Property Tax Tips - Tax Implications of Subdividing the Family Home (Part 3)
In this month’s Tax Tips we’re going to conclude our discussion about subdividing your family home and the tax consequences by looking at what happens if you subdivide, build, and then rent out the new property.
As with any property subdivision, both capital gains tax (CGT) and the goods and services tax (GST) need to be carefully considered. Of course, both of these taxes are only an issue when it actually comes time to sell, but you may be surprised to know that your intent plays a large part in determining the taxation.
In the eyes of the tax office, if they believe you built with the intent of selling for a profit in a business-like way, even if you are now renting out the property, you may not be able to claim any CGT discounts. The profit you make when you eventually sell would be considered ordinary income and simply be added in full to other assessable income you’ve received throughout the year. The onus is on you to prove that this wasn’t your intention, so you should ensure your actions and the circumstances surrounding the subdivision to support your argued intentions. For example, if you only rent it out for a short period and sell quite quickly, the tax office may conclude that your original intention was to develop the property in order to sell it for profit.
If you did build with the intention of renting the property, and the tax office accepts this, then you will be able to access CGT discounts. The tax office in this situation would believe that when you decide to sell, the sale is merely a realisation of a capital asset and not part of carrying on a business or engaging in a profit-making scheme.
When it comes to GST, renting out a residential property is considered an input taxed supply. This means it is not subject to GST and when you decide to sell, the property is considered a capital asset. You do not, therefore, need to be registered for GST or collect GST from your tenants.
If you as the original owner of the property are already registered for GST, even for a totally unrelated business, then the sale of the property may actually be subject to GST. Again, it often comes down to how the tax office perceives your intentions – is it just a realisation of a capital asset or a profit-driven enterprise?
You may also be required to pay GST, even if you’re not currently registered, if your intentions are thought to be developing and selling for profit. In both cases, the only way to avoid this situation entirely is to hold the newly built property as a rental for at least 5 continuous years.
Taxation law is complex and when it comes to property the rules are rarely black and white. If you’re concerned about how the tax office might view your proposed subdivision, speak to your accountant for professional advice.
Momentum Wealth and its affiliated entities are not Accountants. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.