Question about Cost Base for Capital Gains Tax

Hi guys,

I have a question for the forum tax experts regarding calculation of capital gains tax.



Hypothetical simplistic situation is as follows:



Person A owns a property worth $300K.

Person A sells to person B the property for a nominal $1. (think of it as a gift of sorts, only registered on a contract with a nominal $1 price).

3 years go by and person B wishes to sell the property now worth $400K.



What is the cost base for the calculation of CGT?

Is the capital gain considered to be $399,999.00 ($400K - $1 price) or is the value at acquisition ($300K) considered for a capital gain of $100K?



Basically is the price or value used as cost base for capital gain calculation?

 

See s116-30(2) ITAA97
INCOME TAX ASSESSMENT ACT 1997 - SECT 116.30 Market value substitution rule: modification 1

 

Modify capital proceeds and cost base using market value

3 years ago
A has CGT event A1 upon disposal
Capital proceeds are market value $300k
B is deemed to have acquired the property for market value $300k as first element

Today
B has CGT event A1 on disposal
Capital proceeds $400k
Cost base includes the original $300k as first element plus any other costs along the way

 

Hi Terry, hi Rob,

Thank you both for your super fast replies - are you guys real humans or just awesome bots?!
Seriously thanks.

Terry, to come back on your point, if I understand this correctly, I believe the following condition is the base upon which the cost base is determined:

And in this instance, capital proceeds ( only $1) are less than market value.
To connect this with Rob's input, this is basically person's A problem. Person B is deemed to have acquired the property for $300K.

Thanks Rob, for your clear explanation - great stuff.

One more detail if I may: does it matter from person B's perspective, whether person A actually has lodged a CGT event with the ATO for the disposal of the property? To rephrase this, if person A has not lodged a CGT event with the ATO for the disposal of the property (because they are not an Australian Tax resident), would that impact person's B ability to use the $300K market value as cost base?

Thanks again

 

If person A is trying to avoid tax then person B can be caught up in it and suffer as a result.

 

Absolutely Terry, no one should ever seek to avoid tax! This definitely was not what I was trying to convey here, I hope I did not give that impression!

If person A is not an Australian tax resident, they would lodge their CGT disposal not with the ATO, but with the tax office in their home country. As a result, the disposal has not been lodged with the ATO, yet has still been lodged where it should be/ has been done legally and in a tax compliant manner.
In this scenario, any idea how person B might be affected?
Perhaps person B needs to obtain some kind of document from the foreign tax office?

 

An Australian tax return would need to be lodged and tax paid in Australia even if they are a non resident.

 

Thank you Terry - is that because the property is in Australia? Or because person B is an Australian Tax resident?
Thanks again for all your help, these tax matters are complex!

 

Australian property
see
CGT on foreign residents, temporary residents and changing residency | Australian Taxation Office

 

Thank you very much Terry, your help is invaluable!
All makes sense now

 

The non resident should also consider a 12 May 2012 valuation (by a valuer) as this may limit some CGT. Disposal of Australian real property by a non-resident after this date is not eligible for ANY CGT discount unless this requirement is met. Of course despite this AU concession, the full and final tax may be in their country of residence and the AU concession effectively clawed back.

eg USA doesn't give a 50% discount. Taxpayer lodges in AU and pays say $5K tax. Then lodges US return including same income as cap gain and also credit for AU tax paid. Issues with timing, exchange rates etc are followed and the CGT rules in AU are held to apply to the US taxpayer also.