Income Tax on Subdivisions

It seems like there are lots of people doing small subdivisions at the moment.  They subdivide their property into two lots, build a new house on the bare section created, and then sell or rent one or both of those houses.  If you are also considering doing this, you need to know the tax rules.

Firstly, section CB 6  of the Income Tax Act 2007 states that the profit on any property purchased with an intention of selling it is subject to income tax regardless of how long the property is actually owned for, unless that property was purchased to live in as your family home.

Assuming you purchased the property as your personal home or as a long term rental property a few years prior to subdivision, section CB 6 won't apply.  This article also assumes that you are not in the business of developing, subdividing, or land dealing.

Secondly, section CB 12 states that the profit of a subdivision is subject to income tax if:

  • there is subdivision work that is more than minor (even the most basic sub-divisional work is generally considered to be more than minor); and
  • the subdivision is begun within 10 years of acquiring the property (whether or not there was an intention to sell at the time the property was acquired)

unless

  • The subdivision is for the purpose of living on that property (does not apply to a trust owned property); or
  • The subdivision is of land that is less than 4,500sqm and was the family home (does not apply to a trust owned property); or
  • The subdivision is for the purpose of earning rental income (could apply to a trust if the new family home is rented to beneficiaries).

So, here are a number of scenarios and the outcomes assuming all subdivisions are commenced within 10 years of the property being purchased:

  • You subdivide your family home property, build a new home to live in and sell the old family home - Income Tax will not apply
  • You subdivide your family home property, build a house and sell it - Income Tax will apply unless land is owned personally and was less than 4,500 sqm
  • You subdivide your family home property, build a house and rent it out - Income Tax will not apply
  • You subdivide a rental property and build a new home to live in - Income Tax will not apply
  • You subdivide your rental property, build a house and sell it - Income Tax will apply unless land is owned personally and was less than 4,500 sqm
  • You subdivide your rental property, build a house and rent it out - Income Tax will not apply

 

Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.