Value shifting generally occurs when a dealing or transaction between two parties is not at market value and results in the value of one asset decreasing and (usually) the value of another asset increasing.
The general value shifting regime (GVSR) rules apply to:
- value shifts which arise as a result of interests in a company or trust being issued or bought back at other than market value, or as a result of their rights being varied so that the value of some interests increases while the value of others decreases (direct value shifts on interests)
- value shifts which arise as a result of two entities under the same control or ownership conducting dealings or transactions that are neither at market value nor arm's length, so that the value of interests in one entity decreases while (usually) the value of interests in the other entity increases (indirect value shifting), and
- value shifts which arise as a result of the creation of a right over a non-depreciating asset in favour of an associate for less than market value (direct value shifts by creating rights).
The rules relating to direct value shifts on interests target only equity or loan interests held by an individual or entity that controls the company or trust, the controller's associates and, where the company or trust is closely held, any active participants in the arrangement.
The indirect value shifting rules target only equity or loan interests held by an individual or entity that controls the two entities conducting the dealing or transaction and the controller's associates. But if the two entities are closely held, the rules also target equity or loan interests held by two or more common owners of those entities, the common owner's associates and any active participants in the arrangement.
There are also exclusions and safe harbours that limit the operation of the rules.
Where the rules apply, you may need to:
- adjust the cost base and reduced cost base of equity and loan interests affected by the value shift, or
- adjust a realised loss or gain on the disposal of the relevant assets.
In some cases, there may also be an immediate capital gain.
For more information on whether the GVSR rules apply to you, refer to the publication General value shifting regime – who it affects. For detailed information on the operation of the rules, refer to the Guide to the general value shifting regime. Both publications can be found at www.ato.gov.au.