CGT event for Gifted equity purchase

Discussion in 'Accounting & Tax' started by Bencoops, 22nd Mar, 2020.

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  1. Bencoops

    Bencoops New Member

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    Hi, I bought a property off a family member as a ‘favourable purchase’ for 350k with the bank valuation at purchase of 675k. Market value would have been closer to 750k.
    I am now selling the property, and want to know what figure I can use for the Capital gains tax calculation. Is it the normal purchase price of 350k or the market value at the time for the base cost?
    I have not lived in the property and the sale will occurs less than 12 months after I purchased.

    Thanks!
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    market substitution rule might apply.

    Seek professional tax advice.
     
  3. Bencoops

    Bencoops New Member

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    Great thanks Terry
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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  5. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

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    When you acquire property on terms and in a non-arms length manner CGT rules impose a cost base that is based on the market value. This is referred to as the market value substitution rule.

    However there is a catch to this rule. If the other entity did not incur a CGT event when you acquired your interest the modified costbase will only be substituted if the amount paid is MORE than the agreed price paid. This is a anti-avoidance rule that limits one party creating a CGT benefit in exchange for another with no CGT impact.

    This can occur is a common situation concerning a deceased estate. Marth dies and leaves her home valued at $500K and $500K cash to two siblings. They mutually agree with the executor one will take cash as they are non-resident and the other takes the home. After 18 months the one with the home wants to sell. The home has increased in value. The other wants to buy it. They agree to terms to transfer the ownership in exchange for $650K yet the home could be worth $700K now. The sibling that is selling wont pay CGT under the deceased persons CGT tax rules. So what is the buyers true costbase.>? Is it $500K, $650K or $700K ? and how will stamp duty and legals be impacted ?

    A : The costbase may be $700K. The example used is applied to the BUYER. The seller isnt impacted. They calculate the CGT gain based on the market value at the time of death ($500K) and a sale of $700K (market value substitution rule) adjusted for selling costs. But all the gain is exempt as the home is sold within 2 years.
     
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  6. Scott No Mates

    Scott No Mates Well-Known Member

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    @[email protected] - does the substitution rule apply where it is a pre-CGT asset which is purchased? ie vendor is not up for CGT.
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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