Subdividing Your Backyard in Melbourne | Property Tax Advice – 42 Advisory

🏡 The Melbourne Backyard Boom: Turning Land into Smart Wealth

Backyard subdivisions are surging across Melbourne’s south-east — from Chadstone and Ashburton through to Glen Waverley and Oakleigh.

For many homeowners, it’s an appealing idea: unlock the value of your land, build a second dwelling, or sell off part of your block to fund your next step.

But what often starts as a practical project can quickly turn into a complex tax and compliance exercise. The Australian Taxation Office (ATO) views every subdivision through a different lens — and your intention, activity, and structure determine whether you’re taxed as a homeowner or a property developer.

At 42 Advisory, we help property owners move forward with confidence — knowing exactly where they stand before the first shovel hits the soil.

From Capital Gains to GST: How the ATO Classifies Your Project

Not all backyard projects are created equal. Depending on your goals, the ATO may treat your activity as one of the following:

1. Mere Realisation

You simply sell a portion of your land. It’s treated as a capital asset, and Capital Gains Tax (CGT) applies. You may be eligible for the main residence exemption.

2. Profit-Making Scheme

You subdivide, build, and sell to make a profit. The profit is ordinary income, not a capital gain.

3. Business of Property Development

You’ve crossed into business territory — your land becomes trading stock, and GST registration may be required.

💡 42 Tip: Your intention matters as much as your actions. The ATO assesses factors such as project management, borrowed funds, and the extent of commercial activity.

The Big Three Tax Traps to Watch

1. Capital Gains Tax (CGT)

Subdividing land itself doesn’t trigger CGT — but selling the new lot does. Only the portion used as your main residence may be exempt.

If your project is deemed a profit-making scheme or business, you’ll lose access to the CGT 50% discount, and proceeds are taxed as ordinary income instead of a capital gain.

🔍 42 Advisory helps you:

• Model CGT outcomes before you start

• Determine the most tax-effective ownership structure

• Manage record-keeping for cost base and improvement tracking

📚 References:

• ATO Subdividing Land

2. Goods and Services Tax (GST)

Building and selling a new residential property can make you liable for GST — even if you’re not a developer by trade. If your sales exceed $75,000, you must register for GST.

However, you may reduce the GST payable by using the Margin Scheme, which taxes only the profit margin, not the full sale price (Division 75 GST Act; GSTR 2006/8).

🔍 42 Advisory helps you:

• Determine if GST applies to your project

• Register and manage BAS reporting

• Calculate GST under the Margin Scheme

• Prevent double taxation between income and GST

📚 References:

• ATO GSTR 2006/8 – Margin Scheme for Property

3. Income Tax Classification

If the ATO determines your subdivision is a commercial undertaking, profits are ordinary income, not a capital gain. This can eliminate eligibility for CGT discounts or main residence exemptions

🔍 42 Advisory helps you:

• Identify the correct tax treatment from day one

• Maximise deductible expenses (interest, design, council fees)

• Avoid unexpected reclassification by the ATO

Real-World Example: Family Development Done Right

At 42 Advisory, we recently assisted a Melbourne family with a multi-entity property development project involving two adjoining blocks in Melbourne’s south-east.

The family had owned and rented one block for several years. When the neighbouring property came to market, their parents helped fund the purchase — forming a partnership between family trusts and individuals. Together, they planned a 13-unit development: selling 10 and retaining 3.

Because part of the land was owned by a family trust, and ownership structures were carefully aligned during development, we secured:

✅ No stamp duty on the 3 retained units (as beneficial ownership remained consistent, per Duties Act 2000 (Vic), s.7(1)(b))
✅ GST margin scheme successfully applied to sales
✅ ATO verification call cleared immediately, with full documentation substantiating all GST positions

This project demonstrates how correct structuring, documentation, and collaboration between accountants and conveyancers can save clients tens of thousands of dollars and prevent unnecessary ATO audits.

Local Insight: Why Melbourne’s South-East Leads the Trend

Melbourne’s south-east corridor — including Ashwood, Mount Waverley, Hughesdale, and Chadstone — is leading the backyard subdivision boom due to:

• Larger post-war blocks ideal for dual occupancy

• Council zoning flexibility (particularly GRZ and NRZ zones with overlays)

• Proximity to schools, transport, and Monash precinct infrastructure

📚 Sources:

• Victorian Planning Authority – Housing Growth Areas

Your Pre-Project Checklist

Before signing a contract or engaging a builder, make sure you:

✅ Confirm zoning and subdivision approvals (Council / VicSmart)
✅ Seek ATO tax classification advice early
✅ Understand CGT and GST timing
✅ Review finance structures with your accountant
✅ Estimate net profit after tax
✅ Keep detailed cost records for CGT and deductions

How 42 Advisory Helps You Build Wealth — Not Risk

At 42 Advisory, we’re more than accountants — we’re your property tax strategy partners.

We specialise in helping property owners, investors, and developers in Melbourne’s south-east make smarter decisions around subdivision, development, and tax.

Our services include:

• CGT and GST advisory

• Property development structuring

• Feasibility modelling and forecasting

• BAS and compliance management

• Ongoing advisory to reduce future tax risk

Intelligent. Calm. Precise.
That’s how we simplify the complex — and help you move forward with confidence.

Take the Next Step

If you’re considering a backyard subdivision, don’t rely on general advice or online forums.
Get clear, compliant, and confident guidance from a team that understands both Melbourne property and ATO expectations.

📞 Book a Property Tax Clarity Call with 42 Advisory today.
Let’s make sure your backyard project builds wealth — not a tax headache.