• Subdivision of land around a dwelling

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    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    If you subdivide a block of land, each block that results is registered with a separate title. For capital gains tax purposes, the original land parcel is divided into 2 or more separate assets. Subdividing the land does not in itself change the ownership of the subdivided blocks. Therefore, you do not make a capital gain or a capital loss at the time of the subdivision.

    You may make a capital gain or loss when you sell the subdivided blocks. You are taken to have acquired the subdivided blocks when you acquired the original parcel of land. The cost base of the original land is, as far as is reasonable, included in the relevant cost bases of the subdivided blocks. You can usually make a reasonable apportionment f the cost f the land on the basis of its area if all the land is of a similar market value, or on the basis of relative market value if this is not the case.

    Example

    Dwelling purchased before 20 September 1985 and land subdivided after that date

    Max bought a house in May 1983. He subdivided the land into 2 blocks in June 1999 and sold the rear block in October 1999.

    He is not liable to pay capital gains tax on the disposal of the rear block because he acquired it in May 1983 - that is, before 20 September 1985.

    Example

    Dwelling purchased before 20 September 1985, land subdivided after that date and house built on subdivided land

    In 1983, Mike bought a block of land that was less than 2   hectares. He subdivided the land into 2 blocks and built a house on the rear block in September 1999. He sold the house together with the land in October 1999 for $150,000. Mike obtained a valuation from a qualified valuer, who valued the rear block at $70,000 and the house at $80,000. The construction cost of the house was $65,000.

    As the new house was constructed after 19 September 1985 on land purchased on or before that date, the house is taken to be a separate asset from the land. Mike is taken to have acquired the rear block before 20 September 1985, so it is not subject to capital gains tax. Mike makes a capital gain of $15,000 ($80,000 - $$65,000) on disposal of the house because he did not use it as his main residence.

    As Mike did not own the house for at least 12 months he is ineligible for the 50 per cent CGT discount.

    Example

    Dwelling purchased after 19 September 1985 and land subdivided after that date

    Joan bought a house on a quarter acre block of land in June 1999 for $250,000. She lived in the house as her main residence. The house was valued at $80,000 and the land at $170,000. In January 2000 she subdivided the land into blocks of equal size. She incurred $10,000 in survey, legal and subdivision application fees and $1,000 to connect water and drainage to the rear block. In March 2000 she sold the rear block for $100,000.

    As she sold the rear block of land separately, the main residence exemption does not apply to the sale. Joan contacted several local real estate agents who advised her that the value of the front block was $15,000 higher than the rear block. She apportioned the $170,000 original cost base into $77, 500 for the rear block (45.6%) and $92,500 for the front block (54.4%).

    The cost base of the rear block is calculated as follows:

     

    $

    Cost of land

    77,500

    45.6 per cent of the cost of survey, legal and application fees

    4,560

    Cost of connecting water and drainage

    1,000

    Total

    83,060

    The capital gain on the disposal (CGT event A1) of the rear block is $16,940. Joan is not liable to pay capital gains tax when she sells the house and the front block because the house has been used as her main residence for all of the period she owned it.

    As Joan has not owned the land for at least 12 months prior to sale, she cannot apply indexation to the cost base nor can she claim the CGT discount.

    Last modified: 18 Sep 2009QC 18323