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Edited version of private advice
Authorisation Number: 1051644009911
Date of advice: 9 March 2020
Ruling
Subject: Valuation for cost base for capital gains purposes
Question
Would a retrospective valuation done by a registered valuer be considered acceptable for determining the cost base for capital gains tax purposes under section 110-25 of the ITAA 1997?
Answer
Yes
This ruling applies for the following periods:
Year Ended 30 June 2012
Year Ended 30 June 2013
Year Ended 30 June 2014
Year Ended 30 June 2015
Year Ended 30 June 2016
The scheme commences on:
April 2016
Relevant facts and circumstances
You held a property with your spouse.
Your spouse passed away
The property, was purchased in joint names prior to 20 September 1985.
Upon your spouse's death, you inherited your spouse's 50% share of the property.
You advised plans were made to subdivide the property and the process was begun to seek permits and register the subdivision
You sold part of the property, off the plan prior to the registration of the subdivided allotment.
A retrospective valuation was done on the property. This included a separate valuation for the Lot as at the date your spouse passed away.
The valuation report from a board registered valuer was completed detailing the property and the process used to arrive at a retrospective market valuation for the Lot sold.
The market value was stated as follows:
· Market Value estimated prior to the subdivision $XX
· Market Value estimated post the subdivision $XX
The valuation by a registered valuer was done at arms-length by a person with no interest in the outcome of the valuation
Relevant legislative provisions
Income tax assessment Act 1997 section 112-25
Income Tax Assessment Act 1997 section 104-10
Reasons for decision
As you and the deceased acquired the asset before 20 September 1985, the first element of your cost base and reduced cost base is the market value of the asset on the day the deceased died.
This would form the basis for the cost base for the Lot of the property. If you subdivide a block of land, each block that results is registered with a separate title. For capital gains tax purposes, the original land parcel is divided into two or more separate assets.
When a CGT asset (the original asset) is split into 2 or more assets (the new assets), such as when land is subdivided, the subdivision of the land into subdivided lots is not a CGT event (subsection 112-25(2) of the ITAA 1997). Each new subdivided lot will be viewed as having been acquired on the same date that the original asset was acquired. The cost base of the original asset is apportioned between the newly created assets.
CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of each subdivided block. You will make a capital gain if the capital proceeds from the disposal of the block are more than the cost base of the block. You will make a capital loss if those capital proceeds are less than the reduced cost base of the block.
Except for the most straightforward valuation processes, valuations undertaken by people experienced in their field of valuation would be expected to provide more reliable values than those provided by non-experts.
Valuers of real property adopt the definition used by the International Valuation Standards Council:
... the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion.
A valuation should:
be replicable - in effect, this means the valuation should be documented and explained well enough that another person or valuer can understand how the value was determined
preferably be undertaken by a suitably qualified and experienced person in relation to the asset being valued.
A valuation report should:
be understandable
objectively demonstrate the valuation process undertaken in accordance with valuation industry practices.
You have received a retrospective market valuation from a qualified valuer for the property. The valuation was prepared using the Direct Comparison method, which is an appropriate methodology. The valuation provided outlines two valuations, one prior and after the subdivision was completed. On this basis, the unimproved value of the land is the most appropriate value for the calculation of the cost base, as it represents the value of the property when acquired at the time of the passing away of your spouse. The valuation of Lot prior to the subdivision of the property is deemed to be the most appropriate valuation for taxation purposes to determine the cost base for capital gains.
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