The general value shifting regime (GVSR) replaced the previous value shifting rules contained in Divisions 138, 139, and 140 of the Income Tax Assessment Act 1997 (ITAA 1997), generally with effect from 1 July 2002.
The regime addresses arrangements that shift value out of assets, distorting the relationship between their market values and their values for tax purposes. Without a value shifting regime, these arrangements could encourage the creation of artificial losses and the deferring of gains.
The previous value shifting rules:
- did not apply comprehensively (for example, they applied to shares in a company but not to interests in a trust)
- did not contain adequate small value exclusions or safe harbours to ease compliance
- resulted in unintended consequences in some instances.
The Review of Business Taxation – A Tax System Redesigned (1999) recommended introducing the GVSR to address these deficiencies and to improve the overall integrity of the tax system. The regime achieves these objectives by ensuring broadly consistent treatment for comparable value shifts across different types of entities and dealings.
The GVSR applies to entities from 1 July 2002 (including those with substituted accounting periods). The previous value shifting rules contained in Divisions 138, 139 and 140 of the ITAA 1997 do not apply to any schemes entered into on or after that date.
The GVSR may also apply where a scheme is entered into on or after 27 June 2002 and the value shift happens after 30 June 2002.
Small value exclusions ensure the GVSR is targeted at substantial value shifts. As a result, many businesses will not be affected by the regime, and those that are will have smaller compliance costs than if all value shifts had to be identified.
The small value exclusions are:
- entity interest direct value shifting rules (total value shifts under a scheme are less than $150,000)
- created rights direct value shifting rules (the market value of the right granted exceeds the proceeds for the grant by $50,000 or less)
- indirect value shifting rules (total value shifted is equal to or less than $50,000).
There are several exclusions and safe harbours in the indirect value shifting rules. For example, an entity that is a small business entity, or an entity that satisfies the 'maximum net asset value test' will not be required to make any adjustments under the indirect value shifting rules.
There are safe harbours to ensure the rules do not affect assets transferred at cost (in most cases), and most value shifts relating to services are excluded unless they are significant in size.
A 'realisation time method' of making adjustments is also available under the indirect value shifting rules, and value shifts of less than $500,000 that happen more than four years before realisation of certain interests can be disregarded.
When the regime does not apply
You can make sure the GVSR does not apply by ensuring:
- equity and loan interests in entities are issued at market value
- rights over any underlying asset are granted for full market value consideration
- entities provide economic benefits to each other at market value or otherwise deal at arm's length.