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Edited version of your private ruling
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Ruling
Subject: Capital gains tax - acquisition
Question 1
Are you required to include any amount in your assessable income as a result of your family members transferring a portion of the property to you?
Answer
No
Question 2
Will the first element of the cost base of the portion of the property your family members transferred to you be the market value of that portion of the property at the time of transfer?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2010
The scheme commences on:
1 July 2009
Relevant facts and circumstances
You purchased a 50% share in a property. Your family members purchased the remaining 50% share.
The property has been rented to tenants.
After a period of time, your family members transferred their share of the property to you for no consideration.
You received a market valuation of the property at this time and incurred stamp duty and transfer fees.
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
Assessable income
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
When your family members transferred their 50% share in the property to you, you acquired a capital gains tax (CGT) asset. The mere acquisition of a CGT asset does not result in you receiving any assessable income. No capital gain or loss arises in respect of that asset until you dispose of the asset.
Accordingly, you are not required to include any amount in your assessable income as a result of receiving the property from your family members.
Cost base
Under the general cost base and reduced cost base rules, the first element of the cost base and reduced cost base of a 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 family members transferred their 50% share in the property to you and you 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 portion of the property your family members transferred to you will be the market value of that portion of the property at the time of transfer.
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