The tax implication of subdividing Brisbane real estate

Subdividing Brisbane real estate is on the rise as land in the inner city becomes increasingly difficult to find. As a result, many people who own homes on large blocks are looking at subdividing as a way to make some extra money. However, subdividing Brisbane real estate does have a tax implication to be mindful of.

What is the tax implication when subdividing Brisbane real estate?

If you are considering subdividing the land of your primary residence, be aware that the subdivided block(s) will no longer be treated as your main residence. This means that if you were to sell this block(s), it will generally be subject to tax. The way that these are taxed depends on the circumstance…

Tax treatment – capital gain or income?

Understanding how the ATO determines the tax treatment of a subdivision is complex. Essentially, they will consider whether any gain or loss you make will be taxed as a capital gain or as income. Eddie Chung, BDO Business Services Partner, explains, “As a general proposition, any gain you make from the mere realisation of a capital asset is taxed as a capital gain. If the property has been held for at least 12 months by an individual or a trust by the time it is sold, the capital gain will be eligible for the 50% CGT discount, which will effectively halve the tax liability on the gain. In contrast, if the gain you make constitutes a one-off profit-making undertaking, it will be fully taxed as income without any CGT discount.”

The determination between whether a subdivision constitutes a realisation of a capital asset or a one-off profit-making undertaking is tough. Unfortunately, there is no hard and fast rule. Therefore, it’s recommended to seek advice from a tax adviser when trying to determine how your situation would be assessed.

Examples of past subdivision tax cases

When contemplating your personal situation, past tax cases give us some guidance on how the Commissioner of Taxation will assess a case. Principles that the Commissioner of Taxation has highlighted in past tax cases include:

• Have you done a lot of physical work in subdividing the property? – generally, the less you physically do in subdividing the property, the less likely it will be treated as a profit-making undertaking.
• Is your intention for the subdivision exclusive of a profit motive? – if you intend to subdivide for a reason other than to make a profit, it is more likely that your subdivision will be viewed as a realisation of a capital asset.
• Is the subdivision sizeable? – a larger scale subdivision is more likely to be treated as an isolated profit-making arrangement.
• Is the subdivided block being marketed for sale “as is”? – if the block is listed for sale “as is” with the local real estate agent it is less likely to be treated as a profit-making undertaking. If the property is being sold with a big sales campaign through a project marketer with DA plans, professional renders etc. it will more likely be flagged as a profit motive project.
• Have you borrowed funds to complete the subdivision? – the more borrowed funds used for the subdivision, the more likely it will be viewed as a profit-making undertaking.
• Have you owned the property for a period of time? – the longer you own the property, the stronger the argument that the subdivision constitutes a realisation of a capital asset.
• Do you have a history of developing property? – the more extensive your history of developing properties, the more likely it will be seen to be a profit-making undertaking.

Sum up

It is always best to get professional advice when considering a subdivision project. Understand the tax implication of subdividing Brisbane real estate will help avoid any nasty tax bills. A tax adviser can assess your situation and potentially reduce your exposure to potential penalties if the ATO successfully challenges the tax treatment of your subdivision.

This article was written with reference to an article by Eddie Chung that was published in the Real Estate Institute of Queensland’s magazine (REIQ Journal) in August 2019.