In these economic times, the opportunity to own property is one that should not be taken lightly.

While not everyone can afford to break into the real estate market that easily, others that already have their ‘foot in the door’ should be looking to get a bigger return on their investment.

Subdivision of property in Australia means splitting a single block of land into multiple lots.

While in theory it sounds easy, there are definitely a few aspects that you should consider before taking it on.

Firstly, not all properties can be subdivided. It all depends on how big the land is, the location and other regulations such as access to roads and utilities and land use. All of these factors are dependent on which state in Australia your property is located.

Secondly, there are different types of subdivisions, each with their own rules, regulations and processes.

In Australia, these include –

• Freehold – an existing, single property is divided into titles.
• Strata – when a property is divided vertically to make apartments.
• Bare land strata – vertically divided property that is not built yet
• Battle-axe – a portion of land that sits behind another lot
• Development – large section of land allows to hold multiple titles

What do you need to subdivide your land?

The subdivision process is not quick nor easy.

In addition to application forms and permits, there is a long list of additional information required, this includes –

• Full details of the land – including how the land is zoned, when and why you purchased it, what the land was previously used for.
• Documentation relating to the subdivision – rezoning applications, plans, permits, who initiated the subdivision.
• Full details of services currently or potentially engaged in the process – what is their role, how much do their services cost?
• Funding – how will the project be funded, details of your loan application (if relevant), projected cash flow, budgets and/or business plans.

For the full breakdown, visit the Australian Taxation Office website.

How does subdivision affect tax?

According to the ATO Government Website, subdividing land to become two or more assets falls under Capital Gains Tax (CGT).

Capital Gains Tax is the tax that you pay on the profit made.

This is where the complexities come in.

If you’re selling a property, you need to prove your profit-making intention with the subdivision.

There are three categories for taxation purposes –

1. Capital asset realisation
2. Once-off profit making undertaking
3. Property development business

However, these are not categories you declare but are rather determined by the facts surrounding the situation.

For instance, if you buy and subdivide land with the intention of making a profit, it can be considered a business or commercial activity.

Therefore, this profit is treated like an ordinary income and included in the assessable income.

Pros of subdivision

#1 Profit potential

If you’ve been in the real estate game long enough, you’ll know that property can sell quickly or not at all.

Subdivision takes a single property and splits it into more potential profits when you sell. Therefore, you could also boost your project cash flow by selling off a subdivision of one of your properties.

#2 Additional income

By holding on to some (or all) of your units, means you could set yourself up with a lucrative, passive income.

As any property owner can attest, this does have its drawbacks especially when dealing with management, body corporates and/or tenants directly.

#3 Property portfolio expansion

A sure-fire way to boost your real estate portfolio is through subdivision – provided that your primary property is big enough.

In addition, utilising larger areas of land, especially if they’re just vacant is an excellent use of resources.

Cons of subdividing property

#1 Susceptible to the market

We’re always told that property is an excellent investment, however if the market is not in your favour then there’s not much you can do.

For instance, if the potential buyers are no longer interested in the area that your property is in, it can quickly become a financial burden more than a potential profit.

#2 High risk

There are several factors that contribute to subdivision being high-risk and one of the main factors is that you could possibly reduce the value of your property.

Other high-risk factors include:

• Unexpected costs
• Easy to mismanage
• Reduce the value of the property

#3 Can take longer than expected

Subdivision can be a long process.

While applying for permits can be straightforward, there are unforeseen circumstances that can delay your subdivision even further, this includes finding reputable town planners, working with local councils, tax laws and the Australian taxation office.

For instance, if neighbours to your property object to your development, it can delay the process even further.

How COADS Partners can help?

COADS Partners specialises in providing expert business and taxation advice for the best outcome.

As part of our services, we also offer property tax advice and consulting which includes –

• Subdivision of Land and Capital Gains Tax and GST Management
• Tax strategies

Contact us today to chat about your investment properties.