Direct value shifts by creating rights
The 'direct value shifts by creating rights over non-depreciable assets' provisions are located on the ATO Legal Database in Division 723 of the Income Tax Assessment Act 1997.
A non-depreciable asset is disposed of at a loss because the owner granted an associate a right (for example, a lease or other right of use) over the asset for less than market value. The rules can also apply where a non-depreciable asset over which a right was granted is replaced by an asset (including a share or trust interest) acquired under a capital gains tax rollover.
Does not apply if:
- the shortfall on granting the right is $50,000 or less
- the right is created when the owner of the asset dies or is a conservation covenant over land, or
- the asset and right remain within the same consolidated group.
This provision may affect the entity that creates the right and realises the non-depreciable asset, and an entity that acquires the underlying asset under a rollover.
In general, the loss made on the underlying asset is reduced by the lesser of:
- the difference between the market value of the right at the time it was created and the consideration received for it, and
- the amount by which the right affects the market value of the underlying asset when it is realised.
Example: direct value shifts by creating rights
- Mr and Mrs Smith each own 50% of OpCo. Their son Sonny Smith owns a non-depreciating asset (some land).
- Sonny Smith grants OpCo a 25-year lease to use his land, at no cost.
- Sonny sells the land, with the lease intact, at a substantial loss - of which $80,000 is attributable to the continuing existence of the lease.
- Sonny cannot claim the loss attributable to the continuing existence of the lease.