Subdividing Property: How Can An Accountant Help?
Written by: Accounting Team
Are you or your family thinking about subdividing your property but are unsure of the tax consequences of doing so?
Whether you’re deciding to subdivide because you want to downsize on your way to retirement or want to capitalise on the capital growth of your land, subdivisions can offer a multitude of opportunities for taxpayers in Australia.
But before jumping into the decision, it’s crucial to understand how your decision making along the way can impact upon your costs and finances (e.g. tax!). Gaining a tax accountant’s insight early will give you the ability to make the best decision possible.
What Are/Can Be The Benefits of Subdivision?
Subdividing your property can have numerous financial and tax-related benefits.
These could be:
- Realising a property’s full market value potential: having multiple lots may be more valuable than having one piece of land and can assist in fully realising an asset’s highest possible value;
- Creating additional income streams: subdividing a lot and building a property with an asset’s highest possible value;
- Estate planning opportunities; subdividing family-owned land to then be given to beneficiaries of an estate may be a nice, easy way to split a family’s wealth across the remaining descendants; and
- Capital gains tax opportunities: subdividing a lot into multiple lots and planning the sale of each lot across multiple financial years to lessen the impact of capital gains tax.
Can You Subdivide Investment Properties?
Yes, you can subdivide investment properties.
The type of property doesn’t matter for subdivision purposes, but the type of property and the intention of what a taxpayer does with it after subdivision can have unintended income tax or GST consequences.
How Can An Accountant Help When Subdividing Property?
An accountant may not be directly involved in the actual process of subdivision.
Instead, the first step a person usually takes is first determining if a piece of land can actually be subdivided and then obtaining permits, approval and planning from various professionals in the community (e.g. city council, surveyors, town planners, or solicitors).
However, an accountant may be crucial to speak to before planning for the subdivision because the intention behind that subdivision may determine if GST and/or income tax needs to be paid if there is a sale associated with the subdivision.
At the end of the day, speaking to an accountant before, during and/or after subdivision can help clarify any tax implications on decisions made on the subdivided lots.
Does Subdividing A Property Have GST or Income Tax Law Consequences?
Short answer, no.
The act of subdividing a property itself does not give rise to any GST and income tax consequences. It simply divides one asset into multiple assets with the beneficial owner remaining unchanged. However, what you then decide to do with the assets after subdivision may give rise to unintended GST and income tax consequences.
For example: there may be GST on the sale of a residential property that was built on a subdivided block. Or a taxpayer may need to include a capital gain in their tax return if, after subdividing, they decide to sell the block of land as vacant land.
Careful analysis of what happens after subdivision is crucial and the initial intention of the asset, before subdivision, can impact upon these outcomes.
What Are The Tax Law + GST Consequences of Subdividing Property?
When planning a subdivision, the intention of the subdivision and resulting decisions made after subdivision can determine how much tax you pay, if any, and if you are required to be registered for GST.
These can be quite convoluted areas of tax law, and many taxpayers get it wrong. Some taxpayers who subdivide property may be in the business of property development whereas others may just be slicing off a piece of land on their primary residence to sell which may constitute a mere realisation of capital assets.
Here are two examples…
Example 1: Selling subdivided land
Scenario: John and Mary are a married couple, and they have owned their primary residence for 35 years. They purchased it for $300,000. To simplify life as they approach retirement, they have decided to subdivide their property into two lots and sell the empty lot for $700,000. Subdivision costs amounted to $50,000. They continue to live in the original house and reduced piece of land that it sits upon. They have obtained a market valuation of the property as a whole and the valuation states the house is worth $400,000 with the total property being worth $1,000,000 before subdivision. The land was subdivided into two equal pieces of land.
Tax Outcome: First and foremost, there are no GST or income tax ramifications from the subdivision itself. Remember, the act of subdivision does not constitute a capital gain event or a profit-making venture.
The sale of the empty lot triggers capital gains tax. When sold, John and Mary will need to apply a proportional valuation method to calculate the taxable capital gain and, using this method, they determine $105,000 of the purchase price and subdivision costs relate to the lot sold and the capital gain associated with this sale is $595,000.
Example 2: Building and Renting a Property
Scenario: John and Mary do the above, but instead of selling the subdivided land, they decide to build a residential property on the new lot and rent it out. They have no plans of selling this property soon, and the cost of building the property is $320,000. The married couple rent it out at $450 per week.
Tax Outcome: Since John and Mary are not selling the subdivided lot or the property that they have built, there are no GST or income tax repercussions to the decision of subdividing the land. However, John and Mary will need to include the rent they receive from the property in their taxable income with associated costs offset against it (e.g. council rates, interest on mortgage, etc).
Want to know more about GST around your property? Check out this previous blog we put together: GST On Property Sales
Canny Accounting + Property Tax Law Advice
Subdividing offers Australians’ a powerful tool to help use an asset to its full potential and to help meet the goals of taxpayers in lots of different scenarios.
This can be increasing market value of the property, creating additional income streams or helping a better. Navigating this process with an accountant can help bring to fruition those goals and outcomes without any nasty surprises of having to remit GST to the tax office or paying income tax on a sale. It’s important to talk to an accountant as early as possible so you are armed with as much information as you need.
Get in touch with our team so we can take you through the steps before your property journey starts.
