Given the state of the property market in Australia these days, a not-uncommon situation can arise where a residential property owner seeks to demolish and subdivide the block containing the family home and build residential units.T implications of subdividing and building on the family property.
If a taxpayer has the available land of course, this can be a solid strategy. However it can cause headaches from a tax perspective - and in some cases the ability to access the main residence exemption and even the CGT discount can be lost.
Divvying up the backyard
A question that arises every now and then concerns the effects on the CGT main residence exemption where the owner decides to subdivide the land containing their principal place of residence, in some cases demolishing the existing home, and build residential units.
The scenarios that are typically raised involve one of the following choices:
demolish the main residence, subdivide the land, build two home units, sell one and live in the other
subdivide the land, build a home unit on the newly created previously vacant portion, and sell the new unit (with the original residence staying intact)
subdivide the land and sell the non-main residence block (with original dwelling staying intact on the remaining block).
When dealing with these situations, the following pertinent tax questions may need consideration:
- Whether demolition of the original main residence would trigger a capital gain or loss (if any)?
- What are the CGT implications of subdividing the property?
- Is the sale of the home unit or vacant land a "mere realisation" or is there is a profit-making activity conducted?
- How would the original dwelling/unit, retained and lived in by the taxpayer, be treated for CGT purposes?
Note that there may be some GST implications that are not dealt with in detail here. Suffice to say that any venture undertaken by home owners in building units for the purposes of sale would, from the ATO's viewpoint, most likely constitute an "enterprise" and in some cases, depending on the circumstances, may necessitate an ABN and registration for GST.
For a consultation about building on the family property and the possible tax implications contact us or Book an Appointment.