What Goes in the Cost Base and Tricks to Avoid CGT When Transferring to Family

Question

Hello Julia
Re: CGT – Allowable property expenses on family transfer
I purchased a townhouse in Melbourne in 2014. A family member lives there ‘rent free’ The property has never been rented/leased. I live in a regional city in my own home.

In June 2021 I transferred a half share of the Melb townhouse to the family member which triggers CGT liability.

I intend to prepare my own tax return online as I have previously and understand the process and details needed to caculate the capital gain. However I have questions regarding some property holding expenses/ownership costs which may/may not be claimed to minimize the CGT payable.

  1. Travel/MV Exps between my residence and Melbourne for:
    1. Pre-purchase insepection of property, auction attendance, settlement/handover?
    2. Attendance at property to undertake maintenance, meet tradesmen, meet valuer?
  2. Utility expenses such as water and electricity, fixed supply/service charges and/or usage charges?
  3. Stamp Duty on the transfer paid by myself- a direct cost of ‘gifting’/transfer? (Probably wishful thinking!)
  4. If complete records such as receipts, invoices etc of some expenses are not available, to what extent are ‘reasonable estimates’ likely to be accepted by the ATO?

Any additional comments or suggestions are always welcome
Many thanks
Kevin R

(I have made good use of your online information and CG Tool/calculator – Thank you)


Answer

Was there by any chance a written agreement between you and the family member that you would transfer that property to them at a later date? You see if that agreement happened back when you bought the property then for CGT purposes that is the date that the property transferred to them at market value back then, so probably no CGT.

Alternatively is there any chance of arguing you held half the property in a bare trust for them. Something you would probably need to ask your solicitor about. For example they may have been too young to hold it in their name.

Clutching at straws here.

Regarding your questions:

INCOME TAX ASSESSMENT ACT 1997 – SECT 110.38
Exclusions

  1. 1) Expenditure does not form part of any element of the cost base to the extent that section 26-54 prevents it being deducted (even if some other provision also prevents it being deducted).
    Note: Section 26-54 prevents deductions for expenditure related to certain offences.
  2. 2) Expenditure does not form part of any element of the cost base to the extent that it is a * bribe to a foreign public official or a * bribe to a public official.
  3. 3) Expenditure does not form part of any element of the cost base to the extent that it is in respect of providing * entertainment.
  4. 4) Expenditure does not form part of any element of the cost base to the extent that section 26-5 prevents it being deducted (even if some other provision also prevents it being deducted).
    Note: Section 26-5 denies deductions for penalties.
  5. 4A) Expenditure does not form part of any element of the cost base to the extent that section 26-31 prevents it being deducted.
    Note: Section 26-31 denies deductions for travel related to the use of residential premises as residential accommodation.
  1. Travel/MV Exps between my residence and Melbourne for:
    1. Pre-purchase insepection of property, auction attendance, settlement/handover? No
    2. Attendance at property to undertake maintenance, meet tradesmen, meet valuer? No. Mind you if the valuer was to work out the market value because you need to know for the CGT calc then it would be a cost of managing your tax affairs not a cost of owning a residential property.
  2. Utility expenses such as water and electricity, fixed supply/service charges and/or usage charges? No a cost of occupation not of holding the property
  3. Stamp Duty on the transfer paid by myself- a direct cost of ‘gifting’/transfer? (Probably wishful thinking!) Stamp duty is receivers cost, Certainly stamp duty when you bought
  4. If complete records such as receipts, invoices etc of some expenses are not available, to what extent are ‘reasonable estimates’ likely to be accepted by the ATO? Substantiation provisions do not apply, you are required to keep records but the onus of proof rests with you. Might use a quantity surveyor to estimate costs of improvements. Also look for bank statement entries. But really you are at the mercy of the auditor. Nevertheless as substantiation does not apply, just that you are required to keep records you have a reasonably arguable case to avoid penalties. I have seen the ATO be generous in these circumstances but it depends on the person.

I attach my CGT spreadsheet that may help, though I think you already have it.

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