If you subdivide a block of land, each block that results is registered with a separate title. For CGT purposes, the original land parcel is divided into two or more separate assets. Subdividing land does not result in a CGT event if you retain ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.
However, you may make a capital gain or capital loss when you sell the subdivided blocks. The date you acquired the subdivided blocks is the date you acquired the original parcel of land and the cost base of the original land is divided between the subdivided blocks on a reasonable basis.
See also:
- Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?
When the profit is ordinary income
You may have made a profit from the subdivision and sale of land which occurred in the ordinary course of your business or which involved a commercial transaction or business operation entered into with the purpose of making a profit. In this case, the profit is ordinary income (see Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income). You reduce any capital gain from the land by the amount otherwise included in your assessable income.
Example 59: Land purchased before 20 September 1985, land subdivided after that date and house built on subdivided land
In 1983, Mike bought a block of land that was less than two hectares. He subdivided the land into two blocks in May 2019 and began building a house on the rear block, which he finished in August 2019 and did not use as his main residence. He sold the rear block (including the house) in October 2019 for $650,000. Mike got a valuation from a qualified valuer who valued the rear block at $550,000 and the house at $100,000. The construction cost of the house was $85,000.
Mike acquired the rear block before 20 September 1985, so it is not subject to CGT. As the new house was constructed after 20 September 1985 on land purchased before that date, the house is taken to be a separate asset from the land. Mike is taken to have acquired the house in May 2019, when he began building it. Mike made a capital gain of $15,000 ($100,000 − $85,000) when he sold the house because he did not use it as his main residence.
As Mike had owned the house for less than 12 months, he used the 'other' method to calculate his capital gain.
End of example
Example 60: Dwelling purchased on or after 20 September 1985 and land subdivided after that date
Kym bought a house on a 0.2 hectare block of land in June 2019 for $350,000. The house was valued at $120,000 and the land at $230,000. Kym lived in the house as her main residence. She incurred $12,000 in stamp duty and legal fees purchasing the property.
Kym found the block was too big for her to maintain. In January 2020, she subdivided the land into two blocks of equal size – the front one with the house on it. She incurred $10,000 in survey, legal and subdivision application fees, and $1,000 to connect water and drainage to the rear block. In March 2020, she sold the rear block for $130,000.
As Kym sold the rear block of land separately, the main residence exemption does not apply to that land. She contacted several local real estate agents who advised her that the value of the front block was $15,000 higher than the rear block. Kym apportioned the $230,000 original cost base into $107,500 for the rear block (46.7%) and $122,500 for the front block (53.3%). Kym incurred $3,000 legal fees on the sale.
The cost base of the rear block is calculated as follows:
cost of the land |
$107,500 |
Plus |
$5,604 |
Plus |
$4,670 |
Plus |
$1,000 |
Plus |
$3,000 |
Total |
$121,774 |
The capital gain on the sale of the rear block is $8,226. She calculates this by subtracting the cost base ($121,774) from the sale price ($130,000). As Kym had owned the land for less than 12 months, she uses the 'other' method to calculate her capital gain.
Kym will get the full exemption for her house and the front block if she uses them as her main residence for the full period she owns them.
End of example