AVOID UNNECESSARY TAX
I was with a friend a while back and we were reminiscing of the good old days kicking a footy in his parent’s back yard. Occasionally one of us would be a little too overzealous trying to impersonate Gary Abblett Snr and the ball would fly over the back fence. This would usually lead to an argument and paper scissors rock to work out who would jump over to retrieve the ball. Oh how times have changed for most kids these days, as most of these properties have been long subdivided and there isn’t much room between the back door of a house and the boundary to simulate the 1994 grand final!
Subdividing property – I’m sure that we know at least one person who has done this or is considering doing it. As most people know, our primary residence is generally capital gains tax (CGT) exempt and there is a common misconception that this applies when the property is subdivided. An honest mistake, although in reality this is not the case.
Once a property is subdivided, the dwelling (home) is now on a separate title to the section adjacent (which used to be the grassed area of the backyard). The issuing of separate titles will result in an existing asset being converted into 2 or 3 new assets. Once this happens the main residence exemption continues on, but only on the title which the dwelling is on. The title/s which used to be the cricket or footy pitch become new assets, which are taxable once sold.
Due to this misconception, many taxpayers have subdivided their land and sold the back lot off and not bothered telling their accountant. In years gone by this might have “slipped through the cracks” and been missed by the ATO. But as the ATO’s data matching has become more sophisticated it has become much easier for property transactions to be identified and subsequently audited/reviewed by the ATO.
If you are considering subdividing or developing a block of land speak to us so we can discuss any potential tax consequences that may arise from the transaction. We may be able to suggest a more tax effective solution so you can maximise the return from your property assets.