We should all know that you don’t pay tax when you sell the property you lived in, which is called your “main residence” by the ATO.
If you are going to do the subdividing, there are 2 main options you have:
- Split the land up and sell off the new block
- Demolish the house, build one or two new ones, live in one, sell the other.
If you subdivide a block of land, each resulting block is registered with a separate title. For capital gains tax (CGT) purposes, this means you have two different assets, no longer just the one you had before. This might seem obvious but have you considered what that means for tax?
Main Residence Exemption
Basic case
An individual’s main residence is the home they own and typically live in.
A capital gain or loss from the sale of that dwelling is disregarded if the taxpayer is an individual and it was the taxpayer’s main residence throughout the ownership period.
Dwelling
For the Main Residence exemption to apply there needs to be a dwelling (the basic definition is – ”a unit of accommodation that is a building”) on the land being sold. The only exception to this is for land adjacent to a dwelling where both sold together as one transaction.
Tax problem right there
See now how that could cause you a tax issue? The vacant block you created by subdividing the land has no “dwelling” on it. Now the main residence exemption does not apply and you pay tax on any gain you make on this block of land.
Now, this might be the only option you have and paying tax is simply part of the profit calculation.
Do you want to make the tax problem worse?
If you plan it badly, demolish the original dwelling, and sell off 2 vacant blocks you get no main residence exemption on either sale of land! For the entire period of time, you owned it all. There is no apportionment in the tax legislation.
Can it be done differently?
Yes, it is possible but like everything in life, there are costs. If you are planning on selling all the land after subdivision this could be a suitable strategy:
- You can sell the unsubdivided property to a related entity before you perform the subdivision.
- This means the gain on sale is not taxed (main residence exemption).
- There will be a transfer duty cost in that transaction.
Whether this will be a better or worse result will depend on how much of a capital gain you are likely to receive.
Ultimately you need to know all the facts before you make a decision. Speak to your accountant and they can assist you in working out the profit under all potential scenarios.
There are also other rules that might assist in the exemption:
Changing Main Residence
If you acquire a new dwelling both can be your main residence for up to 6 months provided:
- Your existing main residence was your main residence for a continuous 3 month period in the last 12 months you owned it.
- You didn’t use your existing main residence as a rental in any part of those 12 months.
Absences
If you move out of your main residence, you can continue to treat it as your main residence:
- If you rent it out then for up to 6 years. If you move back in, the 6 years reset.
- If you don’t rent it out then indefinitely.
You cannot choose any other dwelling as your main residence (you can’t have 2 main residences at the same time other than in “Changing Main Residence” above).
Build a new dwelling
If you demolish the old dwelling you lived in and build a new dwelling, you can still apply the Main Residence Exemption. This is only if:
- The new dwelling becomes your main residence.
- You move in as soon as practicable after the work is finished.
- You live in there for at least 3 months.
- There is a time limit of 4 years after you ceased to occupy the old dwelling for you to move into the new one.
Partial exemption
Partial main residence exemptions are only available where a dwelling has been used as both the main residence and a rental property. I have an article on this here – https://www.knightgroup.com.au/turning-your-main-residence-into-an-investment-property/
Other factors to consider
Cost base apportionment
You are required to apportion each element of the cost base and reduced cost base of the original asset in a reasonable way to each new asset. The Commissioner accepts any basis of attribution which is appropriate in the circumstances, for example, based on area or relative market value. There is a tax determination on this, TD 97/3.
