Private ruling: Property subdivision - revenue versus capital - CGT main residence exemption
Date of advice: 24 March 2026
Published: 18 May 2026
Ruling period: Income year ended 30 June 20XX | Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q2: Do the proceeds from the sale of Dwelling 1 give rise to assessable income under either section 6-5 or section 15-15 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q3: Will the proceeds from the sale of Dwelling 2 give rise to assessable income under either section 6-5 or section 15-15 of the ITAA 1997? | A2: No | Q4: At the time the property was subdivided, are you taken to have acquired the land at Dwelling 1 and Dwelling 2 in 19XX? | A3: Yes | Q5: Are you entitled to the full capital gains tax (CGT) main residence exemption for Dwelling 1 if you choose to apply section 118-150 of the ITAA 1997? | A4: Yes | Q6: Are both Dwelling 1 and Dwelling 2 treated as your main residence under section 118-140 of the ITAA 1997 for 6 months until your ownership interest in Dwelling 1 ended in 20XX? | A5: Yes | Q7: Is the pro-rated capital gain representing Dwelling 2's ownership period from acquisition in 19XX until the beginning of the period in Question 5 (i.e. 20XX) subject to CGT? | A6: Yes

Relevant facts and circumstances: You reside in Australia. You do not carry on any business activity in Australia. You and your late spouse acquired X (the property) in 19XX which had an existing dwelling. The property was occupied by you and your late spouse as your main residence (the property was less than 2 hectares in size). You and your late spouse worked together in your other business until retirement in 20XX. To make your and your late spouse's home life more comfortable with their ageing and various ailments, you and your late spouse decided to investigate a knock down and rebuild on the property. The intention was to construct, with one dwelling built to a high specification as their retirement residence. The second dwelling was to be built to a normal specification and would be retained to generate rental income to assist with ongoing retirement funding. You and your late spouse entered into building contracts with a building contractor in 20XX. You and your late spouse financed the project using personal funds including superannuation and non-commercial loans. You and your late spouse found a builder who could assist with the development, at a price that was affordable from your savings. Due to the cost of construction rising, you and your late spouse did not have enough savings to complete the building process and funded the shortfall in the loan with finance obtained from X. The existing dwelling on the property was demolished in 20XX. In 20XX, you were diagnosed with illness. The outcome of your treatment is still unknown. Construction of the duplex, comprising of two dwellings known as Dwelling 1 and Dwelling 2 reached practical completion in 20XX. You and your late spouse moved into Dwelling 1 in 20XX as your main residence. Your late spouse passed away not long after that. As this was a traumatic event, you realised that you could not live in the house where your long-term spouse had passed away. You decided to sell Dwelling 1 and invest those funds to assist with your retirement income. The property was subdivided into 2 lots, which allocated a lot to Dwelling 1 and Dwelling 2, respectively. Dwelling 1 was listed for sale in 20XX, with the contract of sale entered into in 20XX and settlement occurring in 20XX. Although you and your late spouse intended to rent or lease Dwelling 2 upon completion, this did not eventuate, and the dwelling remained vacant. On X, you commenced residing at Dwelling 2 and treated the dwelling as your main residence. You now dislike living in Dwelling 2, in close proximity to your previous family home and Dwelling 1, and the memories it holds. You propose to sell Dwelling 2 in the near future and relocate to make a fresh start. You have previously owned two investment properties. The first was owned for over 10 years. It was sold without being renovated. The second unit was owned for over 5 years. Again, no renovation work was done on it during ownership. You have no prior experience of property developing, and no personal skills in the building and construction industry. The sale of Dwelling 1 was conducted at arm's length on the open market, and the proposed sale of Dwelling 2 will also be conducted at arm's length on the open market.

Relevant legislative provisions: Income Tax Assessment Act 1997, section 6-5 | Income Tax Assessment Act 1997, section 15-15 | Income Tax Assessment Act 1997, section 118-110 | Income Tax Assessment Act 1997, subsection 118-130(3) | Income Tax Assessment Act 1997, section 118-140 | Income Tax Assessment Act 1997, section 118-150 | Income Tax Assessment Act 1997, section 995-1

Reasons for decision: Summary: It is considered that you did not have a profit-making intention at the time you and your late spouse purchased the property in 19XX. You lived in the dwelling at the property for a considerable period of time. You subsequently entered into building contracts to re-develop the dwelling, with 2 dwellings built in 20XX. Due to distressing personal circumstances, your intention changed from holding Dwelling 1 longer term, to disposing of it. You are not in the business of subdividing and selling properties, or making profits from an isolated transaction as discussed in TR 92/3. Therefore section 6-5 of the ITAA 1997 does not apply to your circumstances. As you purchased the property after 20 September 1985, section 15-15 of the ITAA 1997 also does not apply to you. Accordingly, the disposal of Dwelling 1 constituted the realisation of a capital asset and resulting profit or gains are subject to the CGT provisions. | Detailed Reasoning - Treatment of profits from land development: Broadly, profits from land development, subdivision and sale can be treated for taxation purposes in the following three ways: • as ordinary income under section 6-5 (revenue account) resulting from the carrying on a business of property development; • as ordinary income under section 6-5 or as profit under section 15-15 (revenue account) resulting from an isolated business or commercial transaction entered into by a non-business taxpayer, or outside the ordinary course of business of a taxpayer carrying on a business, which is the commercial exploitation of an asset acquired for a profit-making purpose; • as statutory income under the CGT legislation (capital account). | Detailed Reasoning - Carrying on a business of property development: Section 995-1 states the term 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. To determine whether an activity, or series of activities, amounts to a business, the activity needs to be considered against the indicators of a business established by case law. In the High Court of Australia case of Hope v. Bathurst City Council (1980) 144 CLR 1; (1980) 29 ALR 577; (1980) 80 ATC 4386; [1980] HCA 16, a business was described in the following ways: It is the words "carrying on'' which imply the repetition of acts and activities which possess something of a permanent character. ...activities engaged in for the purpose of profit on a continuous and repetitive basis. Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit...manifested the essential characteristics required of a business. The Commissioner's view on whether a taxpayer is carrying on a business is found in Taxation Ruling TR 97/11 which uses the following indicators to determine whether a taxpayer is carrying on a business: whether the activity has a significant commercial purpose or character • whether there is repetition and regularity of the activity • whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit • the size, scale and permanency of the activity; and • whether the activity is better described as a hobby, a form of recreation or a sporting activity. In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination, and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour. | Detailed Reasoning - Application to your circumstances:: Based on the facts provided, you are not carrying on the business of property subdivision and selling properties. | Detailed Reasoning - Profits on isolated profit-making scheme: Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income (TR 92/3) provides guidance in determining whether profits from isolated transactions are income and therefore assessable under section 6-5 of the ITAA 1997. The term 'isolated transactions' refers to: a. those transactions outside the ordinary course of business of a taxpayer carrying on a business; and b. those transactions entered into by non-business taxpayers. Whether a profit from an isolated transaction is income according to the ordinary concepts and usages of mankind depends very much on the circumstances of the case. However, a profit from an isolated transaction is generally income when both of the following elements are present: a. the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and b. the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. The relevant intention or purpose of the taxpayer (of making a profit or gain) is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property. If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question. Paragraph 36 of TR 92/3 notes that the courts have often said that a profit on the mere realisation of an investment is not income, even if the taxpayer goes about the realisation in an enterprising way. The expression 'mere realisation' is used to contradistinguish a business operation or a commercial transaction carrying out a profit-making scheme ( Myer at 163 CLR 213; 87 ATC 4368-4369; 18 ATR 699-700). | Detailed Reasoning - Application to your circumstances:: You and your late spouse subdivided the land on which their longstanding main residence was situated, in order to construct a new home for which they would live and also another dwelling which would be used to generate rental income. After the unforeseen death of your late spouse, you reevaluated your future and decided to dispose of your new main residence, Dwelling 1. After moving into Dwelling 2 as your new main residence you subsequently decided you would also dispose of this dwelling and move away from the immediate area to make a fresh start, to manage the impact of the loss of your spouse and your serious illness. It is therefore considered that you did not have a profit-making intention either at the time you and your late spouse purchased the property in 19XX, or subsequent to that at the time of the new constructions. It is considered, due to distressing personal circumstances, your intention changed from holding Dwelling 1 longer term, to disposing of it. | Detailed Reasoning - Section 15-15 of the ITAA 1997: Paragraph 15-15(2)(b) of the ITAA 1997 provides that section 15-15 of the ITAA 1997 does not apply to the sale of property that is acquired on or after 20 September 1985, therefore as you purchased the property after this date this provision also does not apply to you. | Detailed Reasoning - Conclusion: It can therefore be concluded that, profit arising from the disposal of Dwelling 1 is not ordinary income under 6-5 or profit under section 15-15 of the ITAA 1997. Accordingly, the disposal of Dwelling 1 constituted the realisation of a capital asset and resulting profit or gains are subject to the CGT provisions. | Detailed Reasoning - Question 2: Will the proceeds from the sale of Dwelling 2 give rise to assessable income under either section 6-5 or section 15-15 of the ITAA 1997? | Summary: Please refer to the answer in Question 1 for a detailed application of section 6-5 and section 15-15 of the ITAA 1997. The proposed disposal of Dwelling 2 will constitute the realisation of a capital asset and resulting profit or gains are subject to the CGT provisions. | Detailed Reasoning - Question 3: At the time the property was subdivided, are you taken to have acquired the land at Dwelling 1 and Dwelling 2 in 19XX? | Summary: At the time of subdivision, the land at Dwelling 1 and Dwelling 2 are treated as separate assets under the capital gains provisions. They are taken to have been acquired by the owner of the original land parcel when that original parcel was acquired, in 19XX. | Detailed Reasoning - Detailed reasoning: Taxation Determination TD 97/3 Income tax: capital gains: if a parcel of land acquired after 19 September 1985 is subdivided into lots ('blocks'), do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 treat a disposal of a block of the subdivided land as the disposal of part of an asset (the original land parcel) or the disposal of an asset in its own right (the subdivided block)?(TD 97/3) at paragraph 2 provides, the effect of registering separate new titles under a subdivision is to divide the original land parcel into two or more CGT assets (e.g. the subdivided blocks). The subdivided blocks are then treated as separate assets under the capital gains provisions. They are taken to have been acquired by the owner of the original land parcel when that original parcel was acquired. Therefore, at the time the property was subdivided, the land at Dwelling 1 and Dwelling 2 are treated as separate assets under the capital gains provisions. Each of the subdivided block is taken to have been acquired in 19XX. | Detailed Reasoning - Question 4: Are you entitled to the full capital gains tax (CGT) main residence exemption for Dwelling 1 if you choose to apply section 118-150 of the ITAA 1997? | Summary: If you choose to apply section 118-150 of the ITAA 1997 to Dwelling 1, it is eligible for the full main residence exemption. | Detailed Reasoning - Detailed reasoning: Section 118-110 of the ITAA 1997 provides, a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if: a. you are an individual; and b. the dwelling was your main residence throughout your entire ownership period. Section 118-150 of the ITAA 1997 extends the main residence to land in which you have an ownership interest (other than a life interest) if you build, renovate or repair a dwelling on the land and that dwelling becomes your main residence. If you build a dwelling on vacant land, you may choose under subsection 118-150(2) of the ITAA 1997 to apply the main residence exemption for the period from when you acquire your ownership interest in the land until the dwelling becomes your main residence. Subsection 118-150(4) provides, this period may not exceed four years before the dwelling becomes your main residence. Subsection 118-150(3) further provides, the dwelling must become your main residence as soon as practicable after work in building the dwelling is completed and must continue to be your main residence for at least 3 months. You can also choose to apply the main residence exemption if there is a dwelling on land when you acquire your ownership interest in the land and you demolish the existing dwelling and build a new dwelling on the land. Subsection 118-150(5) provides in this situation, you may choose to treat the new dwelling as your main residence during the construction period from when you cease to occupy the existing dwelling until the new dwelling becomes your main residence. This period may not exceed 4 years before it becomes your main residence. The previous dwelling was your main residence from 19XX until it was demolished in 20XX, and then again from the date of occupying the new dwelling (Dwelling 1) in X 20XX until X 20XX. If you choose to apply section 118-150 of the ITAA 1997 to Dwelling 1, you can treat Dwelling 1 as your main residence during the construction period from when you ceased to occupy the previous dwelling until the new dwelling (Dwelling 1) became your main residence. Thus, you are eligible for the full main residence exemption. | Detailed Reasoning - Question 5: Are both Dwelling 1 and Dwelling 2 treated as your main residence under section 118-140 of the ITAA 1997 for 6 months until your ownership interest in Dwelling 1 ended in X 20XX? | Summary: Both dwellings can be treated as your main residence for 6 months, from X 20XX until your ownership interest in Dwelling 1 ended, in X 20XX. | Detailed Reasoning - Detailed reasoning: Section 118-140 of the ITAA 1997 provides that if you acquire an ownership interest in a dwelling that is to become your main residence and you still have your ownership interest in your existing main residence, both dwellings are treated as your main residence for the shorter of: a. 6 months ending when your ownership interest in your existing main residence ends; or b. the period between the acquisition of the new ownership interest and the time when the ownership interest referred to in paragraph (a) ends. It is noted that a taxpayer cannot treat more than one residence as their main residence at the same time except to the extent that section 118-140 of the ITAA 1997 (about changing main residence) applies. The maximum period that you can treat both Dwelling 1 and Dwelling 2 as your main residence under section 118-140 is 6 months, ending when your ownership interest in Dwelling 1 ended. Subsection 118-130(3) provides, for land or a dwelling where you have a contract for the happening of the CGT event, you have an ownership interest in it until your legal ownership of it ends. We consider that your legal ownership interest of Dwelling 1 ended when the settlement of sale occurring, in X 20XX. Consequently, both dwellings can be treated as your main residence for 6 months, from X 20XX until X 20XX. | Detailed Reasoning - Question 6: Is the pro-rated capital gain representing Dwelling 2's ownership period from acquisition in 19XX until the beginning of the period in Question 5 (i.e. X 20XX) subject to CGT? | Summary: The pro-rated capital gain for Dwelling 2 that represents the above period will be subject to CGT. | Detailed Reasoning - Detailed reasoning: In this case, both subdivided blocks are taken to have been acquired in 19XX. As a result of choosing to receive full main residence exemption for Dwelling 1 under section 118-150 (in Question 4), Dwelling 1 is treated as your main residence from 19XX to the time of its settlement of sale, in X 20XX. As discussed in Question 5, in applying section 118-140 of the ITAA 1997, you can only treat both dwellings as your main residence for 6 months. Consequently, Dwelling 2 can be treated as your main residence from X 20XX to X 20XX, along with any applicable period after your ownership interest in Dwelling 1 ended, if dwelling 2 continued to be used as your main residence. This means any pro-rated capital gain for Dwelling 2 that represents the period from acquisition in 19XX until X 20XX will be subject to CGT. Dwelling 2's cost base will include the construction cost of Dwelling 2 along with the proportioned cost base of the original property at the time of acquisition in 19XX.