Updated 10 October 2026
The market value substitution rule in sections 116-30 and 112-20 ITAA 1997 replaces the actual price with market value whenever property changes hands for nothing, for the wrong price, or between parties not dealing at arm's length. Gift a property to your daughter for $1 and the ATO taxes you as if you sold it for full market value. The only question left is what that value is, and who can prove it.
At a glance
- Section 116-30 substitutes market value for actual proceeds in non-arm's length disposals; section 112-20 does the same for the acquirer's cost base
- The rule catches transfers to family, trusts and SMSFs, $1 sales and gifts
- Both sides of the transaction are taxed and costed on the same market value
- State revenue offices also assess duty on market value for related-party transfers
- An independent valuation is the evidence for both the CGT and stamp duty positions
In this guide
What the rule does
CGT is normally calculated on what you actually received. The market value substitution rule is the exception that stops the system being gamed. Under section 116-30, your capital proceeds are replaced with the asset's market value where you received no proceeds at all, where some or all of the proceeds cannot be valued, or where the proceeds are more or less than market value and you and the buyer were not dealing with each other at arm's length.
The rule exists because without it, every family could erase capital gains by selling to each other for a dollar. Parliament closed that door in the first CGT legislation and it has stayed closed since.
When it applies
- Gifts. Transferring a property to a child, sibling or friend for nothing is a CGT event with deemed proceeds at full market value.
- Underpriced family sales. Selling the investment unit to your son for $400,000 when it is worth $650,000 does not save tax. You are assessed on $650,000.
- Transfers into and out of trusts. Moving a property into a family trust, or distributing one out in specie, triggers the rule because trustee and beneficiary are rarely at arm's length.
- SMSF transactions. In specie contributions of business real property, and any acquisition or disposal between a fund and a related party, must occur at market value both for CGT and to stay clear of the non-arm's-length income rules.
- Deceased estate distributions with a twist. Straight Division 128 transmissions are outside the rule, but sales or swaps between beneficiaries at concessional prices are inside it.
Warning
Arm's length is about conduct, not just relationshipRelated parties can deal at arm's length and strangers can fail to. The test looks at whether the parties bargained the way independent parties would. But in practice, any family or related-entity transfer at a soft price should be assumed to attract the rule, and the ATO's data matching against state transfer duty records surfaces these transactions routinely.
The value is taken at the time of the CGT event, which for a transfer under contract is the contract date. Which date is the CGT valuation date covers the timing rule for every event.
Both sides of the transfer
The rule cuts twice, and the second cut is the one families forget. Section 112-20 gives the person acquiring the asset a cost base equal to market value where they paid nothing, or paid a non-arm's-length price. The transferor is taxed on deemed market value proceeds; the transferee starts their ownership with a market value cost base.
That symmetry means one defensible valuation at the transfer date serves both parties: it fixes the parent's capital gain today and the child's cost base for a sale that might be twenty years away. It also means a lowballed value hurts the next generation, because whatever figure survives review becomes the child's starting point. For the parent-to-child case specifically, including a worked example of gift versus sale, see our guide to gifting property to your children.
Worked example
Note
Worked examplePeter bought an investment townhouse in 2012 for $380,000 and transfers it to his daughter Emma in 2026 for $1 as part of helping her into the market. A valuation supports a market value of $720,000 at the transfer date.
Peter's CGT position: deemed capital proceeds of $720,000 under section 116-30, a gain of $340,000 before incidental cost adjustments and the 50 per cent discount, so roughly $170,000 assessable at his marginal rate. The $1 on the contract is irrelevant. Emma's position: cost base of $720,000 under section 112-20, so her future gain is measured from the real value, not from $1. Without a valuation, both figures are exposed, and the ATO is free to argue a number that suits neither of them.
A substituted market value also becomes the starting point for the capital gains tax changes from 1 July 2027, since the gain from that value forward is taxed under the new rules. The CGT calculator shows how a gain is split at the reset date.
Transferring property to family, a trust or your SMSF?
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Start your orderHow it worksStamp duty runs on the same number
State revenue offices apply the same logic. In South Australia, and in every other state and territory, transfer duty on a related-party or nil-consideration transfer is assessed on the property's market value, and RevenueSA and its counterparts routinely require evidence of value with the transfer documents. One properly dated valuation typically serves the CGT calculation, the duty assessment and the conveyancing file, which is three uses of a single $297 report.
Proving the value
Because there is no genuine sale price, the entire tax outcome rests on the market value figure, and the evidentiary standard is the ATO's Market valuation for tax purposes guidance: independence, recognised methodology, comparable sales from the transfer date, and a report that a third party can follow. A related party transfer valuation signed by a Certified Property Valuer meets that standard and brings the penalty safe harbour with it, since properly instructing a professional valuer is itself reasonable care.
If the transfer already happened years ago without a valuation, the position is recoverable: a retrospective valuation at the historical transfer date, built from the sales evidence of that period, establishes the figure both sides should have recorded at the time.
Note
From our valuation filesA father sold a Brisbane unit to his daughter in 2024 for $400,000, roughly what he had paid for it. The contract price was irrelevant for CGT: because the parties were not dealing at arm's length, both sides were taxed on market value. Our valuation supported $650,000. His capital gain was worked out on $650,000, and her cost base started at $650,000 rather than $400,000, which protects her when she eventually sells.
Details are changed. This is a composite of typical files rather than one client.
Common questions
What is the market value substitution rule?
A CGT integrity rule in sections 116-30 and 112-20 ITAA 1997. Where an asset changes hands for no proceeds, unquantifiable proceeds, or a non-arm's-length price, the actual price is replaced with market value, on both the seller's proceeds and the buyer's cost base.
Does it apply to family transfers?
Almost always. Gifts and concessional sales between family members are the classic trigger. The transferor is taxed on deemed market value proceeds and the transferee takes a market value cost base, so both parties depend on a defensible valuation at the transfer date.
Can I just transfer property to my child for $1?
You can, but it changes nothing for tax. CGT is assessed as if you sold at full market value, and stamp duty is assessed on market value too. The $1 avoids neither, and doing it without a valuation leaves both figures open to ATO challenge.
What if the transfer happened years ago without a valuation?
A retrospective valuation at the original transfer date, prepared from comparable sales evidence of that period, establishes the market value both parties needed. The ATO accepts retrospective valuations prepared by a professional valuer with proper evidence.
