Tax with Max: Subdivision smarts

What's the best tax strategy for splitting a residential block in two?

Summary: Splitting residential blocks into two or more offers up many sale alternatives, with different implications for capital gains tax.

Key take out: With just the approval for a subdivision in place, no capital gains tax are payable on selling a block but if a subdivision is completed and the 'new' block sold your net gains become assessable.

Key beneficiaries: Home owners. Category: Tax. 

Lump-sum living

My sister who is 64 has returned to Australia after spending more than 40 years in Singapore, and has never worked in Australia and has no super. She has returned with savings of $500,000 that is invested in a three per cent fixed deposit. She does not want to set up an SMSF, but seems averse to joining a fund for fear of fees. I understand that her expenses are about $20,000 a year and she is relying on bank interest only and eating into her capital. What do you think is a safe strategy for her?

Answer: I am surprised at the level of income that your sister says she needs each year. According to research a single person needs an annual income of $23,797 for a modest lifestyle, while for a comfortable lifestyle a person needs $43,184.

With your sister having returned to Australia and being an Australian citizen she will be eligible for the age pension when she turns 65. On the basis of the savings, but not taking into account any other assets she may have that would be counted by Centrelink, someone in this situation could be eligible for an age pension of approximately $600 a fortnight.

This would mean when the age pension is combined with her investment earnings, even if this was only the three per cent term deposit rate, your sister would be producing income of approximately $30,000 a year.

I think your sister should however look at joining a good industry super fund such as Australian Super and make a non-concessional contribution of up to $500,000. I recommended Australian Super because it is one of the cheapest and best managed super funds and has a maximum administration cost for members in pension phase. Of course, one should seek professional advice to fully assess their Centrelink and financial positions.

Subdivision smarts

Our existing home is built on a two-acre block and we have council approval to divide the block into two one-acre blocks. The 'new' block is estimated to have a selling price of $180,000. The total cost to create it should be, say, $40,000 in council, government and other fees.

The property's sale value as it exists now, two acres with improvements, is about $500,000. We purchased it 25 years ago for $135,000 but spent probably $120,000 improving it over the years. After the subdivision is completed and the 'new' block sold, we should get $480,000 for the remaining one-acre including the house, etc, should we decide to sell.

Could you please advise what are the tax implications assuming if we sell the 'new' block for $180,000 retaining the 'house' block as our residence? Alternatively, what are the implications for selling the whole two acres now with council approval for, say, $550,000 after having already spent $22,000 to obtain the subdivision approval?

Answer: From an income tax point of view if you sell the two acres as they are, with the approval for subdivision in place, no capital gains tax would be payable on any profit that you make. If you subdivided the property and sold the block with your house on it no capital gains tax will be payable as it will meet the main residence exemption.

The vacant one-acre block when it was sold would be subject to capital gains tax. The amount of profit would be determined calculating what the cost of the one-acre has been. This would be done by allocating a share of your original $135,000 purchase price to the acre, add to this any share of the $120,000 in improvements that would relate to the land rather than your home, and add to this a share of the $40,000 spent in obtaining the approval for subdivision plus any other costs required to complete the subdivision.

With a net selling value of $180,000  assuming the total costs that could be attributed to the one-acre being sold is $50,000  that would result in a gain of $130,000. Because the one-acre block is a new asset and it is sold immediately after the subdivision had been granted all of the $130,000 would be assessable income split between your wife and yourself.

Not taking into account any other income that the capital gain would need to be added to, tax and Medicare levy on $65,000 each would amount to approximately $14,000. This means after tax, on the basis of you having no other taxable income, you would net approximately $152,000. If you and your wife had other income to which the capital gain would be added, the tax payable could be more than $23,000 each.

Because of the complexities of this situation, and the fact that $550,000 would be produced if you sold the property with the subdivision approval in place compared to possibly netting after tax approximately $600,000, you should seek professional advice from an accountant that specialises in capital gains tax matters to work out what will be your best option.

FIRB and the family home

I am sure many of your readers have a lot of equity tied up in their primary residences, as we do, and they are well aware that the purchaser market has been deeply influenced by Chinese-nationals. Can you please explain what the current Foreign Investment Review Board rules are regarding house purchases in Australia by overseas-based buyers?

Answer: This is one of those times when I can speak from personal experience as to how potential buyers not being able to get FIRB approval can affect a sale. We are currently selling our own home and did have an offer that at first was unconditional.

The purchaser, after checking with their solicitor, had to request that their offer be made conditional upon them getting FIRB approval. In our case the purchaser did not even go through the final application process as they were advised their application would not succeed because they had the wrong type of visa.

FIRB approval is not required when foreign non-residents are purchasing new dwellings. The requirements to obtain approval by non-residents to purchase vacant land and established dwellings for redevelopment are easier than for an established home.

Approval for the purchase of vacant land by non-residents is dependent upon the development being completed within four years of the date of approval, and evidence of the completion of the dwelling being provided within 30 days of the occupancy or builders completion certificate being received.

An established dwelling that is to be redeveloped can be purchased as long as the following conditions are met:

  • the redevelopment will generally increase housing stock;
  • the dwelling on the property at the time of purchase cannot be rented out prior to its demolition and redevelopment;
  • the existing dwelling must be demolished and the new dwellings completed within four years of the date of approval, and;
  • evidence of the completion of the dwelling is submitted within 30 days of the occupancy or builders completion certificate being received.

Foreign non-residents are banned from purchasing established dwellings. Foreign non-residents are defined as individuals not ordinarily resident in Australia and includes those that hold a visa that allows the individual to remain in Australia for only a limited period of time.


Advice warning: Eureka Report Pty Ltd: ABN: 84 111 063 686 AFSL No: 433424. This article may contain general advice and has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider if it is appropriate for your circumstances. Where the information relates to the acquisition of a product, you should obtain the PDS and consider this before making your decision.