How is the sale of a subdivided backyard treated?
The principles set out before are equally applicable to the subdivision of a backyard of the main residence or a rental property. The starting point is to consider whether there is any suggestion the taxpayer acquired the property to subdivide the backyard and sell it (even if the taxpayer also had the dual intention of making use of a dwelling on the property by living in it or renting it out). For instance, questions may be asked if the taxpayer has undertaken land subdivisions or similar transactions in the past (including through another entity), or whether the taxpayer is a builder or otherwise associated with the building industry (e.g., a real estate agent). If so, the ATO will likely seek to tax the profit as part of a profit-making scheme. However, it may be possible to argue the transaction is not a ‘commercial transaction’. In XTJT v FCT [2013] AATA 936, even though the taxpayer had a profit-making intention about the development of land, the transaction was not sufficiently commercial to be a profit-making scheme due to the nature of the land (it had sentimental value) and the acquisition (a family dealing). If there was no profit-making intention in acquiring the land, the taxpayer has the safe precedent of Statham to rely on; the subdivision should be treated as a ‘mere realization of a capital asset’ were (broadly) the taxpayer limits activities (water, sewerage, and roads) to council requirements, ensures minimal personal involvement and engages an estate agent to market and sell the block(s).
TAX WARNING – Backyard subdivision involves the construction
If a taxpayer arranges for the construction of a dwelling on a subdivided backyard block before the sale (including through an arm’s length builder), the ATO would likely threaten this as a profit-making scheme. Moreover, this will be the case even if the taxpayer has not previously undertaken a property development of this nature. The analysis becomes more complex if the taxpayer leases out the newly constructed property before the sale.