Topical Update | Subdividing your Main Residence
Recently we have seen some confusion by property owners trying to assess their taxation obligations where small acreage properties (quite often a main or principle residence) have undergone zoning changes allowing subdivision (community title, cluster title, or smaller title) which are then subsequently sold.
Quite often owners of these properties have been long term holders of their properties, and the opportunity to subdivide their land holding is their first involvement in any kind of property 'development'.
There are some key taxation issues to consider for these developments, such as the main residence exemption (which we will discuss in an upcoming article more specifically and its ability to be applied), whether the development is done on capital or income account, and whether GST may apply to the sales proceeds.
The correct treatment for taxation purposes is often dependent on individual circumstances such as the intention of the original property purchase (main residence? for development?), and the extent and way in which the property has been developed (minimum council requirements? or more extensive including house construction (house & land)?).
Given the numerous permutations which may apply i won't delve into an analysis of possible or probable taxation outcomes in this article, however to gain some insight into the ATOs current views, we have reviewed some recent private binding rulings below and their outcomes:
ATO PBR 1013110295850 | Subdivision & GST | November 2016
Whether the sale of subdivided property would constitute a taxable supply (s9-5 of the GST Act) for GST purposes.
The land was purchased and utilized as a main residence of the taxpayer from acquisition. Council changed the land zoning, allowing subdivision. The taxpayer was not actively involved in the change of zoning. Minor development works including a private road, connections to each block for sewerage, water and electricity were undertaken by the taxpayer. These were the minimum requirements of council. A portion of the subdivided properties were to be sold, and some sold at market price to related family members. The block with the existing main residence will be retained and rented by the taxpayer.
The ATO ruled that this subdivision did not constitute the carrying on of an enterprise per s9-20 of the GST Act. Accordingly the sale of subdivided land cannot be a taxable supply per s9-5 of the GST Act, so GST would not apply to the sale.
ATO PBR 1013117512390 | Capital v Revenue | October 2016
Whether the sale of subdivided property would be ordinary income under s6-5 of the ITAA 1997 by virtue of either (a) carrying on a property development business or (b) having an isolated commercial transaction with view to profit. AND/OR Whether the sale of subdivided property would be subject to the capital gains tax provisions in Parts 3-1 and Parts 3-3 of the ITAA 1997.
The taxpayer is the same as in ATO PBR 1013110295850 above, and as such the circumstances are identical.
The ATO ruled that the subdivision was a mere realization of a capital asset (CGT Event A1) and accordingly would not be taxed as ordinary income. The gain would therefore be accounted for under Part 3-1 of the ITAA 1997.
ATO PBR 1013110295850 | Capital v Revenue | October 2016
Question Posed The question posed was almost identical as that in ATO PBR 1013117512390 above, particularly whether the sale of the subdivided property would be ordinary income under s6-5 of the ITAA 1997, AND/OR Whether the sale of subdivided property would be subject to the capital gains tax provisions in particular CGT Event A1.
The taxpayer purchased a property, and at some later stage constructed a house. Since that time the property has been used as a primary residence, gardening (private), and at various times to hold a few farm animals. The owners have never been involved in property development. Subdivision was identified as the most appropriate method to to realise the maximum value of the land. The taxpayer engaged a developer to undertake all necessary services to effect the subdivision on their behalf.
Again, the ATO ruled that the subdivision was a mere realization of a capital asset (CGT Event A1) and accordingly would not be taxed as ordinary income. The gain would therefore be accounted for under Part 3-1 of the ITAA 1997
This ruling includes useful insight as to how the ATO assesses as to whether the subdivision is undertaken on capital or revenue account. Drawing on TR 92/3 it also sets out factors which may tip a land subdivision project from being a realization of a capital asset to a revenue undertaking.
A passage included in the ruling of ATO PBR 1013110295850 i think is most befitting land subdivisions and their associated taxation treatment: "....the facts to each transaction must be discretely and closely examined....The decision in each case dependent on its own facts and was very often a matter of relevance and degree."
Given these transactions are often considerable in monetary value and includes the largest asset of most families (the main residence), we would strongly encourage a PBR be sort for absolute clarity with reference to your individual circumstances. PBRs are cost effective and simple in preparation to ensure clarity on the taxation implications in any realization event through sub-division.