Land Subdivision

Definition of Subdivision

• Subdividing involves dividing property, separating it into divisions, or dividing it into parts.
• Subdivision terminology includes bisecting, breaking up, carving, cleaving, cutting, dissecting, dividing, parting, portioning, sectioning, segmenting, separating, slicing, and splitting.
• Legally, subdivision is the division of a lot, tract, or parcel of land into two or more smaller units with separate legal titles for each section.

Reasons to Subdivide

• Subdividing allows property owners to create multiple smaller lots from one property for individual sale, increasing equity as each parcel rises in value.
• Vacant land may be sold after subdivision, or a property may be built on it for sale.
• Building a rental property on vacant land creates an investment opportunity.
• Subdivision can make a large property easier to manage by reducing maintenance or enabling sharing with family.

Land Title

• Only individual tax returns are covered, excluding major subdivisions.
• Property ownership details are in the title deed as sole owner, joint tenants, or tenants in common.
• Joint tenants have equal ownership, and the property automatically transfers to the surviving tenant(s) upon death.
• Tenants in common co-own property with equal or unequal shares; ownership transfers to the beneficiary(ies) upon death and each owner calculates capital gains based on their share and cost base.

Types of Subdivision and Land Zoning

• Land zoning designates land for residential, commercial, industrial, community facilities, rural, or natural/recreational use, regulated by local governments with their own planning guidelines.
• Minimum land size for subdivision is 700 square meters, with driveway or easement access, dependent on zoning and local government rulings.
• Simple subdivision divides a large land block into two smaller parcels of equal or varying sizes.

Land Titles and Categories

• Subdivided land requires title changes at the Land Titles Office, including land and owner(s) details on each title.
• In a "Torrens" title, the property owner owns the land and buildings and subdivided land may be divided into multiple lots without shared facilities, each with its own title certificate.
• Community Title is commonly used where land is divided into lots sharing infrastructure like sewerage and water, often managed by a Community Corporation.
• Community Title Strata Scheme applies to multistorey complexes where buildings are considered common property, maintained and insured by a Community Corporation.
• A Community Corporation is formed upon plan deposit in the Lands Titles Office.
• The Corporation administers common property, enforces by-laws, holds regular meetings with adequate insurance, and maintains records and community divisions with less than three lots can be exempt from this.

Merging Land Title

• Amalgamation combines separate adjacent land blocks into one land title.
• For Wang Cheng, the 2 blocks are treated as separate assets and the first block continues to be exempt from CGT.

Subdivision Costs

• Subdivision costs, which form part of the cost base for capital gains purposes, range from $30,000 to $100,000 depending on the subdivision's size, complexity, and local government fees.
• Subdivision expenses include surveying, engineering fees, local government planning approvals, land development (demolition, retaining walls, fencing, site works, drainage, sewerage), utility connections, stamp duty, land title registration fees, and loan interest.

Subdividing Land and CGT Implications

• Subdivided land becomes separate assets for CGT.
• A CGT event occurs upon selling/disposing of subdivided blocks, with the acquisition date being the original land purchase date.
• The original land's cost base is divided reasonably among subdivided blocks.
• TD 97/3 provides further clarification

Sale of Pre-CGT Land

• Valuation is needed when selling pre-CGT land subdivided after September 20, 1985, if a new residence has been built.
• In 1983, Mike bought land, subdivided it and built the house after 20 September 1985.
• Subdivision costs were $20,000 and the house cost $270,000 to build and was sold for $500,000 with a rear block valued at $200,000 and a house at $300,000
• As the land was acquired before 20 Sept 1985 it is not subject to CGT.
• Mike's $30,000 capital gain on the house is not eligible for a 50% discount as the house was held less than 12 months.

Subdividing Land Containing a Main Residence

• If the land that contains a main residence is subdivided and the vacant land (without the residence) is sold, the main residence exemption does not apply to the vacant land.
• The block with the main residence may still be eligible for the main residence exemption depending on how it's used after the subdivision.
• For Kym that bought a house in on a 0.2 hectare block of land 1 June 2023 for $700,000:
  • The house was valued at $240,000 and the land at $460,000.
  • She incurred $24,000 in stamp duty and legal fees purchasing the property.
  • Kym lived in the house as her main residence.
  • She incurred costs of $20,000 in survey, legal and subdivision application fees, and $2,000 to connect water and drainage to the rear block.
  • On 1 March 2024, she sold the rear block for $260,000 and incurred $6,000 legal fees on the sale.
• Main residence exemption does not apply to that land, since Kym sold the rear block separately.
• To calculate capital gain, Kym apportioned $460,000 original cost base into $215,000 for the rear block (46.7%) and $245,000 for the front block (53.3%).
• Cost of rear block of land $215.000, Stamp duty and legal fees on purchase $24,000 x 46.7% $11,208, Survey, legal and application fees $20,000 x 46.7% $9,340, Water connection and drainage to rear block $2,000 and Legal fees on sale of rear block $6,000 with a total of $243,548
• The capital gain on the sale of the rear block is calculated as; Proceeds $260,000, Less cost base of $243,548 with a total capital gain $16,452 not eligible for 50% discount as held less than 12 months.
• Kym will get a full capital gains exemption for her house and the front block if she uses them as her main residence.

Subdivide Land After Demolition

• Subdivide land after demolition of main residence, construct two townhouses, sell one townhouse and move into the other townhouse, For Simon, who purchased a property in June 2019 and resided there as his main residence.
• The home was demolished due to its poor condition in June 2021-no consideration was received.
• The land was subdivided into two equal size blocks and a townhouse was constructed on each block.
• During construction Simon lived with his extended family.
• Construction was completed in March 2024, and Simon moved into one of the townhouses as his main residence, and The second townhouse was sold May 2024.
• The main residence exemption can apply to a vacant block of land after a house destruction if the destruction was generally accidental.
• If they intend to repair or renovate before moving in, and The dwelling constructed or renovated becomes their main residence as soon as is practical after the work is finished and. It continues to be their main residence for at least 3 months
• The taxpayer can treat the completed dwelling and the land as their main residence for up to four years before actual residency, this is the “four-year rule”.
• Simon maintains main residence status after demolition and until the replacement dwelling is completed, with the vacant land treated as his main residence from move-in, back for up to four years.
• Disposing of the non-main residence unit raises questions about the realization of profit versus a mere isolated transaction, requiring careful consideration of all factors.

Subdivided Land and Ordinary Income

• Selling subdivided land may be treated as ordinary income, not a capital gain, if the intention was to make a profit in the course of carrying on a business operation or a commercial transaction.
• GST obligations and entitlements may arise, even with a single transaction.
• Factors indicating an enterprise include changing the land's purpose, acquiring additional land, considering the parcel a business asset, having a coherent subdivision plan, having a business organization, using borrowed funds, claiming interest as a business expense, developing the land beyond council approval needs, and erecting buildings.

GST Implications for Selling Land

• If registered for GST, GST must be included in the price of goods, and entitlement to claim credits for the GST included in the price of most of your business purchases, with transactions reported by completing a BAS.
• ATO TR 92/3 details if profits on isolated transactions are income and The ATO example below goes into detail regarding a one-off profit making subdivision activity.
• In Claude's example on an one-off profit making subdivision activity, where the backyard sale became a profit-making activity once Claude made the decision to embark on that activity with the net profit included in his assessable income
• Claude purchased his home on a single title from a private seller on 1 July 2001 for $300,000, wished to remain in this home and on 1 July 2022, Claude began detailed research to understand if he could subdivide his backyard to build a new house and sell it with the following outcomes:
  • Claude's registered valuer valued the entire property at $600,000 split 60%:40% - original house and land – $360,000 and newly created subdivided lot – $240,000. He subdivided, built and sold with a lodged application for subdivision, a received approval and engaged a developer to prepare and submit an application.
• To do this, he lodged an application for subdivision and received council approval and engaged a project developer to prepare and submit a development application and build the new house.
• Claude funded the development expenses of $440,000 (GST inclusive) through a bank loan and expected the sale of the new house to pay the loan out in full.
• He engaged a local real estate agent to sell the new house and sold it via a contract signed on 1 July 2023 for $1,210,000 with no agreement to apply the margin scheme to the sale.
• The Income tax outcome was that once the backyard got its own title, it became its own asset and was no longer part of Claude’s home as a domestic asset.
• Claude’s activities amount to a development activity and not just selling the vacant lot.

Overall Gain and Profit

• Claude made an overall gain of $580,000, based on the GST-exclusive sales ($1,100,000) minus expenses ($400,000), and the original subdivided land cost of $120,000.
• The increase in value from original purchase (July 1, 2001) until the activity began (July 1, 2022) is a capital gain, with original cost at $120,000 and a value of $240,000 when activities began.
• In the Proft on development, as Claude has held the subdivided block for over 12 months he is entitled to a 50% CGT with a discounted capital gain of $60,000. The rise in value from start of construction until sale is considered ordinary income, with a net profit ($460,000) from sale minus expenses and land value at the start of construction.

Claude's Taxable Income and GST

• Taxable income includes $60,000 net capital gain and $460,000 net profit for $520,000 total.
• Claude must register for GST due to the profit-making activity and sale price, having a $110,000 GST liability, to notify the purchaser, claim $40,000 credits, and complete business activity statements.

What is an enterprise?

• Steve and Kate plan to profit from new, smaller lots after a by-law change and this is considered an enterprise, taxed as ordinary income.
• Astrid and Bruno, who subdivide to allow their daughter to build next door after a by-law change, are not in an enterprise, so GST doesn't apply.

ATO Property Decision Tool & the Margin Scheme

• The ATO has a GST property decision for additional assistance.
• Selling property during business activity will use an alternative method which is the margin scheme to calculate GST to pay.
• With the margin scheme,GST payable on the property sale is one-eleventh of the margin of the sale and can only be applied if sale is taxable.
• Generally, The margin is the difference between the sale price and purchase.

CGT or Ordinary Income

• The type of entity, subdivision purpose, subdivision type, business activity, commercial property development, acquisition of land, land development costs, financial risk, sale of land and ownership period all contribute to whether you will have CGT or Orindary income.
• Residential suburban block development mixed the purpose of selling and renting land.
• The couple were carrying on a development enterprise and were intending to start a leasing enterprise.
• They are required to register as a partnership for GST and the sale of the townhouses built to rent and sell will be taxable supplies.

Sale as Part of a Business Activity

• In Harrison's example, he bought his first home on an 810 square metre block of land for $780,000.
• He has never carried on a land development business or undertaken land development activities, made enquires with the intent of selling the land and applied to subdivide it with that was approved in July.
• He engaged a valuer with the block apportioned to 60%, the house containing his home as a and the other block representing the remaining 40% and he entered a contract to sell.
• Harrison incurred subdivision costs of $50,000 and selling costs of $18,000.
• With the sale as part of a business activity, the made by Harrison is not business income because the sale did not occur in the course of a business.
• For the s ale as part of a isolated profit making transaction and Harrison isn't carrying on a business, profit could still be income if he purchased land with intention to profit. In this case: Harrison purchased property to be his home, has no previous dealings in properties and the subdivision of the unimproved blocked is straightforward.
• Therefore, a these indicate that Harrison's profit was not made in the course of a business operTation or commercial transaction.

Sales Subject to Capital Gains Tax

• Since each block resulting from the subdivision is a CGT asset, the subdividing block is taken to have been purchased when the original block was with a CGT event (disposal of a CGT asset) happens when the subdivided block.

• The cost base is divided between the blocks on a reasonable basis.

• Proceeds on sale of subdivided block $550,000

• Less cost base:

  • Apportioned cost of land (40% x $780,000) = $312,000
  • Apportioned subdivision costs (40% x $50,000) = $20,000
  • Selling costs $18,000 Total cost base $350,000 Total capital gain $200,000 and net capital gain of #100,000 once the 50% discount for 12 months is applied.

GST Consequences on the Sale

• Harrison's activities do not amount to an enterprise because they were not carried on in business with no leasing, licencing, or business like activity with the land, so GST does not apply to the sale.