Broadly, the entity interest direct value shifting rules apply where a scheme effectively results in a value shift between equity or loan interests in a company or trust that is controlled (for value shifting purposes) by another entity.
Such value shifts include the issue of interests in a company or trust at a discount to market value (shifting value out of existing interests) or the variation of rights attaching to a class of existing interests in a company or trust (for example, shifting value out of that class and increasing the value of another class).
Interests issued for more than market value do not trigger the rules (but existing capital gains tax rules may limit the first element of cost base and reduced cost base of the interests to market value).
The entity interest direct value shifting rules generally nullify the effect of a value shift by adjusting the tax values of certain equity and loan interests in the company or trust. These are interests that are owned by:
- the controller
- their associates
- associates of associates
- for closely held entities, by active participants in the scheme.
However, in some instances, the rules may treat the value shift as if it were a partial realisation of the interests from which the value was shifted, possibly resulting in an assessable gain. It cannot result in a loss. The tax values of interests are adjusted to reflect this treatment.
Example: entity interest direct value shift
- 'Controller' holds all 10 'A class' shares on issue in 'Venture Co'. These shares have a market value of $1 million each. 'Associate' holds all 10 'B class' shares in the same company. These shares have a market value of $200,000 each.
- Controller and Associate agree to vary the rights attaching to both classes of share. This results in the market value of the A class shares decreasing by $200,000 each, and the market value of the B class shares increasing by $200,000 each.
- There has been a value shift of $2 million from Controller's shares to Associate's shares to which the entity interest direct value shifting rules may apply.
- Controller may make an assessable gain depending on the tax value of the A class shares and, in any case, tax value adjustments for the A class and B class shares may be required.