Q. I bought a property on a corner six years ago and subdivided it, which cost me $25,000. Now that I have built a new home and am renting it out, I intend to sell the old home to reduce debt. Can I claim the costs back from the ATO?
A.‘Intention’ is a critical part of property development. Generally, it is not recorded anywhere except in the mind of the individual, and it often shifts and changes with people’s individual circumstances.
Where there is an intention to develop and sell at a profit, the Australian Taxation Office (ATO) may consider that you are carrying out the business of property development. If the facts prove that is the case, then any profit on sale will be taxed as ordinary income and not as capital gains, where a 50 per cent discount would be available.
Where the intention is to develop the property for rental income, then it would be considered on the capital account.
On the assumption that the property was developed to produce more rental income, then the sale of the original property to help reduce your debt would likely be considered to be on the capital account and any capital gains would be subject to the 50 per cent discount.
As such, the subdivision costs would have to be split between the new blocks.
Subdivision costs are considered to part of the building ‘cost base’ of the property. As part of the cost base, no deduction against rental income is available. Instead, it will reduce the capital gain when sold.
Shukri Barbara, accountant and principal adviser, Property Tax Specialists
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