Market value substitution rule
In some cases, if you receive nothing in exchange for a CGT asset (for example, if you give it away as a gift) you are taken to have received the market value of the asset at the time of the CGT event. You may also be taken to have received the market value if:
- your capital proceeds are more or less than the market value of the CGT asset
- you and the purchaser were not dealing with each other at arm's length in connection with the event.
This is known as the market value substitution rule for capital proceeds.
You are said to be dealing at ‘arm's length’ with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties, but also the quality of the bargaining between them.
Example: Gifting an asset
On 7 May 2007, Martha and Stephen bought a block of land.
In November 2015 they complete a transfer form to have the block transferred to their adult son, Paul, as a gift.
Because they received nothing for it, Martha and Stephen are taken to have received the market value of the land at the time it was transferred to Paul.
End of example