When an individual or an entity decides to sell the land they have just subdivided, they will be facing two questions immediately:

  • Do they have to collect GST on the sale (and therefore register for GST if they haven’t done so yet)?
  • How should they treat the sale of the land on their tax return?

Both questions are often related and interdependent on each another. However, to simplify this I will only discuss the income tax consequences in this article and leave the GST consequences as another topic for future articles.

When an individual or an entity sells a piece of land, they will generally be taxed on the appreciation of the land after holding costs, under ordinary income, or capital gain.

As many of us already know, when a transaction is being taxed under capital gains, if it is an individual, trust or a self-managed superannuation fund it will be able to utilise the 50% general discount and therefore basically pay 50% less tax.

However, in the case of subdivision, there are three ways the sale of a subdivided land can be taxed:

  • Ordinary income from carrying on a business;
  • Ordinary income from a once-off profitable transaction; or
  • Capital gain from the mere realisation of an asset;

Generally it would be easy to identify whether the sale was a result of running a business.  However, the difference between a once-off profitable transaction and a capital gain from the mere realisation of an asset is often quite difficult as it is very grey.

Some of the matters that may be relevant when the ATO assess the transaction includes:

  • Intention and the change of intention (if any);
  • The nature and complexity of:
  • The entity
  • Scale;
  • Amount of money involved, use of finance and the amount of profit;
  • The operation and planning;
  • Connections between the taxpayer and other parties related to the operation or transaction;
  • The manner in which the operation or transaction was entered into or carried out;
  • Additional land acquisition
  • Timing
  • Treatment of the land in the financial statements (if any);

No one factor is determinative but if several of these factors are indicating the sale was a once-off profitable transaction (or a business), then it is likely that the ATO will treat the sale as a once-off profitable transaction.

It should be noted that size sometimes might not necessarily be the deciding factor as we have seen in a number of public cases and private rulings where the subdivision involves a significant number of lots and the sale still qualify as mere realisation of an asset.

You can imagine the differences in the tax payable on the transaction can be quite significant.

Feel free to consult with us if you would like to find out more about mere realisation of an asset and whether it can apply to your circumstances.