Given the state of the property market in Australia these days, a common situation can arise where a residential property owner seeks to demolish an existing residence, subdivide and split the block containing the family home and build a mixture of properties thereafter.
We will look at three typical scenarios and the tax implications of them:
Demolish the existing residence, subdivide the land, build two new properties. Sell one of the properties and retain the other as the main residence to continue to live in.
Points to note
The Four Year Rule would apply to the second residence that is intended to become the principle residence – *please see note below.
If the second residence is intended to be built for resale, it may be considered an enterprise for GST purposes. This means that GST would be claimed on the construction cost but would have to be paid on the eventual sale of the property. Income tax would be payable at marginal rates on any profit from this enterprise.
There may be GST Margin Scheme considerations depending on when and how the property was purchased. This would reduce the overall GST payable.
Subdivide land, build a new home on the previously vacant portion, and sell the original principal place of residence intact.
Points to note
The original home may now be subject to CGT if the property is rented or held for resale for longer than 6 months after the new residence is completed. If this existing residence is sold straight away after the subdivision then it would retain the principle residence exemption and be tax free.
Newly built principal home may not be subject to CGT as it would be the new principle residence and be exempt.
This is not considered an enterprise for GST purposes so there would be no requirement to register and pay GST.
The original cost of the property would be apportioned between the two new blocks for the purposes of working out any tax implications
Subdivide land with the main residence and then dispose of the vacant block.
Points to note
The principle residence exemption from CGT would apply to the original home.
CGT would be payable on the profit made on the new block created.
The original cost of the property would be apportioned between the new blocks to create a cost base for tax purposes.
This transaction is not considered an enterprise for GST purposes so no need to register and pay GST. The sale of the block would be considered a mere realisation of a capital asset with no GST and no Income Tax but would be subject to CGT on the eventual profit on sale of the newly created block.
*The Four Year Rule
If you are renovating or constructing a new home that is intended to be your principal residence, you have up to four years to complete construction and move in, in order to retain the principal residence exemption on the home. (i.e. This means that a subsequent sale of the home is tax free). You must move into the premises as soon as practicable after construction is completed and no other property can be designated as your principal residence.