Taxing subdivision?

Question from Zoe updated on 3rd August 2012:

I would like some advice on subdivision tax issues. I brought two investment properties (next to each other) a couple of years ago with a large bank loan. I am now subdividing the back section and putting the new section up for sale. Hopefully I can get some cash back to reduce my debt. From my understanding, even though I have not held the properties for 10 years before subdividing and selling the section, I am not liable for tax on selling the new section, as it is for reducing my debt. Am I right? If I am then can I sell one of the other properties without any tax trouble?

Our expert Mark Withers responded:

I do not believe you are correct. Section CB12 of the Income Tax Act taxes gains from properties that are developed or divided within 10 years of acquisition where the work involves work of more than a minor nature. There is substantial case law on the subject which has been largely unhelpful to taxpayers trying to argue their work was minor. The bar is accordingly set very low. There are a number of exemptions to the section that cover circumstances where the work was done to enable the taxpayer to run a business from the land, live on the land or to derive rental income from the land. There is also a farming exemption and an exemption for taxpayers own residence where the land is less than 4500sqm. If the transaction is taxable then the focus moves to determining what gain has actually been made. This involves working out the cost of the land being sold and deducting this and the costs of development and division from the sale price. It is conceivable that you could have a taxable land transaction on which no profit has actually been made.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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