Square C1 · Tax · Rules from the ATO
Capital gains tax on land that was never your home
Selling land you never lived in, such as a vacant block, a lot cut from a bigger block or land held as an investment, can make a capital gain or loss, worked out from the land’s cost base: generally what it cost to buy, plus other costs of holding it and selling it. Two things are particular to land: costs of holding vacant land that cannot be deducted may be added to that cost base (for land acquired on or after 21 August 1991, and not when working out a capital loss), and subdividing turns one asset into several, each keeping the date the original land was acquired.
General information, not tax advice. Capital gains tax is federal, and the ATO’s pages, listed at the foot of this sheet, are the place to check.
Today the ATO says an Australian resident who has owned an asset for at least 12 months can reduce a capital gain on it by 50%, which it calls the CGT discount. Companies cannot use it, a complying super fund’s discount is 33.33%, and for land sold under a contract the 12 months run to the date of the contract, not to settlement. The ATO says that from 1 July 2027 the 50% CGT discount for individuals, trusts and partnerships is replaced by cost base indexation and a 30% minimum tax rate on capital gains, that these measures are now law, and that the CGT changes apply only to gains that accrue after 1 July 2027.
Holding vacant land
A block that sits empty still costs money each year. The ATO says that from 1 July 2019, the expenses of holding vacant land can be deducted only in certain circumstances, and it counts land as vacant if, when the expense is incurred:
- there is no substantial and permanent structure on it;
- it holds residential premises that are not in use or available for use; or
- it holds residential premises built or substantially renovated while you hold the land, which either cannot lawfully be occupied, or can be but are not rented out or offered for rent.
The holding costs it means are ongoing borrowing costs (including interest on money borrowed to buy the land), land taxes, council rates and maintenance. They do not include the cost of repairing, renovating or building a structure on the land, or the interest on borrowing for that work.
The deductions remain available, the ATO says, where:
- an excluded entity holds the land, which means a corporate tax entity, a super plan other than a self-managed super fund, a managed investment trust, a public unit trust, or a unit trust or partnership whose members are all entities of those kinds;
- the land is used to carry on a business by you, by your affiliate or an entity you are an affiliate of, by your spouse or a child under 18, or by an entity connected with you;
- one of those people or entities runs a primary production business, and you have leased, hired or licensed the land out to another entity;
- you let a business use the land, on arm’s length terms, in carrying on that business;
- a substantial, permanent structure stood on the land, and it is vacant now because of an exceptional circumstance, such as a natural disaster, a major building fire or substantial building defects.
Where the costs that cannot be deducted go
The ATO builds a cost base from five elements. The third is the cost of owning the asset (rates, land taxes, repairs, insurance premiums, interest on a loan to buy it that cannot be deducted, and capital spending to increase its value), and those costs can be included only where they are not deductible. The ATO’s own example of when that happens is vacant land.
The same element cannot be indexed, cannot be used to work out a capital loss, and is not available for an asset acquired before 21 August 1991. The fourth element covers capital costs of increasing or preserving value, and the ATO’s example there is also about land: the cost of applying for a zoning change, whether or not the application succeeds.
The ATO’s list of property records to keep includes the costs of owning, such as interest, rates and land taxes, and says to keep the records for at least 5 years after you dispose of the property.
When one block becomes two
Subdividing makes the land two or more separate assets for capital gains tax, and a gain or loss is made as each new block is sold. Each block is treated as acquired on the date the original land was, and the original cost base is shared between the blocks on a reasonable basis; the ATO points to its determination TD 97/3 for what counts as reasonable.
Two further points from the same page. If you subdivide your home block and sell the vacant part, the main residence exemption does not cover that vacant land. And if you buy and subdivide land meaning to make a profit, that can be a business-like activity: the profit is then ordinary income, and any capital gain on the land is reduced by the amount already counted as income.
The ATO’s worked example follows an owner, Kym, who bought a house on a 0.2 hectare block for $700,000 (the land valued at $460,000), split it into two equal blocks, and sold the vacant rear block for $260,000. Agents told her the front block was worth $30,000 more than the rear one, so she gave the rear block 46.7% of the land’s cost and of the shared costs.
| Part of the cost base | How it is worked out | Amount |
|---|---|---|
| Cost of the land | Share of the $460,000 land value | $215,000 |
| Stamp duty and legal fees on buying | 46.7% of $24,000 | $11,208 |
| Survey, legal and subdivision application fees | 46.7% of $20,000 | $9,340 |
| Water and drainage to the rear block | Spent on that block alone | $2,000 |
| Legal fees on the sale | Spent on that sale alone | $6,000 |
| Cost base | Total | $243,548 |
| Capital gain | $260,000 sale price less the cost base | $16,452 |
Joining titles is the reverse, and the ATO says merging the titles of two or more blocks you own is not a CGT event, so it makes no gain or loss. A subdivision can also raise GST questions; the ATO’s subdividing page points to them, and the GST and margin scheme sheet sets them out.
Land bought before 20 September 1985
Capital gains tax started on 20 September 1985, and land acquired before then keeps that pre-CGT status, even after it is merged with land acquired later. A building and its land are usually one asset, but a major capital improvement made on or after that date to property acquired before it is a separate asset, and subject to CGT.
In the ATO’s example, an owner bought a block in 1983, subdivided it in 2025, built a house on the rear block for $270,000 and sold the two together for $500,000. A valuer put the land at $200,000 and the house at $300,000. The land was exempt as pre-CGT, and the capital gain was $30,000, on the house alone.
An improvement counts as major when its cost is more than 5% of what you receive on disposal and more than that year’s improvement threshold, which for 2026–27 is $194,165 (as at October 2026).