Tax & Duty considerations on land partitioning and subdivision
The partitioning of land should not be confused with the subdivision of land. Partitioning means where land that is held jointly (whether as joint tenants or tenants in common) is transferred to one or more of the co-owners of the land. It involves the disposal by each co-owner of their interest in one of the blocks to the other co-owner, and a corresponding acquisition by each co-owner from the other co-owner of their interest in the land. A partition may occur by express agreement between the parties or by Court order.
On the other hand, subdivision of land is the process when new allotments are created from an existing block of land.
Income tax and CGT considerations
The subdivision itself will not trigger a Capital Gains Tax (CGT) event. However, the profit from selling subdivided land may be a capital gain or ordinary income, depending on the circumstances.
If you subdivide a block of land – such as the land on which you live – and sell the newly created block, any profit is generally treated as a capital gain subject to capital gains tax.
However, any profit is treated as ordinary income (not a capital gain) if both of the following apply:
- your intention or purpose in entering into the transaction was to make a profit or gain
- you entered into the transaction, and the profit was made, in the course of carrying on a business or carrying out a business operation or commercial transaction.
If land is held on capital account the partition of that land will have CGT consequences involving disposals and acquisitions. It does not matter whether there is a monetary consideration involved. There are two CGT exemptions available.
Mere subdivision is not subject to GST as there has not been a supply at his stage. However, you may have GST obligations and entitlements if you sell subdivided land with the intention of profit and in the course of carrying on a business or as a business or commercial transaction. Even with a one-off transaction, you may still be required to register for GST because your one-off property transaction may have the characteristics of a business deal.
In case of land partitioning the transfer of an interest by each co-owner to any other co-owner is likely to be viewed as a supply for consideration and therefore subject to GST. Depending on the circumstances the margin scheme may be used to reduce the GST payable.
Stamp Duty implications
In NSW transfer of land attracts transfer of land or business duty (formerly known as Stamp Duty). However, there is a concession where transfer of ownership is subject to a partition. Timing of the partition is important to access the concession. The joint parties must hold the whole property jointly prior to the partition being entered into.
Please contact one of our tax consultants at The Quinn Group on (02) 9223 9166 or submit an online enquiry.