Client Background CGT Implications:

Our firm recently had the opportunity to assist a client who had undertaken a subdivision of their 100-square-meter block into two separate blocks. The client’s decision to subdivide the land included constructing a new dwelling on one of the newly created blocks while retaining their existing property as their primary residence. The client approached us with a dual query: Firstly, they sought clarification on the potential Capital Gains Tax (CGT) implications of selling the newly constructed dwelling, primarily due to rising interest rates and financial constraints. Secondly, they wanted to understand the tax consequences if they decided to sell their current residence.

CGT Implications:

The Challenge: The primary challenge in this case revolved around determining the CGT treatment of the sale of the newly constructed dwelling, which had been created through a subdivision and construction process. Additionally, the client wanted to explore the tax implications of selling their existing primary residence. The goal was to provide our client with a comprehensive understanding of their tax obligations and opportunities to optimise their financial position.

The Analysis: Our team of Tax Specialists at Investax conducted a detailed analysis based on the specific circumstances of the client’s case. They provided the following advice:

Sale of Newly Constructed Dwelling:

  • Generally, when individuals undertake a basic subdivision on land held for private purposes, and the subdivision work is primarily for council approval, any subsequent sale of the subdivided blocks remains on a capital account.
  • However, if the subdivision involves the construction of a new dwelling on the vacant block with the intention to sell it for a profit, it suggests a profit-making activity beyond a mere realisation. In such cases, any profit generated from the sale is treated as ordinary income rather than a capital gain.
  • In this specific case, where the client went beyond a simple subdivision by constructing dwellings on the property, the sale is more likely to be treated as revenue for tax purposes. This implies that Goods and Services Tax (GST) may also apply if the client decides to sell the property immediately after completing construction.

Sale of Existing Primary Residence:

  • If the client chooses to sell their existing dwelling, which serves as their primary place of residence, they would not be subject to any Capital Gains Tax (CGT) liability. This is due to the CGT main residence exemption, which exempts the primary residence from CGT.

Outcome and Recommendations: Given the advice provided by our Tax Specialists, the client was presented with several options:

  1. Sale of Newly Constructed Dwelling: If they proceed with selling the newly constructed dwelling, they need to be aware that it may be treated as ordinary income, potentially subject to income tax and GST.
  2. Sale of Existing Primary Residence: Selling their current primary residence would not attract CGT, thanks to the main residence exemption.
  3. Exploring Alternatives: Our team recommended further discussions to explore alternative financial strategies and solutions, which could include refinancing or other financial arrangements to address the client’s financial constraints.

Conclusion: This case study highlights the complex tax implications associated with the sale of a subdivided block with a primary residence. Our client was provided with clear guidance on the potential tax treatment of their property transactions, enabling them to make informed decisions regarding their financial future.

It is essential for individuals considering property transactions involving subdivision, construction, or the sale of primary residences to seek professional tax advice to ensure compliance with tax laws and to optimize their financial outcomes. Our firm remains committed to providing tailored solutions to our clients’ unique tax challenges, ensuring they navigate the intricacies of tax regulations with confidence.