Whether it's after being left a property, buying a new block of land, or realising that you'd be better off selling some of the acreage attached to your home, many people around Australia may at some point find themselves embarking on an exercise to leverage their real estate to its best advantage.

Subdividing land or developing property can be a great way to achieve this. However, consideration of the possible tax implications of these endeavours often occur after activities have commenced. You wouldn't gamble with such an undertaking without consulting the local council for approval, the bank for financial assistance or a builder for construction planning and, nor should you without also consulting with a tax professional. Tax planning a property development or subdivision may not remove tax implications however, it will certainly mitigate against nasty surprises.


Generally, receipts or payments received on revenue account are subject to Income Tax, while those received on realisation of a capital asset are taxed under the Capital Gains Tax ("CGT") regime. Additional complexities can arise where the property subject to subdivision or development was acquired under an inheritance. For more information on the tax implications on the inheritance of property, please refer to our 'Property and Taxes - inheritance nuances' article.

In most cases, the distinction is simple. Wages and business profits are very clearly revenue in nature, while receipts from the sale of an investment property are capital in nature. However, when it comes to the subdivision or development of property where, for example, the use or purpose of the asset changes, the lines can blur.

Below are some examples of common circumstances and possible tax traps we see people fall into.


Let's consider Frank and Lucy for a moment. They are retirees who decide it's time to downsize from their family home, purchased in 1980. Both have stopped working, their kids have flown from the nest, and their four-by-two property situated on two and a half acres of prime land required too much upkeep. Before they put their house on the market their friend Clyde informs them that they could make a bigger profit if they subdivide some of their land and sell the new lots first.

Following Clyde's advice, Frank and Lucy obtain council approval and subdivide two acres of land into four half acre lots. Two of the four lots sell quickly. After minimal interest in the remaining two lots, Frank and Lucy decide to build a unit on each lot for eventual sale. Energised and excited at the prospect of realising their family home to its best advantage, Frank and Lucy forge ahead under the misguided assumption all their activities, and any profits, would be entirely tax-free.

The main residence exemption

The main residence exemption only applies to the sale of a dwelling a taxpayer has treated as their main residence and any adjacent land that has been used primarily for private or domestic purposes. By subdividing land, taxpayers like Frank and Lucy can inadvertently sever it from the main residence limiting the exemption to the remaining part only.

While seemingly simple, the application of the main residence exemption, depending on the factual matrix of the situation can become complex, especially where inheritance, extended ownership period and changing use of the property over time is involved.

Profit-making intention

The actions of Frank and Lucy may have shifted the receipts from the sale of the subdivided lots from being on capital account to revenue in nature for taxation purposes. The ATO could view these actions as having gone beyond merely realising a capital asset and instead consider Frank and Lucy to have engaged in a profit-making undertaking or plan.

Should the ATO view Frank and Lucy's activities being beyond a mere realisation, the tax impact would be undeniably significant. Any profit made on the sale of the subdivided lots would no longer be pre-CGT capital receipts (the CGT regime commenced on 20 September 1985) and instead be treated as a transaction on revenue account with tax payable at the taxpayer's marginal tax rate. Further, there would be no access to any CGT concessions such as main residence exemption, or the 50% CGT discount.

Goods and Services Tax issues

While the sale of established homes or vacant land that is to be used for residential purposes and not as part of an 'enterprise', does not attract GST (it is input taxed), the sale of a new residential premises can be a taxable supply for GST purposes. If the sale of the two lots is made as part of a profit-making enterprise, their sale will be subject to GST.

Broadly, a home will be a 'new residential premises' for GST purposes if it has not been previously sold as a residential premise and has not been occupied for residential purposes for at least five years since it was built. Please note, 'new residential premises' excludes land however, in the event of applying the GST withholding rules, 'potential residential', includes vacant land.

Further, where a taxpayer is undertaking an 'enterprise' and the expected turnover from that enterprise would exceed $75,000, GST applies to the sale of those new residential premises.

Once Frank and Lucy complete building residential units on the remaining two lots, the price charged on sale should include GST. While input tax credits for the cost of constructing the units are available, inexperienced property developers are unaware of this and do not keep the appropriate records to substantiate their claims. Consequently, a hefty GST liability results once the developments are sold.


Large-scale property developments or commercial syndicates also have a lot to consider. Developers generally undertake their property activities in a 'business like' manner driven by a commercial profit-making intention. This is in contrast with Frank and Lucy who may very well be hoping to make a profit on their endeavour but are certainly not looking to operate on a scale, or with a regularity, that would be evident if they were carrying on a business of property development. Generally, a large-scale development will be treated as 'trading stock' for tax purposes.

Initial consideration of how the property is to be held or funded and what the intention is for the development once it is complete are all critical from a tax perspective. In addition, the unique profile of each investor will impact the structure options available, how that structure will be treated for tax purposes, the concessions it can access (if any) and whether any time sensitive elections need to be made. Additional obligations e.g. GST, Transfer Duty and CGT must be considered in detail with care taken to appropriately document any tax positions applied.

Property developments are long term activities and do not occur in a vacuum. Business decisions made because of supply/demand in the target market, the availability of trades or economic stability may lead to changes in the developer's activities, intentions, or methods of realisation. Poor tax planning can quickly erode profitable returns or impose further strain on a business that is already sensitive to cash flow pressures.

This article is issued as general commentary - please contact us about your specific circumstances.