In this month’s article JULIA HARTMAN, the Founder of  BAN TACS – National Accountants Group delves into the issues that could arise when subdividing your back yard and the tax implications you need to be aware of. 

It is important to make sure that you get the right advice and do your numbers first with a property savvy accountant as the different taxation treatments can make a big difference to your profit.

For example, if you subdivide your long term home into a battle axe block and then just sell off the vacant land you are merely realising an asset, so therefore you are entitled to the 50% Capital Gains Tax (CGT) discount on the gain.

But, if you go so far as to build a house on that vacant land before you sell it then you are being much more business-like.

This will mean the profit on the project is taxed as is any other business income, no 50% CGT discount.

You will only get the CGT discount on the increase in the value of the property up until the project began.

GST will also apply because you have built the house, not just sold off your back yard. The margin scheme can save you a large portion of the GST, but the contract needs to state this.

Either way, house or vacant land, there will be no main residence exemption, your exemption stays with your home.

Assess the Risks

You could go to all the trouble and risk of building a house on the block, yet your after tax profit may be less than just selling the vacant land.

It gets worse if you have to demolish the house to be able to split the block in two. You will lose your main residence exemption retrospectively. No protection at all for the capital growth to date.

At this stage you are probably saying oh it can’t be that bad, my neighbours down the road did and got away with it. Only for now, the titles office report all sales to the ATO, it is only a matter of data matching before they get a letter. I have seen this happen and because of the delay the taxpayer had already thrown out all her records.

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Julia Hartman is the founder of the BAN TACS National Accountants Group which has offices on the east and south coast of Australia, from Mackay to Adelaide.

General Advice Warning: This blog is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to what is appropriate for you.

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Accounting Cutting off the Back Yard for Profit