The market value substitution rule
Section 116-30 of the ITAA 1997 replaces the actual capital proceeds with the market value of the asset where no proceeds were received, or where the parties did not deal with each other at arm’s length. A transfer between parent and child, between siblings, or into a family trust or company is ordinarily not at arm’s length.
The rule cuts both ways, which is the part people miss. The transferor is treated as having received market value, so their capital gain is calculated on a figure they never actually got. The transferee is treated as having paid market value, so that becomes their cost base for the future. One valuation establishes both positions.
What follows from the transfer
A below-market family transfer typically triggers several obligations at once, and only the first is a CGT matter.
Obligations arising on a below-market family transfer
What can still reduce the gain
Market value substitution decides the proceeds figure. It does not override the exemptions. If the property was the transferor’s main residence for the whole ownership period, the gain may still be fully exempt, and no CGT arises even though a market value has been substituted.
There is also a genuine rollover for transfers between spouses on the breakdown of a marriage or de facto relationship under Subdivision 126-A, which defers the CGT rather than triggering it. Ordinary family generosity does not qualify — there is no general rollover for gifting property to children.
What the valuation needs to be
Because the whole point of the exercise is that the stated price is not evidence of value, the ATO will not accept the parties’ own figure — and a family transfer is precisely the circumstance in which an agent appraisal is least likely to be accepted. This needs an independent valuation by a Certified Practising Valuer, effective the date of the transfer, with a full comparable sales schedule.
Obtain it at or near the transfer date rather than afterwards. Both parties can rely on the same report, and having it on file means the transferee has their cost base documented decades before they need it.