Direct value shifts on interests
The 'direct value shifts on interests' provisions are located on the ATO Legal Database in Division 725 of the Income Tax Assessment Act 1997.
A company or trust is controlled by an entity (or an entity and its associates). For example, the entity and its associates control at least 40% of the voting power or have beneficial rights to 40% of the dividends or distributions the company or trust makes.
Something is done that causes the value of some of the interests in the company or trust to decrease, and some other interests in the company or trust to increase in value or be issued at a discount.
This might occur where:
- shares, units (or similar interests) or loan interests in a company or trust are issued or bought back at other than market value, or
- existing rights attached to such shares, units or loan interests are varied.
Does not apply if:
- the total reduction in market value of the interests that decrease in value is less than $150,000
- under the terms of the arrangement that causes the value shift, the arrangement reverses within four years, or
- the company or trust concerned and all entities with interests affected by the value shift are members of the same consolidated group.
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) any active participants in the arrangement. It does not affect equity or loan interests held indirectly (through another entity).
There may be a deemed gain for the holders of interests that lose value but not a loss.
The adjustable value (for example, the cost base) of the interests that decrease in value is decreased, and the adjustable value of the new interests or the interests that increase in value is increased.
Example: direct value shifts on interests
- OpCo originally had 400 shares, 200 each owned by Mr and Mrs Smith. These shares were issued for $10 each and now have a market value of $1,000 each.
- OpCo issues 400 new shares to Sonny Smith for $200 per share. Forty per cent of the market value of OpCo's shares before the new issue has been shifted from Mr and Mrs Smith to Sonny Smith (who now has a 50% interest in the company).
- Mr and Mrs Smith are taken to have made a capital gain of $79,200 each, calculated as if they had disposed of 40% of their interests to Sonny Smith.
- The cost bases of Sonny's shares are equal to their market value ($600 each) and the cost bases of Mr and Mrs Smith's shares are reduced (to $6 each) on the basis that, effectively, 40% of each of their interests is disposed of.