Ways to ensure a great divide
To reduce the growing urban sprawl most levels of government are allowing higher density housing in the suburbs. This means people with larger residential blocks are presented with an opportunity to subdivide and increase the value of their home.
However if the correct steps are not taken when subdividing a main residence, any increase in value can be eaten up by extra taxes.
Under capital gains tax law, no tax is payable by an individual on the profit they make on the sale of their main residence. A common practice for many people, when subdividing residential land, is to keep the existing dwelling and either sell the new subdivided residential block, or build a structure on the subdivided block and sell or rent this.
When a main residence is subdivided into two parcels of land they are regarded as two separate assets for capital gains tax purposes. If the new subdivided vacant land is sold separately capital gains tax will be payable on any profit made.
To calculate the profit, the cost of the land sold must be calculated. This is done by apportioning the original cost of the property between the value of the structure on it, and the value of the land itself. The cost of the subdivided land sold will be its share of the purchase cost of the land plus a share of the subdivision costs. Whatever the selling proceeds exceed this cost by will be the profit.
If, instead of selling the vacant land separately, it was sold as a part of the sale of the home, with the value of the property having increased due to it being subdivided, no capital gains tax would be payable on any profit made.
If the second option is taken of building on the subdivided land and then selling it, capital gains tax will again be payable on any profit made. In this situation the cost of constructing the new dwelling is added to the cost of the land calculated above and the amount that the net selling proceeds exceeds this cost will be the profit.
In addition to paying capital gains tax on this profit, the owners of the property will also be required to register for GST. Even though this may be a one-off transaction there is a requirement when an activity is done for the purpose of making a profit, and the proceeds from that activity will be more than $75,000, to register for GST.
Once the owners have registered for GST they will need to lodge quarterly BAS returns claiming a refund of the GST included in the building costs. When the property is sold, one eleventh of the selling value will be GST collected and payable to the ATO.
If the owners instead sold their existing home and shifted into the new dwelling on the subdivided property, no capital gains tax will be payable on the former home and no capital gains tax or GST will be payable on the new main residence.
