Tax implications on subdivision of a property

Question

I wonder whether you would be able to help me with the following scenario?

A property was purchased in May 2010 for $755,577. The property has a 3 bedroom house on it, which has been rented out since purchase. The size of the land is 735 square metres.

The proposal is to subdivide the property, so that the 3 bedroom house plus garage is now situated on a site of 487 sq metres, with a new 3 bedroom townhouse to be built on the other section of 248 sq metres.

It is intended that the property containing the old 3 bedroom house will be sold after subdivision.

It is intended that the new 3 bedroom townhouse will be kept and rented out.

Would you please advise the capital gains tax implications on these transactions?

Would I need to get a Quantity Surveyor to determine the cost of construction of the “old” 3 bedroom house and any fixtures and fittings, so that I could then determine the value of the land attributable to the $755,577 purchase price?

Would I need to get a real estate agent to value both properties after subdivision, so that I may establish the cost of the land attributable to the property that houses the new 3 bedroom town house?

Answer


It is not a quantity surveyor you need but a registered valuer. What the valuer will be looking for is the price paid for a small block of land and older house and a vacant small block of land around the time you purchased. Obviously these will add up to more than what you paid but the price you paid can be apportioned on this basis. The ATO have produced a guide to valuations NAT 72508 http://www.ato.gov.au/businesses/PrintFriendly.aspx?ms=businesses&menuid=0&doc=/content/00161737.htm&page=23&H23

A Real Estate agent could provide you with the information about the sales and the ATO may accept that apportionment but a registered valuer carries a lot more weight.

The valuer will apportion the first element of your cost base for you then you have to look at your expenditure since then and decide which property it belongs to. Costs associated with the subdivision would be split between both properties because the both benefit from the separate title. Whereas costs associated with only one of the properties goes only to that property’s cost base ie connecting water to the townhouse block.

Your big problem here is that, it appears, you bought the property with the intention of selling off the old house. This makes that side of the property a business venture or one off profit making scheme rather than an investment. As a result you will not be entitled to the 50% CGT discount on the sale of the old house because it is caught as normal income before it can get to the CGT provisions.

If you had purchased the property with the intention of subdividing but holding both properties as rentals then their eventual sale would be subject to CGT and the 50% discount rather than normal income. It is all a matter of what you were thinking at the time. Though you can change your mind and hold it as a rental then its eventual sale would be subject to CGT. But of course if you claim to change your mind you could not then promptly sell it.

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