Why CGT and subdivision is all about intention: Property Tax Specialists

Intention is the magic ingredient that dictates how a gain from subdivision is taxed, explains Property Tax Specialists’ Shukri Barbara.

If your intention is to realize the capital gain in a property then you will be taxed differently to if your intention is to make a profit in some fashion.

Barbara provides an example of a situation where the property is used as a main residence only. In 2013, the value has increased to $490,000 – when it was purchased in 2005 it cost $250,000.

They subdivide the block, and then sell the vacant land.

Barbara explains that for this specific situation, the gain is capital – with a 50% discount available as it is a “mere realization” of capital. In this case, the cost base of the vacant block would be based on the valuation from a valuer, the Development Application (DA) costs and any improvement required by council.

He suggests to only subdivide when ready to sell, as it allows the owner to maintain the capital gain exempt status for longest, as subdividing demonstrates intention as it is solely to realize capital gains.

Subdividing early and “waiting” is an indication of intention to a profit making undertaking, he warns.

It’s also worth noting that knocking down the main residence before selling significant changes the character of the asset, and may see capital gain tax (CGT) payable. Similarly, registering for GST can also be an indication of an intention to make profit.

Here’s another example:

A couple acquire a house in 2012 and lodge a DA in 2013 to knock down the existing houe, subdivide land and construct two townhouses.

The intention – that key word again – is to occupy one as the main residence, and sell the other one to help fund the main residence.

The owners have no background in building or associated industries and no history of development.

Barbara explains that in this situation it is likely the new main residence is exempt from CGT if it is established as main residence on purchase and is occupied for a period of, say, three months.

It must also be re-occupied within four years and the dwelling must be used for at least three months after completion.

If it is not treated in this way, CGT will be apportioned over time owned.

On the second part of the property, it will be taxed as business income.

GST implications include registration, GST on a portion of the sale price, credits on materials and services on purchase.

Barbara explains that if you sell the vacant block without development it is likely to be a capital 50% discount.

However, constructing and renting out the second block shows intention of investment, which on a later sale may access 50% discount but includes issues such as cash flow.

In fact, planning is critical. In some situations, Barbara notes that the numbers may actually find the after tax position preferably with the sale of the second block vacant rather than developed.

Barbara also warns that subdivisions cannot take place in a self-managed super fund for a number of reasons, mainly because it is high risk.

He notes that the intention is not required to be formally recorded anywhere, and the tax office bases intention on the way that the actions are taken out.