Edited version of your written advice

Authorisation Number: 1013119348958

Date of advice: 3 November 2016

Ruling

Subject: The disposal of a CGT asset

Question 1

Can you use the market value substitution rule to calculate the cost base of the property when it was acquired?

Answer

Yes

Question 2

Can you claim the main residence exemption as the property was occupied by your parent?

Answer

No

This ruling applies for the following period

30 June 20ZZ

The scheme commences on

1 July 20YY

Relevant facts and circumstances

Your spouse purchased a property and legal title was in their name only.

You contributed no purchase monies towards the cost of the property, your name was not on the mortgage and you had no beneficial ownership of the property.

In the 20XX financial year you entered into a private agreement with your spouse to transfer legal title of the property to you.

At the time of the agreement, your spouse obtained a valuation of the property.

The property was also encumbered by a mortgage.

You paid out the mortgage and paid your spouse an additional sum in consideration of the transfer.

You sold the property in the 20ZZ financial year. At no time did you occupy the property.

You made a capital gain upon disposal of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 subsection 110-25(2)

Income Tax Assessment Act 1997 subsection 112-20(1)

Income Tax Assessment Act 1997 section 118-110

Reasons for decision

Question 1

Section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income includes a net capital gain. A capital gain or capital loss is made only if a CGT event happens. CGT event A1 occurred when you disposed of the property in the 20ZZ financial year (section 104-10 of the ITAA 1997). Your capital gain will be the difference between the capital proceeds and the cost base of your CGT asset.

Calculating cost base - market value substitution rule

Very broadly, the cost base of a CGT asset is what a taxpayer paid to acquire that asset. However it may include certain other costs associated with acquiring, holding or disposing of the asset.

The cost base is made up of five elements. The first element of the cost base refers to:

a) the actual money paid (or required to be paid) to acquire the CGT asset; and

b) the market value of the property given (or required to be given) to an entity in order to acquire that asset (subsection 110-25(2) of the ITAA 1997).

Subsection 112-20(1) of the ITAA 1997 substitutes the CGT asset's market value (at the time of acquisition for the first element of the cost base where the taxpayer did not deal at arm's length with the other entity in connection with the acquisition.

Section 995-1 defines 'arm's length' as:

in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance.

An individual is 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.

On the facts provided, the transaction was not conducted at arm's length. You did not pay market value for the asset and the transaction was with a related party. In these circumstances you can use the asset's 'market value' at the time of acquisition in the 2012 financial year.

Question 2

Main Residence Exemption

A capital gain or capital loss an individual makes from a CGT event that happens to a dwelling is disregarded under section 118-110 of the ITAA 1997 if the dwelling was the individual's main residence for the entire period they owned it.

In your case, you never resided in the property. Any capital gain made on the sale of the property will not be disregarded.