Question from Danny updated on 17th May 2019:
We have a family home that we have owned for seven years. We are looking into subdividing into five lots to keep as rentals. But with budget constraints we may need to either sell some houses or even empty lots depending on how we ultimately finance the subdivision/construction.
What are the income tax and GST implications if we need to sell one or more houses/lots to cover our debt? Also, under income tax section CB12, would we be better off holding off the work until we've owned the property for 10 years, as I'm guessing work of this scale is more than minor?
Our expert Matthew Gilligan responded:
For simplicity, I’ll assume the family home is owned personally. However, the tax implications of a subdivision into five lots if you need to sell one is a complex issue. I can only give general comment - as specifics are needed before giving definitive advice.
Section CB 12 could apply if you commence the subdivision within 10 years of acquisition. (CB 12 is a provision of the Income Tax Act capturing gains on sale of subdivided lots, where subdivision commences within 10 years of acquisition and involves work of more than a minor nature).
You are right that such a subdivision is arguably more than minor. Having said that, the work involved in constructing a dwelling is excluded when assessing if the minor work threshold is breached. There are also potential exemptions for a property that you have occupied as a residence.
Would deferring the subdivision until 10 years after acquisition make a difference? Yes, but it would not guarantee there wouldn’t be income tax implications. It would remove sections CB 12 and CB 14 (another potentially relevant provision) from consideration. However, there are other provisions that can apply, including one that taxes gains realised through undertaking a profit-making scheme.
If you construct a dwelling for sale, GST will likely apply to that dwelling, whether within the 10-year timeframe or not. If you sell one bare lot in the course of carrying on a subdivision where you construct four dwellings for residential sale, the GST position is not so clear and depends on the detailed facts. Get specialist advice on this tricky issue.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.