More than minor subdivision?
Question from Gordon updated on 20th March 2015:
We brought a property last year which has two dwellings on one title (a two-bedroom house and a three-bedroom house) on 800 square metres of land. We are considering subdividing into two smaller sections with one dwelling each. We are intending to hold the houses long term, 20 to 30 years. Our intention in subdividing would be to increase the value of the houses and make them an easier sell, when the time comes. I understand if we carry out more than "minor work" in order to subdivide then any gain on sale may be taxable. The work we would need to do would be to add a second fresh water water connection to the street, install an inspection chamber for the waste water, move a fence and create two parking spaces. Is this likely to be considered more than minor work? Would any gains be taxable? Would we be better to wait ten years before subdividing? Thank you for your help.
Our expert Mark Withers responded:
Section CB12 taxes gains from disposal of land where land has been developed or divided within 10 years of acquisition and the work is more than minor. There are a number of exclusions to the taxing provision though including the investment exclusion which excludes the gain from income where the subdivision or development work was done to enable the taxpayer to derive rental income from the land. Whilst you have stated you intend to retain and rent the properties the work was arguably not necessary to derive the rental income so the exclusion may not apply in your case. Common law court decisions have also set the bar very low in terms of whether work is minor. The case of Costello V IRD involved the unit titling of a block of flats involving only legal work. This was held to be work that was more than minor. The length of time the land is held after subdivision is also not relevant to the taxing provision. How long it was held before subdividing is the issue. IRD have recently issued a statement on residual land held after a scheme of division and have indicated that where a taxpayer can produce evidence that the residual land held was for a purpose other than disposal the gains may not be taxable, the mere passage of time though is not evidence that the subdivision wasn't for disposal and you have said in your facts that the subdivision is to increase value and make them more saleable. Accordingly, the works required could well be sufficient to exceed the minor work threshold especially where they involve physical work on the property. If the tax outcome is critical, waiting 10 years before commencing the subdivision is the safest bet to ensure CB12 will not impact the outcome.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.