Hi everyone hope you can help i would really appreciate it.
I currently have an investment property with my parents and my brother as equal shareholders.We purchased this property in Resevoir Melb a few years ago at $150K.
We have now decided between all 4 of us that we my parents and I would like to sell our share to our brother for an agreed price of $200K. The recent rates notice we received had our poperty valued at about $300K. A contract of sale has been prepared by our solicitor and a transfer of land as well to be executed.
The question I have is what tax liability and capital gains will affect me in regards to this transaction. I also currently have an investment property with my partner that i earn income on .
urgent help is required!!!! ThanksAn individual is said to be dealing at arm’s length with someone if each party acts independently and neither party exercises influence or control over the other in connection with the transaction. The law looks at not only the relationship between the parties but also the quality of the bargaining between them (Granby Pty Ltd v Federal Commissioner of Taxation).
If you do not deal at arm’s length with another entity in connection with the CGT event the market value substitution rule takes effect (subsection 116-10(2) ITAA 1997). Broadly speaking, this is when the capital proceeds you actually received are replaced with the market value of the asset.
When the market value substitution rule is applicable the market value at the time you sell the CGT asset is used to calculate any CGT consequences. Taxation Determination TD 10 identifies two methods for determining the market value of the property at the time of disposal. They are:
· obtaining a valuation from a qualified valuer, or
· computing your own valuation based on reasonably objective and supportable data.
It would appear that your arrangement does not meet the requirements stipulated to be considered a transaction completed at arms length as the sale of your interest in the property to your relative is not an independent transaction between unrelated parties. For CGT purposes the sale of your interest in the property to your relative for below its market value has led to the market value substitution rules being applicable.
Therefore, when calculating your capital gain on your interest in the property you will be taken to have received capital proceeds equal to the market value on the date of transfer.
Accordingly, your capital proceeds will be one-quarter of the market value of the property at the time of transfer and not the amount you actually received.
Just to clarify do you mean the gain will be 1/4 of the difference between the cost of base of purchasing the property and the market value of the property at the time of transfer?
Also do you think it is feasible to get a valuation done from a qualified valuer than just using your rates? Is their a listing anywhere showing a panel of valuers that can be used? or is a real estate agent ok?
Appreciate your help.Accordingly, your capital proceeds will be one-quarter of the market value of the property at the time of transfer and not the amount you actually received
Is it 1/4 or 1/3 as one of the parties will become the sole owner of the property? Will he be liable for CGT as well?
Thanks heaps guys. Fantastic forum.
I would be:
1. Talking to an accountant.
2. Getting a proper valuation.But my opinion is:
Your 1/4 or 1/3 share would depend on what the original agreement was when the purchase for $150K was made. If your parents were operating as 1 share then it would be 1/3. If they were operating as individuals then it would be 1/4.
If you are selling your share then you are the one paying the CGT. Your brother doesn’t become liable for CGT until he sells the property. Then it’s a mix of a % of the 1/3 or 1/4 gain in value until now, and then % the total gain in value until eventual sale.
To my understanding if you were in it 1/3 (ie. your parents were only one share and each of you originally contributed $50K each) and since you are recieving $200K total I would assume that you have valued the property only on the rates unimproved land value of $300K, and you would be receiving $100K from this transaction. That would mean a profit before any other attributable expenses of $50K. That means that CGT would be 1/4 of that – in this example at most $12,500.
Unfortunately, from the interpretation given by coastymike, since I find it hard to believe that a land value rates notice would be a correct market value of a property in Reserviour (unless there is no house on the land) then the market value would be considerably higher than $300K. Let’s say for eg. it’s market value is $450K. Then 1/3 share of that is $150K less purchase share of $50K leaves a personal CGT assessable amount of $100K. 1/4 of that is $25K. This would be regardless of what you amount you recieved in the transaction.But I’m not a tax accountant and it would be advisable to seek one out!
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