The subdivision of land is not a CGT event itself, but it often comes along with one.
Subdivision of Land
If you want to sell parts of your land, you need to subdivide. But when you do this subdivision of land, what happens taxwise? When does CGT event K4 apply? Can you retain the main residence exemption? And when would your property development be a profit making scheme or a business?
Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Subdivision of Land
The subdivision of land is a common occurrence in Australia – has been right from the start. And it sounds simple. You just change the title from one to two or many and then sell the lots. Simple as long as your local council agrees. But the tax implications can be complex.
A subdivision itself is not a CGT event. However, with the subdivision often comes a change of intention for the land. And that change of intention often represents a CGT event, for example K4 – the change from capital to trading stock.
But not always. For example when you pull down your main residence to replace it with two duplexes and move back into one and sell the other, the intention for your half hasn’t changed. You still use it as your main residence.
CGT Event K4
K4 only applies to business. So if you do a one-off project that is a money-making scheme or are on capital, you won’t get K4.
K4 happens when you move a capital asset to trading stock, so for example from capital to a development business. It doesn’t apply, when you move land from capital to a profit-making scheme.
Upon CGT event K4 you have a deemed disposal of the land as a capital asset and then a deemed acquisition as trading stock. You choose whether that deemed disposal and deemed acquisition happens at cost or market value. In most cases you will choose market value to maximise the 50% CGT discount or small business CGT concessions, but there are also hypothetical scenarios where market value might be of advantage to you.
To Subdivide or Not
If you want to sell the whole land anyway, then just sell the whole land. Don’t subdivide and then sell. Just sell.
But if you want to keep part of the farm or main residence, then yes then you need to subdivide.
Watch out for CGT K4 if it is a business asset and watch out that you don’t lose the main residence exemption if it is a main residence.
To Develop or Not
When you subdivide and sell land for development, that development potential is most likely already included in the price of land. So just selling the land is often the best financial outcome you can get.
Sometimes the development might ask you to take part in the development to either get the land for a lower price or use some of your cash to ease his cash flow propblems. Don’t bother unless you are not an experienced developer. Taking part in the development probably won’t make you any more money than if you had just clean out sold the land.
If you want to get into development, then do it separately from the sale of the land, in a separate project from the land you sell.
So this is just a very short summary of what we learned in this episode. Please listen in as Andrew Andreyev explains all this much better than we ever could.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 21 February 2022