If you subdivide your main residence and sell the newly created block, any profit from the sale of the vacant land is treated as a capital gain, and therefore subject to capital gains tax. The main residence exemption does not apply to vacant land that is sold separately to the dwelling (your family home).
There is an exception where the family home is accidentally destroyed (e.g. by fire), and the land on which the family home originally stood is sold without another house being constructed on that land. You can choose to continue to treat the vacant land as your main residence from the time of destruction up until the time the ownership of the land ends.
Calculating the Cost Base of the Subdivided Land
As the original property has been split into two assets, the cost base of each block is calculated by reasonably allocating the original cost of the property between the subdivided lot and the remainder of the property at the time of subdivision.
The ATO states that it will accept any apportionment approach that is appropriate in the particular circumstances. For example, where the new blocks are of equal size and value, then an apportionment based on the area would usually be appropriate. If the new blocks are of unequal size or value, then an apportionment based on the market value of each block at the time of subdivision can be used.
Apportionment of Subdivision Costs
Subdividing the family home will often incur subdivision-related costs. These can include survey fees, legal fees, subdivision application fees, and cost of connecting electricity and water to the vacant block.
Many people get caught in the trap of thinking that these costs are solely attributed to the cost base of the new property. However, most subdivision costs must be apportioned between both blocks, based on the same apportionment method used to allocate the cost base of the original property.
On the other hand, the costs of connecting electricity and water to the subdivided block can be solely attributed to the new block, as these costs only relate to the vacant land, and do not relate to the original dwelling.
If your family home was acquired before the 20th of September, 1985 (i.e. pre-CGT), the sale of any subdivided land from your main residence will generally be exempt from capital gains tax. This is because subdivision does not trigger any CGT event and therefore the subdivided land retains its pre-CGT status.
Author: Tessa Jachmann