Once upon a time a standard house block was on average 500sqm to 700sqm of land. Some suburbs the average blocks are 700-900sqm plus. As has been the case for many years, the larger blocks have been subdivided into multi apartment or townhouse sites. Land is a rare commodity close in to the CBD and the maximum allowable use of the land to achieve the optimal yield is what all developers are looking for. It’s a constant battle between architects and local town planning departments within your municipality on what is allowable and what will suit the neighbourhood character.
It is not common knowledge that the tax treatment is different if you sell your backyard compared to building a dwelling in your backyard. Once you erect a building you are entering into a profit making purpose. Hence if a ‘mum and dad’ subdivide the main residence and sell the vacant block of land, then providing they are not undertaking this transaction on a regular basis they would usually argue that the sale is a mere realisation of an asset and any profit is on capital account.
However if ‘mum and dad’ arranged for the construction of a building on the subdivided block of land (even if they outsourced the construction to a builder) the ATO is likely to argue that the transaction has a profit-making purpose. This is likely to be the case even if ‘mum and dad’ have never undertaken a property development of this nature previously.
It is always important to consult with your accountant on the treatment of a transaction like this, as it might not be worth your while to build. The stress of building, income tax and GST implications might eat into what you thought was a profit, was not a profit after all.