Tax Tip 153: CGT on Gifts and Under-market Value Transfers

Discussion in 'Accounting & Tax' started by Terry_w, 17th Apr, 2017.

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  1. Terry_w

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

    9th Jun, 2006
    Australia wide
    Tax Tip 153: CGT on Gifts and Under-market Value Transfers

    Sometimes family members may want to gift property to others. This may not be a good idea generally (there are better ways to do things- a topic for another day) but it does happen.

    In such situations how will CGT be worked out?


    Kim has an investment property worth $500,000 but she transfers it to her daughter, Kath, for $0 – possibly thinking Kim won’t have to pay tax as she has not made a gain.

    To avoid people avoiding taxes like this there is a rule known as the ‘market substitution rule’ which assess the transfer on the market value of the property – the value at the time of the CGT event which would be the contract if there is a contract or the date of transfer if there is no contract.

    S116-30 ITAA97 INCOME TAX ASSESSMENT ACT 1997 - SECT 116.30 Market value substitution rule: modification 1

    Example Continued

    If Kim’s property has a cost base of $100,000 Kim will end up making a capital gain of $400,000.

    Kath’s cost base would assume the property was acquire for $500,000

    The market substitution rule also applies where capital proceeds have been received but these are less than the market value.

    Example Continued

    Kim transfers the property to Kath for $300,000. Kim will be deemed to have disposed of it for $500,000 and Kath deemed to have acquired it at $500,000.

    But this rule would not apply for transactions where each party is dealing with each other at ‘arm’s length’.

    Example 2

    Kath decides she doesn’t want the property so Kim sells it on the open market and Arthur comes along and offers her $400,000 and she accepts. The ‘market value’ is $500,000 but he gets it for $400,000. Because they are dealing with each other on an arm’s length basis they would each be assessed at $400,000
    Simon Moore likes this.
  2. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    18th Jun, 2015
    And in some instances no CGT is involved but full income tax and GST. A good example can include vacant land or a newly completed construction. From time to time I receive enquiries from developers who transfer one lot / unit etc into another persons name (eg wife, trust etc). And once its done you cant undo it.

    Tax law worked out a long long time ago that people transfer things for no consideration. Like barter it almost always has a tax consequence.