Edited version of private advice

Authorisation Number: 1051820066007

Date of advice: 24 March 2021

Ruling

Subject: CGT - disposal

Question 1

Is the first element of the cost base or reduced cost base of the block of units the market value at the time of acquisition?

Answer

Yes.

Question 2

Do you make a capital loss if the block of units is sold for less than its reduced cost base?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You won a property as first prize in a raffle.

When the property was transferred to your name you were provided with a market value for the property.

You have sold the property to an unrelated purchaser.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-45

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 paragraph 118-37(1)(c)

Reasons for decision

The provisions of Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997) relate to capital gains and capital losses. With some limited exceptions, the provisions deem a capital gain or a capital loss to accrue to a taxpayer upon the disposal, on or after 20 September 1985, of any asset that was acquired on or after that date.

Winnings from betting, a lottery or other form of gambling or a game with prizes are generally assets for the purposes of Part 3-1. However, paragraph 118-37(1)(c) disregards the capital gain or capital loss that results from the receipt of an asset from a competition with prizes.

Taxation Ruling IT 2584 discusses the CGT exemption of betting and lottery winnings. While IT 2584 refers to section 160ZB of the Income Tax Assessment Act 1936 (ITAA 1936), this section was rewritten as section 118-37 of the ITAA 1997.

IT 2584 states:

5. Leaving aside money winnings, where a taxpayer subsequently disposes of property that constituted winnings, a capital gain or capital loss may accrue to the taxpayer as a result of the disposal of that asset i.e., the provisions of Part IIIA will have their normal effect in such circumstances.

6. For example, if a taxpayer disposes of a house and land which was won in a lottery and the house did not become the taxpayer's principal place of residence, a capital gain will accrue to the taxpayer if the consideration in respect of the disposal exceeds the cost base or indexed cost base of the property.

When calculating the cost base or reduced cost base of an asset, section 112-20 of the ITAA 1997 provides that, where you did not incur expenditure to acquire the asset, the first element of the cost base or reduced cost base is its market value at the time of acquisition.

IT 2584 supports the use of the market value substitution rule when it follows on from the example in paragraph 6 (note that section 160ZH(9) of the ITAA 1936 was rewritten as section 112-20 of the ITAA 1997).

7. In determining the cost base or indexed cost base of the property, subsection 160ZH(9)(a) will apply and the taxpayer shall be deemed to have paid or given as consideration in respect of the acquisition of the property an amount equal to the market value of property at the time of the acquisition. The time of acquisition of the property is the time when the change in ownership of the asset occurred.

8. Using the same example as in paragraph 6, a capital loss will accrue to the taxpayer if the consideration in respect of the subsequent disposal is less than the reduced cost base of the property to the taxpayer.

In your case, you won a property as first prize in a raffle. As you did not incur expenditure to acquire the property, the first element of the cost base or reduced cost base will be the market value of the property at the time of acquisition. You will incur a capital loss if the capital proceeds you received for the sale of the property are less than the reduced cost base of the asset.

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