Subdividing your land – What taxes apply?

More and more landowners are exploring the options of subdividing their land due to the increased demand for new builds – brought on by tax incentives - and the new services home build groups are offering land owners to develop their land.

Whether it is a single section being subdivided off the back of the property or numerous lots being subdivided off and sold, the tax implications can be largely similar.

An important point to note is that it doesn't matter if the land is owned by an individual, a trust, a partnership, a company, or a JV, the tax rules apply equally.

Focussing on the two main land tax provisions relating to subdivisions (being sections CB 12 and CB 13 of the Income Tax Act 2007), there are three main factors that apply:

• Do you intend to sell the lots once subdivided;
  
  
• How long have you owned the land for; and
  
  
• How much expenditure and work is involved to undertake the subdivision.

Generally speaking, if there is no intention to sell the lots once they have been subdivided, then you should not fall into either section. I.e. if you undertake the subdivisions with the intention to then build dwellings on those titles and rent the homes out long term, then sections CB 12 and CB 13 should not apply.

However, if you do have an intention of selling the lots, then there are some key differences between the two sections.

How long you have owned the land for?

• CB 12: You have owned the land for less than 10 years before you start the undertaking.
  
  
• CB 13: You have owned the land for more than 10 years before you start the undertaking.

What is important here is when you start the undertaking, not when you end up selling the lots, so even if you sell the lots after the 10-year period, if you started the subdivision process within the 10-year period you will still be subject to CB 12.

Is it really a disadvantage to start the process within 10 years?

From a tax perspective, generally yes.

Start within 10 years;

• the threshold at which the level of expenditure and work required to push the project into being subject to income tax is a lot lower,
  
  
• the deduction for the land when working out your taxable profit from the undertaking is based on the original cost of the land.

Whereas if the process is started after 10 years

• the threshold at which the level of expenditure and work required to push the project into being subject to income tax is a lot higher and,
  
  
• you also get a deduction for the market value of the land at the time the process started, so if the land has increased in value since you bought it up until that point, that portion may not be taxable.

It is therefore important to get your timing right and make sure you understand the intricacies of when an undertaking to subdivide starts, as it can have a material outcome on how much tax may or may not be payable.

It is arguably harder to subdivide now and stay under the expenditure thresholds as councils require a more complete section (power, water, septic, driveways, drainage, retaining, etc.) compared to the past. As a result, knowing your tax implications has become increasingly important.

Even if you aren’t captured by any of the income tax rules above, the catch all provisions of the brightline rules or other tax rules applicable to your situation may apply. So, it pays to get a full understanding of tax implications before you get too far down the track of subdividing a property.

Finally, there is GST to consider.

Whether GST applies is largely driven by whether the landowner is already registered for GST or how many lots or properties are to be sold. Again, this is important to get right as you may find the proceeds from sale are less than you thought, due to GST being payable.

There may be opportunities for you to manage the process to have an efficient tax outcome, but this is reliant on getting advice early so that you can implement that advice.