Broadly, the created rights direct value shifting rules can apply where a right is created out of, or over, an asset for less than market value in favour of an associate, and the underlying asset is later realised at a loss while the right still exists.
The creation of the right distorts the relationship between the market value of the underlying asset and the value of that asset for tax purposes.
The created rights direct value shifting rules address the effect of the value shift by reducing the amount of any loss on realisation of the underlying asset. The rules do not apply to:
- depreciating assets
- conservation covenants
- testamentary estates.
Example: created rights direct value shift
- 'Black Co' owns 'Whiteacre', a property with a cost base of $10 million and a market value of $14 million. Black Co grants to 'Black Trust' (an associate) a 20-year lease for $100 premium and no rental. The market value of the lease when granted is $6 million.
- The grant of the lease reduces the market value of Whiteacre by $6 million (to $8 million). Immediately after the grant of the lease, Black Co sells Whiteacre for $8 million.
- The created rights direct value shifting rules may apply to this arrangement to prevent a $2 million capital loss on disposal of Whiteacre.