Private ruling: CGT - cost base
Date of advice: 26 May 2026
Published: 10 August 2026
Ruling period: 1 July 20YY to 30 June 20YY
Date scheme commenced: DD MM 20YY

Ruling: Q1: Can the Taxpayer use the market value of the property, being $X, as the basis for the first element of the cost base for their interest in the property, which was acquired for $X, when that interest is disposed of in the future? | A1: No.

Relevant facts and circumstances: The Trust was established by deed on X XX XXXX. In XXXX, the Trust purchased the Property. The four fixed beneficiaries of the Trust were as follows: X The executors of the Deceased Estate were X and X. X was the former tax agent for the Trust and its beneficiaries. X is the current tax agent for the Trust and its beneficiaries. The sole beneficiary of the Deceased Estate is X. X only accepts cash distributions and would not accept an entitlement in a trust. However, the Surviving Beneficiaries wanted to keep the Property in the family. Accordingly, the Surviving Beneficiaries offered to buy out the Deceased Estate's interest in the Property. Due to complexities with the Deceased Estate and the time-consuming nature of the process, the transfer was divided into the two steps outlined below. Step One On X XX XXXX, the Trust transferred the Property to the four beneficiaries as tenants in common, with each beneficiary receiving a one quarter (1/4) interest in the Property. Prior to this transfer, on X XX XXXX, a market valuation of the Property was issued, assessing the market value of the Property at $X. Ownership of the Property after this transfer was as follows: X Step Two On X XX XXXX, the Deceased Estate entered into a contract with the Taxpayer and X to dispose of its one quarter (1/4) interest in the Property. Under the contract, each of the Taxpayer and X acquired a one eighth (1/8) interest in the Property for $X. This value reflected the level of demand for a non-controlling interest in the Property as a tenant in common. On X XX XXXX, a market valuation of the Property was issued, assessing the market value of the Property at $X. Ownership of the Property after this transfer was as follows: X A market valuation has been obtained for the one quarter (1/4) interest as at X XX XXXX valuing the interest at $X ('the Valuation'). On X XX XXXX, a request for information was sent via email to the Taxpayer's tax agent querying the process by which the Deceased Estate, the Taxpayer, and X agreed upon the price of $X for the interest in the Property, and to include any references to any negotiations, bargaining, and any other factors that were considered. On X XX XXXX a response was provided that noted the following: (a) the Property requires significant repair and maintenance, including, but not limited to: (i) asbestos roof that is damaged and cracked, causing leaks to the apartments below; (ii) rotten timber beneath the roof that needs to be replaced; (iii) rusted gutters and downpipes that need to be replaced; (iv) severely corroded concrete in some balconies and stairwells; (v) pipes and sewage system that require repairs and/or replacement; (vi) repainting of the Property's interior and exterior; and (vii) replacement and/or renovation of kitchens and bathrooms. (b) repairs and maintenance would be very costly and time consuming, and none of the co-owners want to spend money for repairs and maintenance; and (c) a legal firm was engaged by the executors of the Deceased Estate to deal with third parties and the X.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 110-25(1) | Income Tax Assessment Act 1997 subsection 110-25(2) | Income Tax Assessment Act 1997 subsection 112-20(1) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Cost base and market value substitution Subsection 110-25(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') [1] provides that the cost base of a CGT asset consists of 5 elements. Subsection 110-25(2) provides that the first element of the cost base of a CGT asset is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it; and (b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). However, subsection 112-20(1) provides that the first element of a CGT asset's cost base is its market value (at the time of acquisition) if: (a) you did not incur expenditure to acquire it, except where your acquisition resulted from: (i) CGT event D1 happening; or (ii) another entity doing something that did not constitute a CGT event happening; or (b) some or all of the expenditure to acquire it cannot be valued; or (c) you did not deal at arm's length with the other entity in connection with the acquisition. Despite paragraph 112-20(1)(c), subsection 112-20(2) provides that the market value is substituted only if what you paid to acquired the CGT asset was more than its market value (at the time of acquisition) if: (a) you did not deal at arm's length with the other entity; and (b) your acquisition of the CGT asset resulted from another entity doing something that did not constitute a CGT event happening. Subsection 995-1(1) provides that in determining whether parties deal at arm's length, any connection between them and any other relevant circumstance is to be considered. 'Arm's length' is otherwise undefined in the ITAA 1997. In ACI Operations Pty Ltd v Berri Ltd [2] ('ACI') , Dodds-Streeton J stated the following at [223]: ...an arm's length relationship is that of strangers, or parties who are unaffected by existing mutual duties, liabilities, obligations, cross-ownership of assets, or identity of interests which present a capacity in either party to influence or control the other, or an inducement to serve that common interest which might operate to modify the terms on which strangers would deal. However, parties that are not at arm's length may nevertheless deal at arm's length. Whether parties deal at arm's length requires consideration of the nature of the dealing and transaction, and not simply the relationship between the parties. In ACI , Dodds-Streeton J further stated the following: [3] The concept of an arm's length relationship is distinct from that of an arm's length dealing or transaction, despite the potential overlap. Unrelated parties may collude or otherwise deal with each other in an interested way, so that neither the dealing nor the resultant transaction may properly be considered arm's length. Where the parties are not in an arm's length relationship, it is recognised that the inference may be drawn that they did not deal with each other at arm's length. It may further be inferred that the resultant transaction is not arm's length. Related parties may nevertheless, in some circumstances, demonstrate a dealing which displaces the inference based on their relationship. They may engage in the disinterested bargaining characteristics of strangers, applying independent separate wills. The circumstances of the impugned transaction may be such that despite the parties' connection or common interest, the interposition of some independent process (such as the sale of shares on the stock exchange) ensures that the transaction itself is arm's length, in the sense that it could equally have been concluded by unrelated parties, consulting their own self-interest and uninfluenced by any particular association or interest in common. In Healey v Federal Commissioner of Taxation [4] ('Healey'), McKerracher J listed the following principles established by case law: [5] 1. Whether the parties dealt at arm's length is a question of fact. 2. There is a distinction between dealing at arm's length and an arm's length relationship. 3. Whether the parties dealt at arm's length involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction. 4. At issue is whether the parties have acted separately and independently in forming their bargain. There should be an assessment of whether the parties dealt with each other as arm's length parties would be expected to behave so that the outcome is a matter of real bargaining. 5. It is relevant to consider the nature of any relationship between the parties. 6. If the parties are not at arm's length the inference may be drawn that they did not deal with each other at arm's length. Application to your circumstances Upon entering into the contract on X XX XXXX, the Taxpayer acquired a CGT asset, being an interest in the Property, from the Deceased Estate. The Taxpayer paid $X to acquire this CGT asset. Ordinarily, this would be the first element of the cost base pursuant to paragraph 110-25(2)(a). However, the market value substitution rule in subsection 112-20(1) needs to be considered. Specifically, paragraph 112-20(1)(c) and whether the Taxpayer dealt with the Deceased Estate at arm's length in acquiring the interest in the Property. From the information that has been provided, the Taxpayer and the Deceased Estate do not have an arm's length relationship. This is because: (a) the Taxpayer is the sibling of the decedent of the Deceased Estate; (b) the Taxpayer and the Deceased Estate share the same current and former tax agent; and (c) both the current and former tax agent are executors of the Deceased Estate. The Taxpayer isn't an executor of the Deceased Estate. Furthermore, it does not appear that the Taxpayer has any influence over the executors of the Deceased Estate. The fact that the executors act for both the Taxpayer and the Deceased Estate as tax agents is not in itself conclusive. However, when this is considered alongside the personal relationship that the Taxpayer had with the decedent of the Deceased Estate and the Taxpayer and Deceased Estate's interests in the Property, the Commissioner's view is that the Taxpayer and the Deceased Estate are not in an arm's length relationship. It cannot be said that the Taxpayer and Deceased Estate are unaffected by mutual duties, liabilities, cross-ownership of assets, or identity of interests as envisioned by Dodds-Streeton J in ACI . An inference can be drawn that the acquisition by the Taxpayer of the Deceased Estate's interest in the Property was not conducted at arm's length. It is necessary to determine whether this inference can be displaced by examining how the transaction was conducted. The Taxpayer and the Deceased Estate agreed on a purchase price of $X for the interest in the Property. No evidence of any negotiation, bargaining, or other evidence demonstrating how the purchase price was agreed upon has been provided. The response on X XX XXXX refers to repairs and maintenance required for the Property, that such repairs and maintenance would be costly and time consuming, and that none of the owners wanted to spend money for repairs and maintenance. While these factors may impact upon the value of the Property, they are not indicative of the acquisition by the Taxpayer from the Deceased Estate being at arm's length. Accordingly, for the purposes of paragraph 112-20(1)(c), the Taxpayer and the Deceased Estate did not deal with each other at arm's length in relation to the Taxpayer's acquisition of interest in the Property. The first element of cost base will therefore me its market value at the time of acquisition. The Valuation was obtained valuing the interest that was disposed by the Deceased Estate to the Taxpayer and X at $X, with each of the Taxpayer and X's interests being valued at $X each. Pursuant to subsection 112-20(1), $X will be the Taxpayer's first element of cost base for their interest in the Property. For completeness, subsection 112-20(2) will not apply because the Taxpayer's acquisition of the CGT asset resulted from another entity, being the Deceased Estate, doing something that constitute a CGT event happening, being CGT event A1. [1] All legislative references in this Document are to the ITAA 1997 unless otherwise specified. [2] [2005] VSC 201. [3] Ibid, [224]-[225]. [4] [2012] FCA 269. [5] Ibid, [95].