Transferring property to family: market value substitution.

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.

• Main residence exemption may still apply and may eliminate the gain entirely.
• Marriage or de facto breakdown transfers can roll over under Subdiv 126-A.
• Pre-CGT status, if the property was acquired before 20 September 1985.
• The 50% CGT discount, where the asset has been held at least 12 months by an individual or trust.
• A valuation is still worth obtaining even where an exemption applies — it fixes the transferee’s cost base.

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.

Questions we are asked about this

Keep reading

Sources

• Income Tax Assessment Act 1997 — Consolidated Act, AustLII
• Market valuation for tax purposes — Australian Taxation Office — the eight valuation fundamentals
• Australian Property Institute — Professional Practice Standards and the CPV designation

This page is general information about how valuations are used for tax purposes. It is not tax advice. Your accountant or tax agent should confirm which provision applies to your circumstances.