Subdivisions and small developments have become a common way for Australians to build wealth: the family home on a big block, a knock-down with two townhouses, a few lots off the farm. The tax on these projects is often bigger and more complicated than people expect, and the single most expensive mistake is assuming the profit is a capital gain when it's ordinary income.
This guide explains how the ATO and the courts decide between income and capital, what follows from each, how GST and the margin scheme work on a development, which structure to use, and how the capital gains tax and negative gearing changes from 1 July 2027 apply. Those changes are law, under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.
Is a property development profit income or a capital gain?
There are three possible answers, and they give very different tax bills.
| Character | What it looks like | How it's taxed |
|---|---|---|
| Mere realisation of a capital asset | You've held land for a long time for another purpose (home, farm, investment), and you subdivide and sell it to get the best price, with limited involvement | Capital gain. 50% discount on growth to 30 June 2027 (if held 12+ months), indexation after. Main residence exemption may cover the house itself |
| One-off profit-making undertaking | You're not a developer, but you buy or use land in a planned, commercial venture to make a profit, such as building townhouses to sell | Net profit is ordinary income in full. No CGT discount. Any capital gain is reduced by the amount taxed as income |
| Business of property development | Repeated, organised, business-like projects. The land is trading stock | Ordinary income. Land is trading stock, valued under the trading stock rules. No CGT, no main residence exemption |
What decides it
No single factor decides. The ATO and the courts weigh them together:
- Your purpose when you acquired the land, and whether and when it changed
- Scale and nature of the work: minimum works to get approval and sell, or building dwellings
- Your involvement: hands-off with a developer, or project-managing it yourself
- Organisation and repetition: one project, or a pattern
- Finance: borrowing specifically for the development points towards income
- A coherent profit plan: budgets, feasibility studies and marketing for sale point towards income
The ATO's ruling TR 92/3 sets out when profit from an isolated transaction is income: broadly, where you entered the transaction intending to make a profit and it was part of a business operation or commercial transaction.
Recent cases
In 2025 the Federal Court decided that a retired farmer's large subdivision, carried out through a developer, was a mere realisation of a capital asset, not a business or profit-making venture. The Full Federal Court dismissed the Commissioner's appeal in March 2026, and the ATO published a decision impact statement in June 2026. The case confirms that long ownership, an original non-development purpose and limited personal involvement still count for a lot, even when the subdivision is large. It doesn't mean every farm subdivision is capital. The facts still decide.
Typical scenarios
| Scenario | Likely character |
|---|---|
| Lived in the home 20 years, subdivided the back, sold the vacant block | Capital (the block isn't covered by the main residence exemption) |
| Demolished the home, built three townhouses: one to live in, one to rent, one to sell | Mixed: the one built to sell is income; the others are usually capital |
| Bought a block to build two units and sell them | Income (profit-making undertaking) |
| Farming family subdivides part of the farm after decades, using a developer | Often capital, but depends heavily on involvement and works |
| Buy, renovate and sell houses regularly | Business: income, trading stock, no main residence exemption, even for one you live in briefly |
Our property development agent works through the facts against the cases and the ATO's rulings, and sets out the indicators for income and for capital. Your accountant reviews the analysis and decides what we advise.
What follows if it's income?
- The full profit is taxed at your rate (or the entity's rate). No 50% discount, no indexation, no 30% minimum tax mechanics. The CGT changes largely don't touch it.
- Costs are deducted against the profit, either as they're incurred (trading stock in a business) or when the venture is completed (a one-off project).
- Interest and holding costs are generally deductible or part of the cost of the project.
- Losses can be used against other income (subject to the non-commercial loss rules for individuals).
- GST is likely, because a sale on revenue account is generally part of an enterprise. See below.
- The main residence exemption doesn't apply to dwellings built for sale.
If you held the land on capital account for years before deciding to develop, the land's value at the time the venture started may matter. How the cost of the land is brought into the profit calculation is a technical question with real money in it, so we model it both ways.
How does GST apply to a development?
GST is where developments most often go wrong, because people forget it until the sale.
Do you need to register?
You must register for GST if your GST turnover is $75,000 or more, and you're carrying on an enterprise. A one-off development to sell new dwellings is usually an enterprise. The sale of new residential premises counts towards turnover, so one townhouse sale can push you over the threshold. Sales of your home and capital assets are not counted for the threshold test.
Register before the construction spend if you'll need to, so you can claim GST credits on the build.
What's taxable
| Sale | GST treatment |
|---|---|
| New residential premises (including substantially renovated) sold in the course of an enterprise | Taxable |
| Vacant land sold in the course of an enterprise (potential residential land) | Taxable |
| Existing residential premises | Input taxed: no GST on the sale, no credits on the costs |
| Your home, or land sold as a mere realisation outside any enterprise, when you're not registered or required to be | Generally no GST |
| Commercial property sold by a registered seller | Taxable, unless a going concern or farmland exemption applies |
The margin scheme
The margin scheme lets you calculate GST on the margin (broadly the sale price less what you paid for the land) instead of on the full price. For land held since before 1 July 2000, you can use a valuation at that date instead of the purchase price. It's often the biggest single tax saving in a development.
- You and the buyer must agree in writing to use it, normally in the contract.
- It's not available if you bought the land in a fully taxable sale where GST was worked out without the margin scheme.
- You still claim GST credits on construction and other costs.
- The buyer can't claim a GST credit on a margin scheme purchase.
GST at settlement
For new residential premises and potential residential land, the buyer must withhold part of the price and pay it to the ATO at settlement: 1/11 of the price for a fully taxable sale, or 7% of the price if the margin scheme applies. You must give the buyer written notice of the withholding before settlement. You get a credit for the withheld amount on your next BAS. Our guide to GST on property covers this in detail.
Worked example: subdivide and sell, or build and sell?
Hypothetical, rounded. An individual who bought their home in 2010. Contracts signed before 1 July 2027. GST credits assume construction costs include GST.
Say Tom's home sits on a large block. He's been offered two routes for the back half. The apportioned cost of that land from his 2010 purchase is $150,000.
Route A: subdivide and sell the vacant block. Subdivision costs $80,000. Sale price $600,000. He uses a surveyor and a town planner, does minimal works, and lists it.
Route B: subdivide and build a townhouse to sell. Subdivision costs $80,000. Construction and fees $700,000. Sale price $1,400,000.
| Route A: sell the block | Route B: build and sell | |
|---|---|---|
| Likely character | Capital (mere realisation) | Income (profit-making undertaking) |
| Profit or gain before tax | $370,000 | $470,000 (before GST) |
| Discount | 50% discount: taxable $185,000 | None: taxable in full |
| GST on sale | Generally none (not in an enterprise, not registered) | Required to register. Margin scheme: 1/11 × ($1,400,000 − $150,000) = $113,636, less credits on construction of about $63,600 = about $50,000 net |
| GST without the margin scheme | n/a | 1/11 × $1,400,000 = $127,273, less credits = about $63,600 net |
| Main residence exemption | Doesn't cover vacant land | Doesn't cover a dwelling built to sell |
Route B makes more money, but more of it is taxed, at full rates, and GST takes a slice. The margin scheme saves about $13,600 here, but only if it's in the contract. If Tom wanted to keep the townhouse as a rental instead, the analysis changes: it would likely be a capital asset, an eligible new build with full negative gearing for him, and he could choose the 50% discount when he eventually sells it, even after 2027.
Which structure should you use for a property development?
| Structure | Tax rate on profit | Good for | Watch |
|---|---|---|---|
| Individual (your own name) | Your marginal rate, up to 45% plus Medicare | Small, one-off projects on land you already own | No asset protection; the whole profit lands in one year |
| Company | 25% if a base rate entity, otherwise 30% | Repeat developers; reinvesting profits into the next project | Profits trapped; getting them out raises dividend tax and Division 7A. No CGT discount ever |
| Discretionary trust | Beneficiaries' rates; can distribute to a company | Flexibility and protection; family groups | Proposed 30% minimum tax on discretionary trusts from 1 July 2028 is a Bill (Tax Reform No. 3 Bill 2026), not law. Trusts often get lower land tax thresholds |
| Unit trust or joint venture | Depends on unitholders or venturers | Projects with unrelated partners | Needs a solid agreement; GST joint venture rules are specific |
| SMSF | Not suitable for development in most cases | Rarely | Strict rules on development, related parties and borrowing. Speak to a licensed adviser |
Moving land you already own into a new entity before developing usually triggers CGT and stamp duty. Sometimes it's worth it, especially before 30 June 2027 while the 50% discount still applies to the transfer, but it needs modelling. Our business structures service covers the choice, and our guide to sole trader vs company vs trust compares the options in general.
How do the 2027 changes affect property development?
The CGT and negative gearing changes from 1 July 2027 are law. For developers:
- Income-account projects are largely unaffected. Developers taxed on revenue account never had the discount.
- Capital-account subdivisions (mere realisations) are affected: growth to 30 June 2027 keeps the 50% discount; growth after is indexed and the 30% minimum tax can apply to resident individuals. Land you or your family trust still hold at 30 June 2027 is treated as sold and reacquired at that date, with the gain deferred (company-held land isn't rebased). Get the land valued at that date.
- Pre-CGT land (owned since before 20 September 1985), including many farms, loses its exempt status for growth after 30 June 2027. Growth to that date stays exempt. A farm subdivision planned for after 2027 needs a defensible 30 June 2027 valuation. See our guide to pre-CGT assets and the 2027 changes.
- New builds keep the old rules. Eligible new residential dwellings, and qualifying affordable housing, keep the choice of the 50% discount (affordable housing keeps its 60% discount), and the first owner keeps full negative gearing. A dwelling built to hold, not sell, is often better placed than an established property.
- Knock-down rebuilds that don't add a dwelling don't count as new builds for these purposes.
The detailed definition of an eligible new residential dwelling is still being finalised, so check the current definition at the time you commit, not just when you plan. Our guide to the CGT discount changes from 1 July 2027 explains the transition.
Mistakes we see with developments and subdivisions
- Assuming it's capital because you're "not a developer". A single project can be income.
- No GST registration until the first sale, losing credits on the construction.
- Missing the margin scheme because it wasn't written into the contract.
- Buying in your own name when the project should have been in a company or trust, then paying duty to move it.
- Not documenting purpose: which dwellings were built to sell and which to keep.
- Assuming the main residence exemption covers a subdivided block.
- Funding from a redraw on the home loan without tracking it, so interest can't be properly traced.
- Forgetting land tax and stamp duty in the feasibility.
- No 30 June 2027 valuation for land held on capital account past that date.
How BPAG helps with property development tax
- Before you start. We work out the likely character, the GST position and the structure, with a written view you can rely on. For borderline projects, our private ruling agent drafts the application for your accountant to finalise and lodge.
- During the project. We register for GST at the right time, set up project accounting in Xero so costs are tracked per lot, and prepare BAS with the credits claimed. Our GST on property agent checks each sale for going concern, margin scheme and withholding. Your accountant confirms every treatment.
- At sale and after. We prepare the returns, the GST at settlement notices and the capital gains schedule, and plan the next project. For land tax and duty, our state taxes service covers each state. If you build and hold, our work with property investors picks up from there.
The AI agents draft. A qualified accountant reviews and signs off every analysis and every lodgement, and nothing goes to you or the ATO without a person approving it. Contracts, joint venture agreements and trust deeds are prepared by your solicitor, and we brief them.
Frequently asked questions
If I subdivide my backyard, do I pay tax when I sell the block?
Usually yes. The main residence exemption doesn't cover vacant land sold separately from your home. If you simply subdivide and sell the block, it's typically a capital gain, with the 50% discount on growth to 30 June 2027. If you build on it to sell, the profit is more likely ordinary income, and GST may apply to the new dwelling.
Can I claim GST credits on development costs if I'm not registered?
No. Only registered entities can claim GST credits. If your project means you're required to register (because sales of new dwellings will push your GST turnover over $75,000), register before you start incurring the big costs, so you can claim credits on construction as you go.
Is interest on a development loan deductible?
If the project is on revenue account, interest is generally deductible or forms part of the cost of the project, depending on whether the land is trading stock or a one-off profit-making venture. If the land is held on capital account and not producing income, holding costs for vacant land are generally not deductible and go into the cost base instead.
Should I get a private ruling?
For a material project where the characterisation is genuinely unclear, often yes. A private ruling binds the ATO on your facts and can be obtained before you sell. It takes time and needs a complete, honest set of facts, but it removes the biggest risk in a development, which is getting the character wrong.
Does land tax apply during a development?
Usually, yes, because land that isn't your home is generally taxable for state land tax, and a development company or trust may have a lower threshold or higher rates. Some states have concessions for land under development or for primary production land. Check your state's rules before deciding which entity owns the land.
What if I keep some of the new dwellings as rentals?
The dwellings you keep are usually capital assets, and as eligible new builds they keep full negative gearing for you as the first owner under the 2027 changes, and you can choose the 50% discount when you sell. The dwellings you build to sell are usually income. Document which is which before construction finishes.
Official sources
General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.