Tax on the subdivision and sale of land

Sally Preston

We often see clients acquire large blocks of land, subdivide an existing block, or convert land into a small-scale development for sale. Sometimes the work is limited to the bare minimum needed for council approval. In other cases, architects, project managers, builders, developers and real estate agents are engaged to create and sell completed dwellings or subdivided lots.

The real question is not just whether the project is commercially viable. It is whether income tax, capital gains tax, GST, duty or land tax will apply to the transaction, and whether the after-tax result still makes sense.

Key message: Do not assume a subdivision profit will be treated as a capital gain merely because the land was originally held as a private or investment asset. 

Three possible income tax outcomes

·       Business income – where the activities amount to carrying on a property development business

·       Profit-making undertaking or scheme – where the activity is commercial and profit-making even if it is a one-off project

·       Capital gain – where the transaction is a mere realisation of a capital asset

Why the classification matters

The classification matters because it determines both the tax calculation and the way any loss is treated. If the profit is ordinary income, the CGT discount or CGT indexation rules will not apply. If the gain is capital, the CGT rules apply, but the applicable rules will depend on when the relevant gain accrued and when the asset is sold.

Under the old rules, an individual or trust that held a CGT asset for at least 12 months could generally access the 50% CGT discount, subject to the usual conditions. From 1 July 2027, the 50% CGT discount is replaced for individuals, trusts and partnerships with cost base indexation and a 30% minimum tax rate for capital gains accruing after that date. Gains that accrued before 1 July 2027 are expected to remain subject to the old CGT treatment, so many future sales will require a practical split between the pre-change and post-change gain.

This makes timing, valuations and records more important than ever. For land held across the change-over date, taxpayers should consider obtaining appropriate valuation evidence as at 1 July 2027 and retaining detailed records of acquisition costs, holding costs, development costs and sale costs.

For example, a $1 million profit taxed as ordinary income may be fully assessable at marginal rates. Under the old CGT rules, a qualifying capital gain could have been reduced by the 50% CGT discount before being taxed. Under the new rules, the focus shifts to indexation of the cost base, the real gain after inflation, and the 30% minimum tax overlay for relevant taxpayers.

GST risk

GST may apply where the subdivision and sale occurs in the course of an enterprise. Importantly, even a one-off project can have GST consequences if it is carried out in a business-like or commercial way. If GST applies, the seller may need to register for GST, remit GST on taxable sales, consider whether the margin scheme is available, and comply with GST withholding notification obligations for new residential premises or potential residential land.

Where GST applies, GST credits may be available for development costs, subject to the usual rules. However, GST outcomes can differ between lots depending on intended use, actual use, whether premises are new residential premises, whether a lot was intended to be rented, and whether the sale is a taxable supply. This is why GST should be considered before contracts are signed and before pricing is finalised.

Practical examples

A long-held family home on a large block may remain largely capital in nature if the owners do no more than obtain basic subdivision approval and sell part of the land. However, once the owners demolish, build new dwellings, engage a development team, borrow to fund construction and sell completed dwellings for profit, the activity is much more likely to be treated as a profit-making undertaking or scheme, with ordinary income and GST consequences.

Mixed-purpose projects can also produce mixed outcomes. For example, if three townhouses are built and one is intended to be retained as a home, one is intended to be rented, and one is intended to be sold at a profit, the income tax and GST treatment may differ for each townhouse. The original intention, later changes in circumstances, evidence of purpose, and actual conduct of the project will all be relevant.

Factors to consider

☐ Why was the land originally acquired?

☐ Did the intention change during ownership?

☐ How extensive were the development works?

☐ Were consultants, builders, project managers or sales agents engaged?

☐ Was the project financed in a business-like way?

☐ Were lots marketed and sold in a commercial manner?

☐ Has the taxpayer undertaken similar projects before?

☐ Was the land part of a main residence, investment property or business asset?

☐ Could GST registration be required?

☐ Has state duty or land tax been considered?

Practical point

Tax advice should be obtained before contracts are entered into, not after lots are sold. The tax outcome can materially affect the feasibility of the project.

 Need help?

Smart Solutions Tax Advisory can assist with income tax, CGT and GST advice for subdivisions, property developments and one-off profit-making projects.

Disclaimer: This article contains general information only and should not be relied on as tax or legal advice. The application of the old and new CGT rules, income tax rules and GST rules will depend on the facts, timing, ownership structure and available evidence.

References / Useful links

ATO property sales: Tax consequences on sales of property | Australian Taxation Office

ATO subdividing land: Subdividing land | Australian Taxation Office

ATO CGT reform guidance: Tax reform – Boosting home ownership – Reforming negative gearing and capital gains tax | Australian Taxation Office