Building residential units on available land where the family home is, or once was, is not an uncommon occurrence in Australia these days, especially with the property market the way that it is. If you are thinking of demolishing the family home and subdividing the land into blocks, then if it is possible, this is a lucrative strategy.
However, the tax implications of this decision can be complex. Depending on your situation, you may find that benefits such as the CGT discount or main residence exemptions are lost.
This and GST implications, which are not dealt with in this article, can be pretty confusing for many not trained in these matters, so if you are interested in performing one of these scenarios as described below, or something similar, then please get in touch with us at Prosperity Accountants to receive bespoke advice and support to ensure you are fully informed and confident with your decision.
What are some of the common scenarios and their implications?
Scenario 1: Demolish family home, subdivide the land and build two units; one to sell and the other retained as the main dwelling.
The main residence unit in this scenario will continue to qualify for the CGT main residence exemption. As the original dwelling has been demolished, this main residence exemption can be extended to the other unit, providing some conditions are met for four years.
As the land is subdivided, it does create two new separate CGT assets, and the cost base of the land needs to be recalculated. The subdivision itself creates no CGT consequences.
Scenario 2: Subdivide land, build a home unit on a previously vacant property area, and sell this unit with the original residence remaining in place.
The same concepts apply here as they do with the previous scenario: no CGT liability is implemented. The cost base of the entire property will need to be allocated to each subdivided part.
The creation of the second dwelling is clearly for the intent of profit, and as such, no main residence exemption to CGT general discount will apply to this unit.
However, unlike this non-main residence dwelling, the main home does continue to be included under the main residence exemption.
Scenario 3: Subdivide land withholding main residence and selling the vacant plot
There have been indications that suggest that these situations would not necessarily result in an ‘enterprise’ for GST purposes. It is likely to be considered this kind of action to be not made purely for profit gains.
If you hold the property for at least 12 months, then CGT general discount applies; however, the net capital gain on the sale of the vacant plot of land would be subject to tax unless both land and dwelling are sold together.
Each and every situation is unique, so please get in touch with our team at Prosperity Accountants with any questions you may have regarding subdivisions and the Capital Gains Tax implications that might be relevant to you.
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