• Subdividing and amalgamating land

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    Subdividing land

    If you subdivide a block of land, each resulting block is registered with a separate title. For capital gains tax (CGT) purposes, the original land parcel is divided into two or more separate assets.

    Subdividing land is not a CGT event if you retain ownership of the subdivided blocks, so you don't make a capital gain or loss at the time of the subdivision. However, you may make a capital gain or loss when you sell the subdivided blocks.

    The date you acquired the subdivided blocks is the date you acquired the original parcel of land. The cost base of the original land is divided between the subdivided blocks on a reasonable basis.

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    Example: Land purchased before 20 September 1985 and later subdivided

    In 1983 Mike bought a block of land that was less than two hectares. He subdivided the land into two blocks in May 2015 and began building a house on the rear block, with the intention of using it as his home. The house was finished in August 2015, at a construction cost of $170,000, but he didn't use it as his main residence. He sold the rear block (including the house) in October 2015 for $500,000.

    Mike got a valuation from a qualified valuer, who valued the rear block at $300,000 and the house at $200,000.

    Mike acquired the rear block before 20 September 1985, so it is not subject to CGT. As the new house was constructed after 20 September 1985 on land purchased before that date, the house is taken to be a separate asset from the land. Mike is taken to have acquired the house in May 2015 when he began building it. Mike made a capital gain of $30,000 ($200,000 − $170,000) when he sold the house because he did not use it as his main residence.

    As Mike had owned the house for less than 12 months, he used the 'other' method to calculate his capital gain.

    Example: Dwelling purchased on or after 20 September 1985 and land later subdivided

    Kym bought a house on a 0.2 hectare block of land in June 2016 for $700,000. The house was valued at $240,000 and the land at $460,000. Kym lived in the house as her main residence. She incurred $24,000 in stamp duty and legal fees purchasing the property.

    In January 2017 Kym subdivided the land into two blocks of equal size. She incurred costs of $20,000 in survey, legal and subdivision application fees, and $2,000 to connect water and drainage to the rear block. In March 2017, she sold the rear block for $260,000 and incurred $6,000 legal fees on the sale.

    As Kym sold the rear block of land separately, the main residence exemption does not apply to that land. She contacted several local real estate agents who advised her that the value of the front block was $30,000 higher than the rear block. Kym apportioned the $460,000 original cost base into $215,000 for the rear block (46.7%) and $245,000 for the front block (53.3%).

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

    Cost of land

    $215,000

    46.7% of the $24,000 stamp duty and legal fees on the purchase

    $11,208

    46.7% of the $20,000 cost of survey, legal and application fees

    $9,340

    Cost of connecting water and drainage

    $2,000

    Legal fees on sale

    $6,000

    Total

    $243,548

    The capital gain on the sale of the rear block was $16,452 (sale price of $260,000 less cost base of $243,548). As Kym owned the land for less than 12 months, she uses the 'other' method to calculate her capital gain.

    Kym will get the full exemption for her house and the front block if they are used as her main residence for the full period she owns them.

    End of example

    When the profit is ordinary income

    You may make a profit from the subdivision and sale of land that occurs in the ordinary course of your business or involves a commercial transaction or business operation entered into with the purpose of making a profit. In this case, the profit is ordinary income. You reduce any capital gain from the land by the amount otherwise included in your assessable income.

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    Amalgamating two or more titles

    The amalgamation of the titles to various blocks of land that you own does not result in a CGT event happening.

    Land that you acquired before 20 September 1985 that is amalgamated with land acquired on or after that date retains its pre-CGT status.

    Example: Amalgamation of title

    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 amalgamated the titles to the two blocks into one title.

    Wang Cheng is taken to have two separate assets. The first block continues to be treated as a pre-CGT asset.

    End of example

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    Last modified: 17 Jul 2017QC 52202