With property prices rising and demand for housing increasing, many homeowners are exploring the idea of property development, often literally in their own backyards.
Subdividing is frequently the first step for those starting out in property development. This may be subdividing your own property or knocking down an old property and subdividing the land.
Subdivision can offer substantial financial rewards but it also comes with legal, planning, and taxation considerations that must not be overlooked. Here, we outline some important considerations:
What does subdividing involve?
Subdividing typically means splitting a single residential block into two or more lots, often to build and sell, or to retain a dwelling. This process requires council approval and adherence to zoning, access rights, and minimum lot size regulations. Property owners planning to subdivide will need to engage a surveyor, town planner, and sometimes a solicitor or conveyancer to guide their projects through planning permits, subdivision plans and titles registration.
[For more information, by state/territory: Australian Capital Territory, New South Wales, Northern Territory, Queensland, South Australia, Tasmania, Victoria, Western Australia]
Tax implications to consider
Before proceeding, it’s also crucial that developers understand how the Australian tax system treats subdivisions and property developments. The relevant taxes here include:
1. Goods and Services Tax (GST): When you subdivide with the intent to sell for profit (especially if you have constructed a new dwelling), the ATO may classify your activity as an ‘enterprise’. This means you may be required to register for GST, complete Business Activity Statements and remit 1/11th of the sale price to the ATO. Importantly, you will also be able to claim GST on the construction costs while completing the development. GST implications are particularly relevant if you are developing more than one property or operate in a business-like manner. The need to manage GST is a consideration that we frequently see first time developers misunderstand or miss altogether in their planning.
2. Capital Gains Tax (CGT): When you sell a subdivided portion of your land, CGT may apply. While your main residence is generally exempt from CGT, this exemption may not apply to the portion being sold, especially if it’s no longer part of your primary residence or, if it’s used to generate income. If you have already subdivided your main residence in the past, this will also be considered as an important factor when capital gains are calculated. Depending on your type of subdivision, market value uplifts can apply to the cost base of the property for CGT purposes.
3. Income Tax: The profits you make from your subdivision can be treated as either a capital gain or ordinary income, depending on your intentions. If the ATO determines your actions amount to property development, the profits may be taxed as income, at your marginal tax rate, rather than under the more concessional CGT regime.
4. Stamp Duty: Your subdivision itself doesn’t trigger stamp duty – but it may be applied if you transfer newly created titles (for example, to a trust or related entity).
Planning and unexpected costs
In our experience, planning for these unexpected taxes is absolutely critical in your overall property development preparation, and it’s a step often overlooked by new developers.
Before undertaking a property development, you must consider what your intentions will be once the development is complete. This may be retaining the property to live in, selling the property at completion, or retaining to earn rental income. Each scenario will have differing CGT, GST and tax outcomes. It’s equally important that you also forecast for unexpected costs that can occur during the development, such as the rising construction costs currently being experienced.
Seek professional advice
Given the complexity of taxes involved, we strongly recommend that you speak to a tax advisor or accountant who is experienced in property development before you undertake a subdivision. Proper structuring and planning can help minimise your tax and avoid costly surprises.
While subdividing your property for development can be a lucrative opportunity, it’s important to understand the tax consequences and to make informed decisions to help you maximise your return and minimise your exposure to tax obligations and other unforeseen costs.
Danielle Hart, CPA is an Associate Director and Daniel Walachowski, CA is a manager at Marin Accountants. This article is for general information only. It does not consider any of your personal objectives, financial situation or needs. Before taking any action, you should seek appropriate professional advice.