Indirect value shifting
The 'indirect value shifting' provisions are located on the ATO Legal Database in Division 727 of the Income Tax Assessment Act 1997.
Two entities under the same control or ownership conduct dealings or transactions that are neither at market value nor otherwise at arm's length. This might occur where, for example, services or assets are transferred between two companies under your control and no payment is made (or the payment is less than market value).
Does not apply if:
- the value shift is $50,000 or less
- the value shift is from a superannuation entity or an entity that is neither a company nor a trust
- the value is shifted down a wholly-owned chain of entities (except if the value of a loan is affected)
- the shift relates almost entirely to loans or other services that are provided for at least their direct cost, or not more than a commercially realistic price, or
- the shift relates to an asset and the transfer is for at least the asset's cost base or cost, whichever is greater, and not for more than the asset's market value (in most cases).
Also, holders of interests in the two entities are excepted from the general value shifting regime impacts if:
- they are a small business entity, or
- they, together with related entities, have net assets of $6 million or less (the capital gains tax maximum net asset threshold test).
End of attention
- for the 2007-8 and later income years the simplified tax system no longer operates and has been replaced by the small business entity provisions.
- a limit of $5 million or less applies to 2006-7 and earlier income years.
This provision may affect equity or loan interests held by the controller of the company or trust, the controller's associates and (if the company or trust is closely held) common owners, the common owners' associates and active participants in the arrangement.
Adjustments are made to prevent artificial losses (for interests in the losing entity) and gains (for interests in the gaining entity).
For value shifts of less than $500,000, adjustments may not be required for losses made more than four years after the value shift happened.
Example: indirect value shifting
- Mr and Mrs Smith each own one ordinary share in AssetCo (50% of the issued share capital) with a cost base of $250,000. They also each own 50% of NewCo.
- AssetCo transfers an asset worth $5 million to NewCo for $2 million in a non-arm's length dealing. The effect of the transaction is to reduce the market value of each share in AssetCo to $1 million. The market value of each share in NewCo increases by $1.5 million.
- The adjustable values of Mr and Mrs Smith's shares in these entities are adjusted to prevent inappropriate losses and gains arising. Alternatively, the provisions reduce or extinguish any loss or gain made when the shares are realised.