Beware the tax mine field of subdividing
12 April 2021
With house and land prices on a steady incline, the demand for land to build on is increasing. This has prompted many people to consider subdivisions that range from subdividing off the back section of their homes to undertaking subdivision schemes of farming land.
Subdivision transactions are complex in their nature. To date, I have not come across any two with the same facts, which means each transaction needs to be considered individually and will often have different outcomes from both an income tax and GST perspective.
Given the tax complexity of subdivisions, it is great to see many professionals involved with these transactions advising their clients to get tax advice before they get too far into the process of subdividing.
From a tax perspective, there is far more value to be gained from involving a tax expert at the start of the transaction. All too often, when tax advice is left until after the transaction has taken place, the only option left is to advise the client of their tax liability when they have undertaken an activity they thought would be tax free.
If you are thinking of subdividing, make sure you seek tax advice and seek it early. The following list is a good place to start when considering the information your tax adviser will need but there will likely be further information required.
1. Original Purchase details
The date you purchased the property, what you paid for it, did this include or exclude GST? The rules have altered over several years and today’s rules may differ from the rules when you purchased the land.
2. Reason for original land purchase
What did you purchase the land for at the time you entered into the purchase agreement? E.g. was it for the purposes of living on it, running a business on it, holding with the intention of selling later?
3. Other activities
Are you associated to anyone or have you carried out any activities that involve dealing in land or developing land in the past?
4. Zone changes
Are you now considering selling or subdividing this land as the result of a zone change in that area, or a pending zone change?
5. Activity on the land
What have you been doing on the land since you purchased it? I.e. have you been carrying on a GST activity on the land or have you been using it for residential purposes only?
6. What you need to do to enable the subdivision to occur
Is there substantial legal or surveying fees to enable you to be able to sell the section as blocks?
7. Investment in the subdivision
What work must be carried out to enable the subdivision? E.g. major earth works, services installed such as power and other services.
There is a lot of information required to determine whether your subdivision will be taxable or not. If you would like assistance with this or require more information, please speak with your adviser or contact the Findex Accounting and Business Advisory team.