivision does not reset the clock so you have already exceeded the 12 months but I don’t believe that will do you any good because the ATO is going to say you are in business and that takes precedent over the CGT concessions.
Please remember both this and your next askbantacs question are only answered based on the information you have provided so cannot substitute personal advice from your accountant.