Private ruling: CGT - cost base
Published: October 2012
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the first element of the cost base of the property be substituted with your share of the market value of the property at the time of transfer? | A1: Yes

Relevant facts and circumstances: A family member gifted a property to you and your spouse. The title of the property passed to you and your spouse. At that time you had the house valued by a real estate agent to determine the stamp duty payable. The property was built prior to 1985 and was never used as a primary residence or to generate a rental return. Since being transferred to you and your spouse, the house has still not been used as a primary residence or to generate a rental return.

Relevant legislative provisions: Income Tax Assessment Act Section 110-25 | Income Tax Assessment Act Section 110-55 | Income Tax Assessment Act Section 112-20

Reasons for decision: Summary: Under the general cost base and reduced cost base rules, the first element of the cost base and reduced cost base of a capital gains tax (CGT) asset is the sum of the amount paid (or required to be paid) and the market value of property given (or required to be given) in respect of acquiring it. The general rules may be modified if the market value substitution rule in section 112-20 of the Income Tax Assessment Act 1997 (ITAA 1997) applies. The market value substitution rule generally applies where a taxpayer: · did not incur any expenditure to acquire that asset · incurred expenditure which cannot be valued in whole or in part, or · did not deal at arm's length with the other entity in connection with the acquisition. If the market value substitution rule applies, the first element of the cost base or reduced cost base of a CGT asset that is acquired from another entity is its market value at the time of acquisition (subsection 112-20(1) of the ITAA 1997). In your case, you acquired a property and did not incur any expenditure to acquire it. The market value substitution rule contained in section 112-20 of the ITAA 1997 applies in this case. Accordingly, the first element of your cost base of the property will be substituted with your share of the market value of the property at the time of transfer.

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