The tax implications of subdividing your property.
So, you’ve decided to knock down your home and build a couple of townhouses instead — and maybe live in one (but you’ll wait and see how things pan out). Or perhaps you’re planning to subdivide your large backyard and do something similar.
In another scenario, you may have purchased a large block of land down the coast or in the country to build a holiday home or your dream retirement house, but now you’ve decided to take advantage of a hot market and build multiple dwellings to sell. (And you know how to manage a project — you’ve been doing it your entire working life.)
Will the ATO treat you as a property developer?
In these situations, the ATO may view your activities as small-scale property development. As a result, your profits could be taxed as ordinary business income — and potentially at the top marginal tax rate — rather than as capital gains, which often receive concessional tax treatment.
If you’ve “ventured” land into a development project, CGT rules may apply up to the point the land is used in the project. Any capital gain (or loss) made up to that date could be subject to CGT — unless the land was exempt, such as a principal residence.
Tax advantages and disadvantages
If treated as a developer:
You can generally claim expenses each year as they are incurred.
This includes interest on borrowed funds for the development.
Your profits are taxed as business income, not as a capital gain.
If you subdivide and sell:
You may only be subject to CGT on any profit.
However, the CGT main residence exemption doesn’t apply to the subdivided portion you sell.
That means even if the land is part of your home, you could still pay CGT on any gain made from the sale of the subdivided block.
You knock-down and rebuild (owner-occupied):
If you rebuild and move back in within the required timeframes, CGT may not apply.
However, the ATO may scrutinise these arrangements more closely in future if this exemption is seen to be widely exploited.
What about GST?
Generally, GST doesn’t apply to small-scale developments — unless you’re conducting the activity as a business and are registered for GST.
In simpler terms:
- For one-off projects, GST is unlikely to apply.
- But if you subdivide and sell multiple lots, you could fall into GST territory.
That said, GST treatment for property developments is complex, and the rules can vary depending on the nature and scale of the activity.
More information
Need property development and subdivision advice?
The way your small-scale property development is taxed depends on your unique circumstances — including your intention, the scale of the project, and how the activity is carried out.
If you’re considering — or have already begun — a property development or subdivision project, it’s essential to get professional advice.
Speak to us early to ensure you’re aware of the tax implications and can plan effectively. Based in Noosa, on the Sunshine Coast Queensland, we work with clients throughout Australia.