How to work out CGT when you sell land that you subdivided or amalgamated.
If you subdivide a block of land, it becomes 2 or more separate assets for capital gains tax (CGT) purposes.
You make a capital gain or loss when you sell the subdivided blocks.
For CGT purposes, the date you acquired the subdivided blocks is the same as the date you acquired the original land.
The cost base of the original land is divided between the subdivided blocks on a reasonable basis. Taxation determination TD 97/3 explains what is considered 'a reasonable basis'.
In 1983, Mike bought a block of land.
Mike acquired the rear block before 20 September 1985 so it is not subject to CGT.
As the new house was built after 20 September 1985 on land purchased before that date, the house is treated as a separate asset from the land.
Mike made a capital gain of $30,000 ($300,000 − $270,000) when he sold the house.
If you subdivide your main residence and sell the vacant land (that does not contain the dwelling), you are not eligible for the main residence exemption (MRE) for the vacant land sold. You may be eligible for the MRE when you sell the block containing the dwelling, if it was used as your main residence for the whole time you owned it.
Kym bought a house on a 0.2 hectare block of land in June 2022 for $700,000.
In January 2023, Kym subdivided the land into 2 blocks of equal size.
As Kym sold the rear block of land separately, the main residence exemption does not apply to that land.
Kym works out the cost base of the rear block as follows:
The capital gain on the sale of the rear block was $16,452 (sale price of $260,000 less cost base of $243,548).
Kym will get a full exemption for her house and the front block if she uses them as her main residence for the whole time she owns them.
If you buy and subdivide land with the intention of making a profit, it may be considered a business-like or commercial activity.
In this case, the profit is ordinary income and is included in your assessable income. You reduce any capital gain from the land by the amount otherwise included in your assessable income.
Taxation Ruling TR 92/3 explains the situations where profits on isolated transactions are treated as income.
You are not eligible for the MRE if you subdivide a block and sell as vacant land.
When you subdivide land that could be used to build new residential property (potential residential land), you need to consider if you have goods and services tax (GST) obligations. You need to determine if:
Amalgamating the titles of 2 or more blocks of land that you own is not a CGT event so there is no capital gain or loss.
If you acquired land before 20 September 1985, it retains its pre-CGT status even if you merge it with land that you acquired on or after that date.
Wang Cheng bought a block of land on 1 April 1984. On 1 June 2008, he bought another block adjacent to the first one.
Wang Cheng merged the titles to the 2 blocks into one title.
The 2 blocks are treated as separate assets. The first block continues to be exempt from CGT.