Tax implication of subdivision of family home

Question

We purchased our family home in 1996. The house is on a large block, which we would like to subdivide. My understanding is that if we subdivide the block and sell the land with planning approval, we are not liable for GST and CGT. If, however, after subdividing we build a house on the back of the block, how will that affect our tax liability if we try to sell it when the new house is built?

Answer

Firstly to avoid any CGT liability you would have to cover the property with your main residence exemption and it has to have a dwelling on it. Now I am assuming that after subdivision and sale you will be left with your home on a smaller block so the main residence exemption doesn’t apply to the block you will sell.

The rest of the tax considerations revolve around whether you are merely realising an asset or could be more readily described as business like in your activities. Certainly for GST purposes building a house on it for resale would mean you have to charge GST on the sale though you could utilise the margin scheme and would be able to claim input credits on your building costs. Nevertheless the GST may mean it is not worth the cost of building the house, let alone the complications.

Again building a house may well make your activities so business like that the profit you make will be taxed as normal income so no CGT discount.

I would be surprised if the profit you make on the house is enough to cover all these extra taxes. If you did not buy the property with the main intention of profit from resale and you are not already registered for GST then you could cut off the spare land even get further planning approval before you sell but still be considered merely realising an asset in the best possible way rather than being in business.

Maybe I have misunderstood your question and you are considering subdividing and getting development approval. Then selling the whole block including your house to the same person. In this case you would be able to utilise your main residence exemption if the house is still on the block and the block is less than 2 hectares as it makes no difference how many titles as long as the blocks are used for private purposes in conjunction with your home and they are adjacent.

There is a lot more detail on this subject in our how not to be a developer booklet which is in the freebies section of the web site.

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