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Edited version of your private ruling
Authorisation Number: 1012512182920
Ruling
Subject: Cost base of CGT asset
Question
Will the first element of your cost base of the property be substituted with your share of the market value of the property at the time of acquisition?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts and circumstances
Your relative owned a property. The property was your relative's main residence. Your relative had a loan that was secured by the property.
Your relative was unable to pay off the loan. To prevent the bank from foreclosing the mortgaged property your relative sold the property to you under a contract.
You applied for a loan to cover the agreed price and any additional relevant costs for the transfer of ownership.
Your financier requested a valuation of the property.
Following the transfer of ownership of the property, your relative continued to live in the property and paid you rent.
You disposed of the property in the 2012-13 income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 112-20
Income Tax Assessment Act 1997 Subsection 995-1(1)
Reasons for decision
Under the general cost base and reduced cost base rules, the first element of the cost base and reduced cost base of a capital gains tax (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).
Whether parties have dealt at arm's length is a question of fact that must be determined in any particular case. Subsection 995-1(1) of the ITAA 1997, in respect of the term 'arm's length', states that in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance.
In this case, when taking into account the family connection you have with your relative and the circumstances that surrounded your acquisition of the property, we do not consider that you and your relative dealt with each other on an arm's length basis.
Accordingly, section 112-20 of the ITAA 1997 will apply to treat the first element of the cost base (or reduced cost base) as your share of the market value of the property on the date it was acquired, being 15 April 2010.