New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 (90 of 2002)

Schedule 15   Value shifting

Part 1   New Divisions inserted in the Income Tax Assessment Act 1997

1   After Part 3-90

Insert:

Part 3-95 - Value shifting

Division 723 - Direct value shifting by creating right over non-depreciating asset

Table of Subdivisions

723-A Reduction in loss from realising non depreciating asset

723-B Reducing reduced cost base of interests in entity that acquires non depreciating asset under roll over

Subdivision 723-A - Reduction in loss from realising non-depreciating asset

Table of sections

723-1 Object

723-10 Reduction in loss from realising non depreciating asset over which right has been created

723-15 Reduction in loss from realising non depreciating asset at the same time as right is created over it

723-20 Exceptions

723-25 Realisation event that is only a partial realisation

723-35 Multiple rights created to take advantage of the $50,000 threshold

723-40 Application to CGT asset that is also trading stock or revenue asset

723-50 Effects if right created over underlying asset is also trading stock or a revenue asset

723-1 Object

The purpose of this Division is to reduce a loss that would otherwise be *realised for income tax purposes by a *realisation event happening to an asset (except a *depreciating asset), to the extent that:

(a) value has been shifted out of the asset by the owner creating in an associate a right over the asset; and

(b) the value shifted was not brought to tax when the right was created and has not since been brought to tax on a realisation of the right.

723-10 Reduction in loss from realising non-depreciating asset over which right has been created

(1) A loss that would, apart from this Division, be *realised for income tax purposes by a *realisation event is reduced by the amount worked out under subsections (3) and (4) if:

(a) the event happens to a *CGT asset (the underlying asset ) you own that, at the time of the event (the realisation time ):

(i) is not a *depreciating asset; or

(ii) is an item of your *trading stock; or

(iii) is a *revenue asset of yours; and

(b) before the realisation time:

(i) you created in an *associate of yours; or

(ii) an entity covered by subsection (2) (about previous owners of the underlying asset) created in an associate of the entity;

a right in respect of the underlying asset; and

(c) immediately before the realisation time, the right is still in existence and is owned by an associate of yours; and

(d) a decrease in the underlying asset's market value is reasonably attributable to the creating of the right; and

(e) creating the right involved a *CGT event:

(i) whose *capital proceeds are less than the market value of the right when created (the difference between those capital proceeds and that market value is called the shortfall on creating the right ); and

(ii) that is not a CGT event that happens to some part of the underlying asset but not to the remainder of it; and

(f) the shortfall on creating the right is more than $50,000; and

(g) the market value of the underlying asset at the realisation time is less than it would have been if the right no longer existed at that time (the difference is called the deficit on realisation ).

Note: If subparagraph (1)(e)(ii) applies, the cost base and reduced cost base of the underlying asset is apportioned under section 112-30, so there is no need for this section to apply to the right.

(2) This subsection covers an entity if:

(a) the entity *acquired the underlying asset before you did; and

(b) there has been a roll over for each *CGT event (if any) as a result of which an entity (including you) acquired the asset after the first entity acquired it, and before the realisation time; and

(c) for each such CGT event (if any), the entity (including you) that acquired the underlying asset as a result of the event was, immediately after the event, an *associate of the entity that last acquired the asset before the event.

(3) The amount by which this section reduces the loss is the lesser of:

(a) the shortfall on creating the right; and

(b) the deficit on realisation.

However, that amount is reduced by each gain that:

(c) is *realised for income tax purposes by a *realisation event that happens to the right:

(i) before or at the realisation time for the underlying asset; and

(ii) at a time when the right is owned by an entity that is your *associate immediately before the realisation time for the underlying asset; and

(d) is not disregarded.

Note: To work out a gain realised for income tax purposes by a realisation event that happens to the right, see sections 977-15, 977-35, 977-40 and 977-55. If more than one of those sections applies to the right, see section 723-50.

(4) For each gain that:

(a) is *realised for income tax purposes by a *realisation event that happens to the right:

(i) within 4 years after the realisation time for the underlying asset; and

(ii) at a time when the right is owned by an entity that is your *associate immediately before the realisation time for the underlying asset; and

(b) is not disregarded;

the amount worked out under subsection (3) is taken to have been reduced by the amount of that gain.

Note: This subsection may result in amendment of an assessment for the income year in which the realisation time happens.

723-15 Reduction in loss from realising non-depreciating asset at the same time as right is created over it

(1) A loss that would, apart from this Division, be *realised for income tax purposes by a *realisation event is reduced by the amount worked out under subsections (2) and (3) if:

(a) the event happens to a *CGT asset (the underlying asset ) you own that, at the time of the event (the realisation time ):

(i) is not a *depreciating asset; or

(ii) is an item of your *trading stock;

(iii) is a *revenue asset of yours; and

(b) at the realisation time, you create in an *associate of yours a right in respect of the underlying asset; and

(c) creating the right involves a *CGT event:

(i) whose *capital proceeds are less than the market value of the right when created (the difference between those capital proceeds and that market value is called the shortfall on creating the right ); and

(ii) that is not a CGT event that happens to some part of the underlying asset but not to the remainder of it; and

(d) the shortfall on creating the right is more than $50,000; and

(e) the market value of the underlying asset at the realisation time is less than it would have been if the right had not been created (the difference is called the deficit on realisation ).

Note: If subparagraph (1)(c)(ii) applies, the cost base and reduced cost base of the underlying asset is apportioned under section 112-30, so there is no need for this section to apply to the right.

(2) The amount by which this section reduces the loss is the lesser of:

(a) the shortfall on creating the right; and

(b) the deficit on realisation.

(3) For each gain that:

(a) is *realised for income tax purposes by a *realisation event that happens to the right:

(i) within 4 years after the realisation time for the underlying asset; and

(ii) at a time when the right is owned by an entity that is your *associate immediately before the realisation time for the underlying asset; and

(b) is not disregarded;

the amount worked out under subsection (2) is taken to have been reduced by the amount of that gain.

Note 1: To work out a gain realised for income tax purposes by a realisation event that happens to the right, see sections 977-15, 977-35, 977-40 and 977-55. If more than one of those sections applies to the right, see section 723-50.

Note 2: This subsection may require amendment of an assessment for the income year in which the realisation time happens.

723-20 Exceptions

Conservation covenant over land

(1) Section 723-10 or 723-15 does not reduce a loss if:

(a) the underlying asset is land; and

(b) the right referred to in paragraph 723-10(1)(b) or 723-15(1)(b) is a *conservation covenant over the land.

Right created on death of owner

(2) Section 723-10 or 723-15 does not reduce a loss if the right referred to in paragraph 723-10(1)(b) or 723-15(1)(b) is created by:

(a) a will or codicil; or

(b) an order of a court varying or modifying a will or codicil; or

(c) a total or partial intestacy; or

(d) an order of a court varying or modifying the application of the law about distributing the estate of someone who dies intestate.

723-25 Realisation event that is only a partial realisation

(1) Section 723-10 or 723-15 applies differently if:

(a) a *realisation event happens to some part of a *CGT asset (the underlying asset ) you own that, at the time of the event:

(i) is not a *depreciating asset; or

(ii) is an item of your *trading stock; or

(iii) is a *revenue asset of yours;

but not to the remainder of the underlying asset; or

(b) a realisation event consists of creating an interest in a CGT asset (also the underlying asset ) you own that, at the time of the event, is covered by subparagraph (a)(i), (ii) or (iii).

(2) The section applies on the basis that:

(a) the *realisation event happens to the underlying asset; and

(b) the shortfall on creating the right referred to in paragraph 723-10(1)(e) or 723-15(1)(c); and

(c) the deficit on realisation referred to in paragraph 723-10(1)(g) or 723-15(1)(e);

are each reduced by multiplying its amount by this fraction:

((Market value of part) / (Market value of underlying asset))

(3) For the purposes of the formula in subsection (2):

market value of part means the market value, at the time of the *realisation event, of the part referred to in paragraph (1)(a) or the interest referred to in paragraph (1)(b), as appropriate.

market value of underlying asset means the market value, immediately before the *realisation event, of the underlying asset.

[The next section is section 723-35.]

723-35 Multiple rights created to take advantage of the $50,000 threshold

(1) Sections 723-10 and 723-15 apply differently if, having regard to all relevant circumstances, it is reasonable to conclude that the sole or main reason why a right was created as a different right from one or more other rights created in respect of the same thing was so that paragraph 723-10(1)(f) or 723-15(1)(d) would not be satisfied for one or more of the rights mentioned in this subsection.

(2) Those sections:

(a) apply to that thing, in relation to each of the rights mentioned in subsection (1) of this section, as if paragraphs 723-10(1)(f) and 723-15(1)(d) were omitted; and

(b) are taken always to have so applied.

723-40 Application to CGT asset that is also trading stock or revenue asset

If a *CGT asset you own is also an item of your *trading stock or a *revenue asset, this Division applies to the asset once in its character as a CGT asset and again in its character as trading stock or a revenue asset.

[The next section is section 723-50.]

723-50 Effects if right created over underlying asset is also trading stock or a revenue asset

(1) Subsection 723-10(3) or (4) or 723-15(3) applies differently if the right created in respect of the underlying asset is also *trading stock or a *revenue asset at the time of a *realisation event that happens to the right.

(2) The gain that is taken into account for the purposes of that subsection is:

(a) if the right is also trading stock-worked out under section 977-35 or 977-40 (about realisation events for trading stock); or

(b) if the right is also a revenue asset-the greater of:

(i) the gain worked out under section 977-15 (about realisation events for CGT assets); and

(ii) the gain worked out under section 977-55 (about realisation events for revenue assets).

Subdivision 723-B - Reducing reduced cost base of interests in entity that acquires non-depreciating asset under roll-over

Table of sections

723-105 Reduced cost base of interest reduced when interest realised at a loss

723-110 Direct and indirect roll-over replacement for underlying asset

723-105 Reduced cost base of interest reduced when interest realised at a loss

(1) The *reduced cost base of a *primary equity interest, *secondary equity interest, or *indirect primary equity interest, in a company or trust is reduced just before a *realisation event that is a *CGT event happens to the interest if:

(a) apart from this Division, a loss would be *realised for income tax purposes by the CGT event; and

(b) apart from this Division, a loss would have been *realised for income tax purposes by a realisation event if the event had happened, just before the CGT event, to a *CGT asset (the underlying asset ) that the company or trust then owned and that:

(i) was not then a *depreciating asset; or

(ii) was then an item of *trading stock of the company or trust; or

(iii) was then a *revenue asset of the company or trust; and

(c) the loss referred to in paragraph (b) would have been reduced under Subdivision 723-A by an amount (the underlying asset loss reduction ); and

(d) for the entity (the transferor ) that owned the interest just before the CGT event, the interest was a *direct roll over replacement or *indirect roll over replacement for the underlying asset.

(2) If the interest was a *direct roll over replacement, its *reduced cost base is reduced by the amount worked out using this formula, unless that amount does not appropriately reflect the matters referred to in subsection (4):

(((RCB of interest) / (Total of RCBs of direct roll-over replacements)) * (Underlying asset loss reduction))

(3) For the purposes of the formula in subsection (2):

RCB of interest means the interest's *reduced cost base when the transferor *acquired it.

total of RCBs of direct roll-over replacements means the total of the *reduced cost bases of all *direct roll over replacements for the underlying asset when the transferor *acquired them.

(4) If:

(a) the interest was an *indirect roll over replacement; or

(b) the amount worked out under subsection (2) does not appropriately reflect the matters referred to in this subsection;

the interest's *reduced cost base is reduced by an amount that is appropriate having regard to these matters:

(c) the underlying asset loss reduction; and

(d) the quantum of the interest relative to all *direct roll over replacements and indirect roll over replacements that the transferor owns or has previously owned.

723-110 Direct and indirect roll-over replacement for underlying asset

(1) For an entity (the transferor ) that owns a *CGT asset, the CGT asset is a direct roll-over replacement for something (the underlying asset ) that another entity owns if, and only if:

(a) a *CGT event happened to the underlying asset while the transferor owned it; and

(b) the other entity *acquired the underlying asset as a result of that CGT event; and

(c) there was a *replacement asset roll over for the CGT event; and

(d) the transferor received the CGT asset (or CGT assets including it) in respect of the CGT event as the replacement asset (or the replacement assets).

(3) For an entity (the transferor ) that owns a *CGT asset, the CGT asset is an indirect roll-over replacement for something (the underlying asset ) that another entity owns if, and only if:

(a) a *CGT event happened to another CGT asset at a time when the transferor owned it and the other entity already owned the underlying asset; and

(b) for the transferor, the other CGT asset was at that time:

(i) a *direct roll over replacement for the underlying asset; or

(ii) an indirect roll over replacement for the underlying asset because of any other application or applications of this subsection; and

(c) there was a *replacement asset roll over for the CGT event; and

(d) the transferor received the first CGT asset (or CGT assets including it) in respect of the CGT event as the replacement asset (or the replacement assets).

Division 725 - Direct value shifting affecting interests in companies and trusts

Table of Subdivisions

Guide to Division 725

725-A Scope of the direct value shifting rules

725-B What is a direct value shift

725-C Consequences of a direct value shift

725-D Consequences for down interest or up interest as CGT asset

725-E Consequences for down interest or up interest as trading stock or a revenue asset

725-F Value adjustments and taxed gains

Guide to Division 725

725-1 What this Division is about

If, under a scheme, value is shifted from equity or loan interests in a company or trust to other equity or loan interests in the same company or trust (including interests issued at a discount), this Division:

(a) adjusts the value of those interests for income tax purposes to take account of material changes in market value that are attributable to the value shift; and

(b) treats the value shift as a partial realisation to the extent that value is shifted between interests held by different owners, and in some other cases.

However, it does so only for interests that are owned by entities involved in the value shift.

Subdivision 725-A - Scope of the direct value shifting rules

Table of sections

725-45 Main object

725-50 When a direct value shift has consequences under this Division

725-55 Controlling entity test

725-65 Cause of the value shift

725-70 Consequences for down interest only if there is a material decrease in its market value

725-80 Who is an affected owner of a down interest?

725-85 Who is an affected owner of an up interest?

725-90 Direct value shift that will be reversed

725-95 Direct value shift resulting from reversal

725-45 Main object

(1) The main object of this Division is:

(a) to prevent inappropriate losses from arising on the realisation of *equity or loan interests from which value has been shifted to other equity or loan interests in the same entity; and

(b) to prevent inappropriate gains from arising on the realisation of equity or loan interests in the same entity to which the value has been shifted;

so far as those interests are owned by entities involved in the value shift.

(2) This is done by:

(a) adjusting the value of those interests for income tax purposes to take account of changes in market value that are attributable to the value shift; and

(b) treating the value shift as a partial realisation to the extent that value is shifted:

(i) between interests held by different owners; or

(ii) in the case of interests in their character as CGT assets-from post CGT assets to pre CGT assets; or

(iii) between interests of different characters.

725-50 When a direct value shift has consequences under this Division

A *direct value shift under a *scheme involving *equity or loan interests in an entity (the target entity ) has consequences for you under this Division if, and only if:

(a) the target entity is a company or trust at some time during the *scheme period; and

(b) section 725-55 (Controlling entity test) is satisfied; and

(c) section 725-65 (Cause of the value shift) is satisfied; and

(d) you are an *affected owner of a *down interest, or an *affected owner of an *up interest, or both; and

(e) neither of sections 725-90 and 725-95 (about direct value shifts that are reversed) applies.

Note: For a down interest of which you are an affected owner, the direct value shift has consequences under this Division only if section 725-70 (about material decrease in market value) is satisfied.

725-55 Controlling entity test

An entity (the controller ) must *control (for value shifting purposes) the target entity at some time during the period starting when the *scheme is entered into and ending when it has been carried out. (That period is the scheme period .)

For the concept of control ( for value shifting purposes ), see sections 727-355 to 727-375.

[The next section is section 725-65.]

725-65 Cause of the value shift

(1) It must be the case that one or more of the following:

(a) the target entity;

(b) the controller;

(c) an entity that was an *associate of the controller at some time during or after the *scheme period;

(d) an *active participant in the *scheme;

(either alone or together with one or more other entities) did under the scheme the one or more things:

(e) to which the decrease in the market value of the *down interests is reasonably attributable; and

(f) to which the increase in the market value of the *up interests, or the issue of up interests at a *discount, is reasonably attributable, or that is or include the issue of up interests at a *discount.

Active participants (if target entity is closely held)

(2) An entity (the first entity ) is an active participant in the *scheme if, and only if:

(a) at some time during the *scheme period, the target entity has fewer than 300 members (in the case of a company) or fewer than 300 beneficiaries (in the case of a trust); and

(b) the first entity has actively participated in, or directly facilitated, the entering into or carrying out of the *scheme (whether or not it did so at the direction of some other entity); and

(c) the first entity:

(i) owns a *down interest at the *decrease time; or

(ii) owns an *up interest at the *increase time or has an up interest issued to it at a *discount because of the *direct value shift.

When an entity has 300 or more members or beneficiaries

(3) Section 124-810 (under which certain companies and trusts are not regarded as having 300 or more members or beneficiaries) also applies for the purposes of this Division.

(4) In addition, this Division applies to a *non fixed trust as if it did not have 300 or more beneficiaries.

725-70 Consequences for down interest only if there is a material decrease in its market value

(1) For a *down interest of which you are an *affected owner, the *direct value shift has consequences under this Division only if the sum of the decreases in the market value of all down interests because of direct value shifts under the same *scheme as the direct value shift is at least $150,000.

Note: In working out the sum of the decreases in market value of all down interests, it will be necessary to include decreases not only in your down interests, but also in those of other affected owners and of entities that are not affected owners.

(2) However, if, having regard to all relevant circumstances, it is reasonable to conclude that the sole or main reason why a *direct value shift happened under a different scheme from one or more other direct value shifts was so that subsection (1) would not be satisfied for one or more of the direct value shifts mentioned in this subsection, subsection (1) does not apply (and is taken never to have applied) to any of the direct value shifts.

[The next section is section 725-80.]

725-80 Who is an affected owner of a down interest?

An entity is an affected owner of a *down interest if, and only if, the entity owns the down interest at the *decrease time and at least one of these paragraphs is satisfied:

(a) the entity is the controller;

(b) the entity was an *associate of the controller at some time during or after the *scheme period;

(c) the entity is an *active participant in the *scheme.

725-85 Who is an affected owner of an up interest?

An entity is an affected owner of an *up interest if, and only if:

(a) there is at least one *affected owner of *down interests; and

(b) the entity owns the up interest at the *increase time, or the interest is an up interest because it was issued to the entity at a *discount;

and at least one of these paragraphs is satisfied:

(c) the entity is the controller;

(d) the entity was an *associate of the controller at some time during or after the *scheme period;

(e) at some time during or after the scheme period, the entity was an associate of an entity that is an affected owner of down interests because it was an associate of the controller at some time during or after that period;

(f) the entity is an *active participant in the *scheme.

725-90 Direct value shift that will be reversed

(1) The *direct value shift does not have consequences for you under this Division if:

(a) the one or more things referred to in paragraph 725-145(1)(b) brought about a state of affairs, but for which the direct value shift would not have happened; and

(b) as at the time referred to in that paragraph, it is more likely than not that, because of the *scheme, that state of affairs will cease to exist within 4 years after that time.

Example: Under a scheme, the voting rights attached to a class of shares in a company are changed. As a result, the market value of shares in that class decreases, and the market value of other classes of shares in the company increases. The company's constitution provides that the change is to last for only 3 years.

(2) However, this section stops applying if the state of affairs referred to in paragraph (1)(a) still exists:

(a) at the end of those 4 years; or

(b) when a *realisation event happens to *down interests or *up interests of which you are, or any other entity is, an *affected owner;

whichever happens sooner.

(3) If this section stops applying, it is taken never to have applied to the *direct value shift.

Note: This may result in an assessment for an earlier income year having to be amended to give effect to the consequences that the direct value shift would have had for you under this Division if this section hadn't applied.

725-95 Direct value shift resulting from reversal

(1) A *direct value shift does not have consequences for any entity under this Division if:

(a) section 725-90 applies, and the state of affairs referred to in paragraph 725-90(1)(a) ceases to exist; and

(b) the direct value shift would not have happened but for that state of affairs ceasing to exist.

(2) However, if section 725-90 stops applying, this section is taken never to have applied to the later direct value shift.

Subdivision 725-B - What is a direct value shift

Table of sections

725-145 When there is a direct value shift

725-150 Issue of equity or loan interests at a discount

725-155 Meaning of down interests, decrease time, up interests and increase time

725-160 What is the nature of a direct value shift?

725-165 If market value decrease or increase is only partly attributable to the scheme

725-145 When there is a direct value shift

(1) There is a direct value shift under a *scheme involving *equity or loan interests in an entity (the target entity ) if:

(a) there is a decrease in the market value of one or more equity or loan interests in the target entity; and

(b) the decrease is reasonably attributable to one or more things done under the scheme, and occurs at or after the time when that thing, or the first of those things, is done; and

(c) either or both of subsections (2) and (3) are satisfied.

Examples of something done under a scheme are issuing new shares at a *discount, buying back shares or changing the voting rights attached to shares.

(2) One or more *equity or loan interests in the target entity must be issued at a *discount. The issue must be, or must be reasonably attributable to, the thing, or one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph.

Example: A company runs a family business. There are 2 shares originally issued for $2 each. They are owned by husband and wife. The market value of the shares is much greater (represented by the value of the assets of the company less its liabilities). The company issues one more share for $2 to their son.

Caution is needed in such a situation. The example would result in a large CGT liability for the husband and wife under this Division, because they have shifted 1/3 of the value of their own shares to their son. No such liability would arise if the share had been issued for its market value.

(3) Or, there must be an increase in the market value of one or more *equity or loan interests in the target entity. The increase must be reasonably attributable to the thing, or to one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph.

725-150 Issue of equity or loan interests at a discount

(1) An *equity or loan interest is issued at a discount if, and only if, the market value of the interest when issued exceeds the amount of the payment that the issuing entity receives. The excess is the amount of the discount .

(2) The payment that the issuing entity receives can include property. If it does, use the market value of the property in working out the amount of the payment.

Amounts for which bonus equities are treated as being issued

(3) If:

(a) a *primary equity interest is issued as mentioned in subsection 130-20(1) (about bonus equities issued in relation to original equities); and

(b) subsection 130-20(3) does not apply (about bonus equities that are a dividend or otherwise assessable income);

subsection (1) of this section applies to the interest as if the amount of the payment that the issuing entity receives were equal to the *cost base of the interest when issued (as worked out under section 130-20).

(4) If:

(a) a *primary equity interest is issued as mentioned in subsection 6BA(1) of the Income Tax Assessment Act 1936 (about bonus shares issued in relation to original shares); and

(b) subsection 6BA(2) of that Act applies (about bonus shares that are a dividend);

subsection (1) of this section applies to the interest as if the amount of the payment that the issuing entity receives were equal to the consideration worked out under subsection 6BA(2) of that Act.

(5) If both of subsections (3) and (4) apply to the issue of the same *primary equity interest, subsection (1) of this section applies to the interest as if the amount of the payment that the issuing entity receives were equal to the greater of the amounts worked out under subsections (3) and (4).

Application of subsections (3), (4) and (5)

(6) Subsection (3) does not apply if, for the income year in which the interest is issued, the issuing entity is:

(a) a corporate unit trust within the meaning of section 102J of the Income Tax Assessment Act 1936; or

(b) a public trading trust within the meaning of section 102R of that Act.

(7) Subsections (3), (4) and (5) have effect only for the purposes of working out whether a *direct value shift has happened and, if so, its consequences (if any) under this Division.

725-155 Meaning of down interests, decrease time, up interests and increase time

(1) An *equity or loan interest in the target entity is a down interest if a decrease in its market value is reasonably attributable to the one or more things referred to in paragraph 725-145(1)(b), and occurs at or after the time referred to in that paragraph. The time when the decrease happens is called the decrease time for that interest.

(2) An *equity or loan interest in the target entity is an up interest if subsection 725-145(2) or (3) is satisfied for the interest. The time when the interest is issued at a *discount, or the increase in market value happens, is called the increase time for that interest.

725-160 What is the nature of a direct value shift?

(1) The *direct value shift has 2 aspects.

(2) Overall, it consists of:

(a) the decreases in market value of the down interests; and

(b) the issue at a *discount of the up interests covered by subsection 725-145(2); and

(c) the increases in market value of the up interests covered by subsection 725-145(3).

(3) This Division also proceeds on the basis that the *direct value shift is from each of the *down interests to each of the *up interests.

725-165 If market value decrease or increase is only partly attributable to the scheme

If it is reasonable to conclude that an increase or decrease in market value, or the issuing of an *equity or loan interest at a *discount, is only partly caused by the doing of the one or more things under the *scheme, this Division applies to the increase, decrease, or issue at a discount, to that extent only.

Subdivision 725-C - Consequences of a direct value shift

Table of sections

General

725-205 Consequences depend on character of down interests and up interests

725-210 Consequences for down interests depend on pre shift gains and losses

Special cases

725-220 Neutral direct value shifts

725-225 Issue of bonus shares or units

725-230 Off market buy backs

General

725-205 Consequences depend on character of down interests and up interests

(1) The consequences for you of the *direct value shift depend on the character of the *down interests and *up interests of which you are an *affected owner.

(2) There are consequences for all your *down interests and *up interests in their character as *CGT assets. However, some of them may also be *trading stock or *revenue assets. There are additional consequences for those interests in their character as trading stock or revenue assets.

Note: For example, you may own a down interest that is a CGT asset and a revenue asset.

Sections 725-240 to 725-255 set out the consequences for you of a shift in value from that interest in its character as a CGT asset. The cost base of the asset will be decreased, which will affect the calculation of a capital gain when a CGT event happens to the interest.

Section 725-320 sets out the consequences for you of a shift in value from that interest in its character as a revenue asset. The adjustment made under that section will affect the calculation of any profit on the sale of the interest.

Any overlap between the capital gain and the profit realised on the sale of the interest is then dealt with under section 118-20.

In some instances, the direct value shift may result in a taxing event generating a gain for you in the income year in which the shift happens. That gain will be both a capital gain (because the down interest can be characterised as a CGT asset) and an increase in your assessable income (because the down interest can be characterised as a revenue asset). Again, any overlap is dealt with under section 118-20.

725-210 Consequences for down interests depend on pre-shift gains and losses

(1) The consequences for a *down interest also depend on whether it has a *pre shift gain or a *pre shift loss.

(2) It has a pre-shift gain if, immediately before the *decrease time, its market value was greater than its *adjustable value.

(3) It has a pre-shift loss if, immediately before the *decrease time, its market value was equal to or less than its *adjustable value.

[The next section is section 725-220.]

Special cases

725-220 Neutral direct value shifts

(1) The consequences are different if the total decrease in market value of your *down interests is equal to the sum of:

(a) the total increase in market value of your *up interests; and

(b) the total *discounts given to you on the issue of your up interests.

(2) In that case, this Subdivision and Subdivisions 725 D to 725 F apply to you as if the *direct value shift:

(a) consisted only of:

(i) the decreases in market value of your *down interests; and

(ii) the issue at a *discount of your *up interests covered by subsection 725-145(2); and

(iii) the increases in market value of your up interests covered by subsection 725-145(3); and

(b) were from each of your down interests to each of your up interests.

(3) This section has effect despite section 725-160.

725-225 Issue of bonus shares or units

(1) The consequences are different if you are an *affected owner of *up interests (the bonus interests ) that the target entity issues to you, at a *discount, under the *scheme, in relation to *down interests (the original interests ) of which you are an affected owner.

Effect of treatment under subsection 130-20(3)

(2) To the extent that the *direct value shift is to the bonus interests from original interests in relation to which the target entity issued bonus interests to which:

(a) subsection 130-20(3) applies (because none of them is a dividend or otherwise assessable income); and

(b) item 1 of the table in that subsection applies (because the original interests are post CGT assets);

these paragraphs apply:

(c) the respective *cost bases and *reduced cost bases of those original interests are not reduced;

(d) the bonus interests referred to in subsection (1) do not give rise to a *taxing event generating a gain for you under the table in section 725-245 on any of those original interests.

(3) To the extent that the *direct value shift is from the original interests to bonus interests to which subsection 130-20(3) applies (because none of them is a dividend or otherwise assessable income) and:

(a) item 1 of the table in that subsection applies (because the original interests are post CGT assets); or

(b) item 2 of that table applies (because the original interests are pre CGT assets and an amount has been paid for the bonus interests that you were required to pay);

the respective *cost bases and *reduced cost bases of those bonus interests are not uplifted.

Effect of treatment under subsection 6BA(3) of the Income Tax Assessment Act 1936

(4) To the extent that the *direct value shift is to the bonus interests from original interests in relation to which the target entity issued bonus interests to which subsection 6BA(3) of the Income Tax Assessment Act 1936 applies (either because they are shares issued for no consideration and none of them is a dividend or because they qualify for the intercorporate dividend rebate):

(a) the respective *adjustable values of those original interests, in their character as *trading stock or *revenue assets, are not reduced; and

(b) the bonus interests referred to in subsection (1) do not give rise to a *taxing event generating a gain for you under the table in section 725-335 on any of those original interests.

(5) To the extent that the *direct value shift is from the original interests to bonus interests to which subsection 6BA(3) of the Income Tax Assessment Act 1936 applies, the respective *adjustable values of those bonus interests of which you are an affected owner, in their character as trading stock or revenue assets, are not uplifted.

725-230 Off-market buy-backs

(1) The consequences are different if:

(a) a decrease in the market value of a *down interest of which you are an *affected owner is reasonably attributable to the target entity proposing to buy back that interest for less than its market value; and

(b) the target entity does buy back that down interest; and

(c) subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936 treats you as having received the down interest's market value worked out as if the buy back had not occurred and was never proposed to occur.

(2) The *adjustable value of the *down interest is not reduced, and there is no *taxing event generating a gain.

Note: The down interest is not dealt with here because it is already dealt with in Division 16K of Part III of the Income Tax Assessment Act 1936.

(3) Also, to the extent that the *direct value shift is from the *down interest to *up interests of which you are an *affected owner, uplifts in the *adjustable value of the up interests are worked out under either or both of:

(a) item 8 of the table in subsection 725-250(2); and

(b) item 9 of the table in subsection 725-335(3);

as if the down interest were one owned by another affected owner.

Subdivision 725-D Consequences for down interest or up interest as CGT asset

725-245 Table of taxing events generating a gain for interests as CGT assets

725-250 Table of consequences for adjustable values of interests as CGT assets

725-255 Multiple CGT consequences for the same down interest or up interest

725-240 CGT consequences; meaning of adjustable value

(1) The CGT consequences for you of a *direct value shift are of one or more of these 3 kinds:

(a) there are one or more *taxing events generating a gain for *down interests of which you are an affected owner (see subsection (2));

(b) the *cost base and *reduced cost base of down interests of which you are an *affected owner are reduced (see subsection (3));

(c) the cost base and reduced cost base of *up interests of which you are an affected owner are uplifted (see subsection (4)).

Note: If there is a taxing event generating a gain, CGT event K8 happens. See section 104-240.

Taxing event generating a gain

(2) To work out:

(a) whether under the table in section 725-245 there is a *taxing event generating a gain for you on a *down interest; and

(b) if so, the amount of the gain;

assume that the adjustable value from time to time of that or any other *equity or loan interest in the *target entity is its *cost base.

Note: For example, for that purpose the question whether the interest has a pre shift gain or a pre shift loss is determined on the basis that the interest's adjustable value is its cost base.

Reduction or uplift of cost base and reduced cost base

(3) The *cost base and the *reduced cost base of a *down interest are reduced at the *decrease time to the extent that section 725-250 provides for the *adjustable value of the interest to be reduced.

(4) The *cost base and the *reduced cost base of an *up interest are uplifted at the *increase time to the extent that section 725-250 provides for the *adjustable value of the interest to be uplifted.

(5) However, the *cost base or *reduced cost base is uplifted only to the extent that the amount of the uplift is still reflected in the market value of the interest when a later *CGT event happens to the interest.

(6) To work out:

(a) whether the *cost base or *reduced cost base of the interest is reduced or uplifted; and

(b) if so, by how much;

assume that:

(c) the adjustable value from time to time of that or any other *equity or loan interest in the *target entity is its cost base or reduced cost base, as appropriate; and

(d) if the interest is an *up interest because it was issued at a *discount-the adjustable value of the interest immediately before it was issued was its cost base or reduced cost base, as appropriate, when it was issued.

Note: For example, for that purpose the question whether the interest has a pre shift gain or a pre shift loss is determined on the basis that the interest's adjustable value is its cost base or reduced cost base, as appropriate.

Reductions and uplifts also apply to pre-CGT assets

(7) A reduction or uplift occurs regardless of whether the entity that owns the interest *acquired it before, on or after 20 September 1985.

725-245 Table of taxing events generating a gain for interests as CGT assets

To the extent that the *direct value shift is from *down interests of which you are an *affected owner, and that are specified in an item in the table, to *up interests specified in that item, those up interests give rise to a taxing event generating a gain for you on each of those down interests. The gain is worked out under section 725-365.

Taxing events generating a gain for down interests as CGT assets

Item

Down interests:

Up interests:

1

*down interests that:

(a) are owned by you; and

(b) are neither your *revenue assets nor your *trading stock; and

(c) have *pre-shift gains; and

(d) are *post-CGT assets

*up interests owned by you that:

(a) are neither your *revenue assets nor your *trading stock; and

(b) are *pre-CGT assets

2

*down interests that:

(a) are owned by you; and

(b) are neither your *revenue assets nor your *trading stock; and

(c) have *pre-shift gains *up interests owned by you that are your *trading stock or *revenue assets

*up interests owned byyou that areyour*trading stockor*revenue assets

3

*down interests owned byyou that:

(a) are of the one kind (either your *trading stock or your *revenue assets); and

(b) have *pre-shift gains *up interests owned by you that:

(a) are of the other kind (either your *revenue assets or your *trading stock); or

(b) are neither your *revenue assets nor your *trading stock

4

*down interests owned by you that have *pre-shift gains

up interests owned by other *affected owners

Note: If there is a taxing event generating a gain on a down interest, CGT event K8 happens: see section 104-240. However, a capital gain you make under CGT event K8 is disregarded if the down interest:

· is your trading stock (see section 118-25); or

· is a pre CGT asset (see subsection 104-240(5)).

725-250 Table of consequences for adjustable values of interests as CGT assets

(1) The table in subsection (2) sets out consequences of the *direct value shift for the *adjustable values of *down interests and *up interests of which you are an *affected owner, in their character as *CGT assets.

(2) To the extent that the *direct value shift is from *down interests specified in an item in the table to *up interests specified in that item:

(a) the *adjustable value of each of those down interests is decreased by the amount worked out under the section (if any) specified for the down interests in the last column of that item; and

(b) the adjustable value of each of those *up interests is uplifted by the amount worked out under the section (if any) specified for the up interests in that column.

Consequences of the direct value shift for adjustable values of CGT assets

Item

To the extent that the direct value shift is from:

To:

The decrease or uplift is worked out under:

1

*down interests that:

(a) are owned byyou; and

(b) have*pre-shiftgains; and

(c) are*post-CGT assets

*up interests owned byyou that donot give rise to a*taxing event generating a gain for you on those down interests under section 725-245

for the down interests: section 725-365; and

for the up interests: section 725-370

2

*down interests that:

(a) are owned byyou; and

(b) have*pre-shiftgains; and

(c) are*pre-CGT assets

*up interests owned byyou that are*pre-CGT assets

for the down interests: section 725-365; and

for the up interests: section 725-370

3

*down interests that:

(a) are owned byyou; and

(b) have*pre-shiftgains; and

(c) are*pre-CGT assets

*up interests owned byyou that are*post-CGT assets

for the down interests: section 725-365; and

for the up interests: section 725-375

4

*down interests owned byyou that have*pre-shiftgains

*up interests owned byyou that give rise to a*taxing event generating a gain on those down interests under section 725-245

for the down interests: section 725-365; and

for the up interests: section 725-375

5

*down interests owned byyou that have*pre-shift losses

*up interests owned byyou

for the down interests: section 725-380; and

for the up interests: section 725-375

6

*down interests owned byyou that have*pre-shiftgains

*up interests owned byother*affected owners

for the down interests: section 725-365

7

*down interests owned byyou that have*pre-shift losses

*up interests owned byother*affected owners

for the down interests: section 725-380

8

*down interests owned byother*affected owners

*up interests owned byyou

for the up interests: section 725-375

9

*down interests owned byyou

*up interests owned byentities that are not*affected owners

(there are no decreases or uplifts)

10

*down interests owned byentities that are not*affected owners

*up interests owned byyou

(there are no decreases or uplifts)

725-255 Multiple CGT consequences for the same down interest or up interest

(1) A *down interest or *up interest of which you are an *affected owner may be covered by 2 or more items in the table in subsection 725-250(2).

(2) If the *cost base or *reduced cost base of the same *down interest or *up interest is decreased or uplifted under 2 or more items, it is decreased or uplifted by the total of the amounts worked out under those items.

(3) If for a particular *down interest there is a *taxing event generating a gain under an item in the table in section 725-245, that taxing event is in addition to:

(a) each taxing event generating a gain for that interest under any other item in that table; and

(b) each decrease in the *cost base or *reduced cost base of the interest under an item in the table in subsection 725-250(2).

Subdivision 725-E - Consequences for down interest or up interest as trading stock or a revenue asset

Table of sections

725-310 Consequences for down interest or up interest as trading stock

725-315 Adjustable value of trading stock

725-320 Consequences for down interest or up interest as a revenue asset

725-325 Adjustable value of revenue asset

725-335 How to work out those consequences

725-340 Multiple trading stock or revenue asset consequences for the same down interest or up interest

725-310 Consequences for down interest or up interest as trading stock

(1) The consequences of the *direct value shift for your *trading stock are of one or more of these 3 kinds:

(a) the *adjustable values of *down interests of which you are an *affected owner are reduced (see subsection (2));

(b) the adjustable values of *up interests of which you are an affected owner are uplifted (see subsection (3));

(c) there are one or more *taxing events generating a gain for down interests of which you are an affected owner (see subsection (5)).

Effect of reduction or uplift of adjustable value

(2) If the *adjustable value of a *down interest that is your trading stock is reduced under section 725-335, you are treated as if:

(a) *immediately before the *decrease time, you had sold the interest to someone else (at *arm's length and in the ordinary course of business) for its *adjustable value immediately before the decrease time; and

(b) immediately after the decrease time, you had bought the interest back for the reduced adjustable value.

(3) If the *adjustable value of an *up interest that is your *trading stock is uplifted under section 725-335, you are treated as if:

(a) *immediately before the *increase time, you had sold the interest to someone else (at *arm's length and in the ordinary course of business) for its *adjustable value immediately before the increase time; and

(b) immediately after the increase time, you had bought the interest back for the uplifted adjustable value.

(4) However, the increase in the cost of an *up interest because of paragraph (3)(b) is taken into account from time to time only to the extent that the amount of the increase is still reflected in the market value of the interest.

Note: The situations where the increase in cost would be taken into account include:

· in working out your deductions for the cost of trading stock acquired during the income year in which the increase time happens; and

· the end of an income year if the interest's closing value as trading stock is worked out on the basis of its cost; and

· the start of the income year in which the interest is disposed of, if that happens in a later income year and the interest's closing value as trading stock at the end of the previous income year was worked out on the basis of its cost.

If the interest stops being trading stock, section 70-110 treats you as having disposed of it.

Taxing event generating a gain

(5) For each *taxing event generating a gain under an item in the table in subsection 725-335(3), the gain is included in your assessable income for the income year in which the *decrease time happens.

725-315 Adjustable value of trading stock

If a *down interest or *up interest is your trading stock, its adjustable value at a particular time is:

(a) if the interest has been *trading stock of yours ever since the start of the income year in which that time occurs-its *value as trading stock at the start of the income year; or

(b) otherwise-its cost.

Note 1: If an interest has been affected by an earlier direct value shift during the same income year, it will be treated as having already been sold and repurchased (because of an earlier application of section 725-310). As a result, the cost on repurchase becomes its adjustable value immediately before the decrease time or increase time for the later direct value shift.

Note 2: The adjustable value of an interest that is an up interest because it was issued at a discount is worked out under paragraph (b).

725-320 Consequences for down interest or up interest as a revenue asset

(1) The consequences of the *direct value shift for your *revenue assets are of one or more of these 3 kinds:

(a) the *adjustable values of *down interests of which you are an *affected owner are reduced (see subsection (2));

(b) the adjustable values of *up interests of which you are an affected owner are uplifted (see subsection (3));

(c) one or more *taxing events generating a gain for down interests of which you are an affected owner (see subsection (5)).

Effect of reduction or uplift of adjustable value

(2) If the *adjustable value of a *down interest that is your *revenue asset is decreased under section 725-335, you are treated as if:

(a) *immediately before the *decrease time, you had sold the interest to someone else for its *adjustable value immediately before the decrease time; and

(b) immediately afterwards, you had bought the interest back for the reduced adjustable value; and

(c) from the time when you bought it back, the interest continued to be a revenue asset, for the same reasons as it was a revenue asset before you sold it.

(3) If the *adjustable value of an *up interest that is your *revenue asset is uplifted under section 725-335, you are treated as if:

(a) *immediately before the *increase time, you had sold the interest to someone else for its *adjustable value immediately before the increase time; and

(b) immediately afterwards, you had bought the interest back for the uplifted adjustable value; and

(c) from the time when you bought it back, the interest continued to be a revenue asset, for the same reasons as it was a revenue asset before you sold it.

(4) However, the uplift in *adjustable value is taken into account only to the extent that the amount of the uplift is still reflected in the market value of the interest when it is disposed of or otherwise realised.

Taxing event generating a gain

(5) For each *taxing event generating a gain under an item in the table in subsection 725-335(3), the gain is included in your assessable income for the income year in which the *decrease time happens.

725-325 Adjustable value of revenue asset

(1) If a *down interest is your *revenue asset, its adjustable value immediately before the *decrease time is the total of the amounts that would be subtracted from the gross disposal proceeds in calculating any profit or loss on disposal of the interest if you disposed of it immediately before the decrease time.

(2) If an *up interest is your *revenue asset and it increases in market value because of the *direct value shift, its adjustable value immediately before the *increase time is the total of the amounts that would be subtracted from the gross disposal proceeds in calculating any profit or loss on disposal of the interest if you disposed of it immediately before the increase time.

(3) If an *up interest is your *revenue asset and it is issued at a *discount, it is taken to have an adjustable value immediately before it is issued equal to the consideration paid or given by you for the interest.

Note: If an interest has been affected by an earlier direct value shift during the same income year, it will be treated as having already been sold and repurchased (because of an earlier application of section 725-320). As a result, the cost on repurchase becomes its adjustable value immediately before the decrease time or increase time for the later direct value shift.

[The next section is section 725-335.]

725-335 How to work out those consequences

(1) This section sets out the consequences of the *direct value shift for a *down interest or *up interest as *trading stock or a *revenue asset.

(2) If you have both trading stock and revenue assets, items 1 and 2 of the table in subsection (3) can apply once to the trading stock and again to the revenue assets. The other items apply (if at all) to the trading stock and revenue assets together.

Decreases and uplifts in adjustable value

(3) To the extent that the *direct value shift is from *down interests specified in an item in the table to *up interests specified in that item:

(a) the *adjustable value of each of those down interests is decreased by the amount worked out under the section (if any) specified for the down interests in the last column of that item; and

(b) the adjustable value of each of those *up interests is uplifted by the amount worked out under the section (if any) specified for the up interests in that column.

Consequences for down interest or up interest as trading stock or revenue asset

Item

To the extent that the direct value shift is from:

To:

The decrease or uplift is worked out under:

1

*down interests owned byyou that:

(a) are of the one kind (either your*trading stockor your*revenue assets); and

(b) have*pre-shift gains

*up interests owned byyouthat areof that same kind

for the down interests: section 725-365; and

for the up interests: section 725-370

2

*down interests owned byyou that:

(a) are of the one kind (either your*trading stockor your*revenue assets); and

(b) have*pre-shift gains

*up interests owned byyouthat areof the other kind (either your*revenue assetsor your*trading stock)

for the down interests: section 725-365; and

for the up interests: section 725-375

3

*down interests owned byyou that:

(a) areyour*trading stockor*revenue assets; and

(b) have*pre-shift losses

*up interests owned byyouthat areof that same kindor of the other kind

for the down interests: section 725-380; and

for the up interests: section 725-375

4

*down interests owned byyou that:

(a) areyour*trading stockor*revenue assets; and

(b) have*pre-shift gains

*up interests owned byyou that areneither your*revenue assets nor your*trading stock

for the down interests: section 725-365

5

*down interests owned byyou that:

(a) areyour*trading stockor*revenue assets; and

(b) have*pre-shift losses

*up interests owned byyou that areneither your*revenue assets nor your*trading stock

for the down interests: section 725-380

6

*down interests owned byyou that areneither your*revenue assets nor your*trading stock

*up interests owned byyou that areyour*trading stockor*revenue assets

for the up interests: section 725-375

7

*down interests owned byyou that:

(a) areyour*trading stockor*revenue assets; and

(b) have*pre-shift gains

up interests owned byother*affected owners

for the down interests: section 725-365

8

*down interests owned byyou that:

(a) areyour*trading stockor*revenue assets; and

(b) have*pre-shift losses

*up interests owned byother*affected owners

for the down interests: section 725-380

9

*down interests owned byother*affected owners

*up interests owned byyou that areyour*trading stock or*revenue assets

for the up interests: section 725-375

10

*down interests owned byyou that areyour*trading stock or*revenue assets

*up interests owned byentities that are not*affected owners

(there are no decreases or uplifts)

11

*down interests owned byentities that are not*affected owners

*up interests owned byyou that areyour*trading stock or*revenue assets

(there are no decreases or uplifts)

Taxing events generating a gain

(4) To the extent that the *direct value shift is from *down interests:

(a) of which you are an *affected owner; and

(b) that are specified in item 2, 4 or 7 in the table in subsection (3);

to *up interests specified in that item, those up interests give rise to a taxing event generating a gain for you under that item on each of those down interests. The gain is worked out under section 725-365.

725-340 Multiple trading stock or revenue asset consequences for the same down interest or up interest

(1) A *down interest or *up interest of which you are an *affected owner may be covered by 2 or more items in the table in subsection 725-335(3).

(2) If the *adjustable value of the same *down interest or *up interest is decreased or uplifted under 2 or more items, it is decreased or uplifted by the total of the amounts worked out under those items.

(3) If for a particular *down interest there is a *taxing event generating a gain under an item, that taxing event is in addition to:

(a) each taxing event generating a gain for that interest under any other item in the table; and

(b) each decrease in the *adjustable value of the interest under that or any other item in the table.

Subdivision 725-F - Value adjustments and taxed gains

Table of sections

725-365 Decreases in adjustable values of down interests (with pre shift gains), and taxing events generating a gain

725-370 Uplifts in adjustable values of up interests under certain table items

725-375 Uplifts in adjustable values of up interests under other table items

725-380 Decreases in adjustable value of down interests (with pre shift losses)

725-365 Decreases in adjustable values of down interests (with pre-shift gains), and taxing events generating a gain

Use the following method statement:

(a) to work out the amount of the gain for a *taxing event generating a gain under:

(i) section 725-245; or

(ii) item 2, 4 or 7 of the table in subsection 725-335(3); and

(b) to work out the decrease in *adjustable value of a *down interest under:

(i) item 1, 2, 3, 4 or 6 of the table in subsection 725-250(2); or

(ii) item 1, 2, 4 or 7 of the table in subsection 725-335(3).

Method statement

Step 1. Group together all *down interests that:

(a) are of the kind referred to in the relevant item; and

(b) immediately before the *decrease time, had the same *adjustable value as the down interest; and

(c) immediately before that time had the same market value as the down interest; and

(d) sustained the same decrease in market value as the down interest because of the *direct value shift.

Step 2. Work out the value shifted from that group of *down interests to the *up interests referred to in the relevant item using the following formula:

((Sum of the decreases in market value of all down interests in the group because of the diret value shift) * ((Sum of the increases in market value of , and discount on the issue of, those up interests because of the direct value shift) / (Sum of the increases in market value of, and discounts given on the issue of, all up interests because of the direct value shift)))

Step 3. Work out the notional adjustable value of the value shifted from that group of *down interests to those *up interests using the formula:

((Sum of the adjustabel values, immediately before the decrease time, of all down interests in the group) * ((Value shifted) / (Sum of the market values, immediately before the decrease time, of all down interests in the group)))

Step 4. The decrease in the *adjustable value of the *down interest under the relevant item is equal to:

((Notional adjustable value) / (Number of down interests in the group))

Step 5. For a *taxing event generating a gain under the relevant item, the amount of the gain is equal to:

(((Value shifted) - (Notional adjustable value)) / (Number of down interestsin the group))

725-370 Uplifts in adjustable values of up interests under certain table items

Use the following method statement to work out the uplift in *adjustable value of an *up interest under:

(a) item 1 or 2 of the table in subsection 725-250(2); or

(b) item 1 of the table in subsection 725-335(3).

Method statement

Step 1. If the market value of the *up interest increases because of the *direct value shift, group together all up interests of the kind referred to in the relevant item that:

(a) immediately before the *increase time, had the same *adjustable value as the up interest; and

(b) sustained the same increase in market value as the up interest because of the *direct value shift.

If the *up interest is issued at a *discount, group together all *up interests of the kind referred to in the relevant item that:

(c) immediately before the *increase time, had the same *adjustable value as the up interest; and

(d) because of the direct value shift, are issued at the same discount as the up interest.

Step 2. The notional adjustable value of the value shifted from the *down interests referred to in the relevant item to all the *up interests referred to in that item has already been worked out under one or more applications of step 3 of the method statement in section 725-365.

Step 3. Use the following formula to work out how much of that notional adjustable value is attributable to the value shifted to the group of *up interests referred to in step 1 of this method statement:

National adjustable value * (Sum of the market values, immediately after the increase time, of all up interests in the group / sum of the market values, immediately after the increase time, of all up interests referred to in the relevant item)

Step 4. The uplift in the *adjustable value of the *up interest under the relevant item is equal to:

((The amount worked out under step 3) / (Number of interests in the group of up interests))

725-375 Uplifts in adjustable values of up interests under other table items

Use the following method statement to work out the uplift in *adjustable value of an *up interest under:

(a) item 3, 4, 5 or 8 of the table in subsection 725-250(2); or

(b) item 2, 3, 6 or 9 of the table in subsection 725-335(3).

Method statement

Step 1. If the market value of the *up interest increases because of the direct value shift, group together all *up interests of the kind referred to in the relevant item that sustained the same increase in market value as the up interest because of the direct value shift.

If the up interest is issued at a discount, group together all up interests of the kind referred to in the relevant item that are issued at a discount of the same amount as the up interest because of the direct value shift.

Step 2. The value shifted to that group of *up interests from the *down interests referred to in the relevant item is the amount worked out using the formula:

(((Sum of the group increases or discounts) * (Sum of the decreases in market value of those down interests)) / (Total value of the direct value shift))

where:

sum of the group increases or discounts means (as appropriate):

(a) the sum of the increases in market value of all *up interests in the group because of the *direct value shift; or

(b) the sum of the *discounts at which all *up interests in the group were issued because of the *direct value shift.

total value of the direct value shift means:

(a) if the sum of the decreases in market value of all *down interests because of the *direct value shift is equal to or greater than the sum of the increases in market value of all *up interests and all *discounts given because of the shift-the sum of the decreases; or

(b) if the sum of the decreases in market value of all down interests because of the direct value shift is less than the sum of the increases in market value of all up interests and all discounts given because of the shift-the sum of the increases and discounts.

Step 3. The uplift in the *adjustable value of the *up interest under the relevant item is equal to:

((Value shifted) / (Number of up interests in the group))

725-380 Decreases in adjustable value of down interests (with pre-shift losses)

Use the following method statement to work out the decrease in *adjustable value of a *down interest under:

(a) item 5 or 7 of the table in subsection 725-250(2); or

(b) item 3, 5 or 8 of the table in subsection 725-335(3).

Method statement

Step 1. Group together all *down interests of the kind referred to in the relevant item that:

(a) immediately before the *decrease time, had the same *adjustable value as the down interest; and

(b) immediately before that time had the same market value as the down interest; and

(c) sustained the same decrease in market value as the down interest because of the *direct value shift.

Step 2. Work out the value shifted from that group of *down interests to the *up interests referred to in the relevant item using the formula:

((Sum of the decreases in market value of all down interests in the group because of the direct value shift) * ((Sum of the increases in market value of, and discounts on the issue of, those up interests because of the direct value shift) / (Sum of the increases in market value of, and discounts geven on the issue of, all up interests because of the direct value shift)))

Step 3. The decrease in *adjustable value of the *down interest under the relevant item is equal to:

((Value shifted) / (Number of down interests in the group))

Division 727 - Indirect value shifting affecting interests in companies and trusts, and arising from non-arm's length dealings

Table of Subdivisions

Guide to Division 727

727-A Scope of the indirect value shifting rules

727-B What is an indirect value shift

727-C Exclusions

727-D Working out the market value of economic benefits

727-E Key concepts

727-F Consequences of an indirect value shift

727-G The realisation time method

727-H The adjustable value method

727-K Reduction of loss on equity or loan interests realised before the IVS time

727-L Indirect value shift resulting from a direct value shift

Guide to Division 727

727-1 What this Division is about

If there is a net shift of value between 2 related entities because of a non arm's length dealing, this Division:

(a) prevents losses from arising, because of the value shift, on realisation of direct or indirect equity or loan interests in the losing entity; and

(b) within limits, prevents gains from arising, because of the value shift, on realisation of direct or indirect equity or loan interests in the gaining entity.

However, it does so only for interests that are owned by entities involved in the value shift.

Table of sections

727-5 What is an indirect value shift?

727-10 How does this Division deal with indirect value shifts?

727-15 When does an indirect value shift have consequences under this Division?

727-25 Effect of this Division on realisations at a loss that occur before the nature or extent of an indirect value shift can be fully determined

727-5 What is an indirect value shift?

(1) An indirect value shift arises when there is a net shift of value from one entity to another.

Example: Company A transfers property to company B in return for a cash payment. If the market value of the property is $180 million but the cash payment is only $50 million, there is a net shift of value from company A to company B of $130 million.

(2) It is called indirect because the transaction will have the indirect effect of shifting value from equity or loan interests in the losing entity to equity or loan interests in the gaining entity.

This is because the net shift in value between the entities will usually decrease the market value of interests in the losing entity and increase the market value of interests in the gaining entity.

Example: Assume that company C owns all the shares in company A and company D owns all the shares in company B. The net shift of value from company A to company B will reduce the value of company C's shares in company A and increase the value of company D's shares in company B.

(3) It will also produce corresponding effects further up a chain of entities.

Example: Assume that company E owns all the shares in company C and company D. The net shift of value from company A to company B will also reduce the value of company E's shares in company C and increase the value of its shares in company D.

A diagram showing how the companies in the above example relate to each other for the Shift of value from one company to another

(4) This Division is not concerned with the tax treatment of the net shift in value between the entities at the bottom of the chains. Instead, it deals with the effects on the market value of interests (both direct and indirect) in those entities.

(5) An indirect value shift distorts the relationship between the market value of an equity or loan interest and its value for income tax purposes. When the interest is realised, this can produce an inappropriate loss for income tax purposes, or an inappropriate gain.

Example: If company E sold its shares in company C, the indirect value shift could (apart from this Division) result in a loss for income tax purposes. Company E could defer the corresponding gain on its shares in company D by not selling these.

727-10 How does this Division deal with indirect value shifts?

(1) To prevent an inappropriate loss or gain from arising on realisation of an interest, this Division reduces the amount of the loss or gain (realisation time method). However, a choice can be made to adjust the interest's value for income tax purposes in a way that takes account of the indirect value shift (adjustable value method).

(2) This Division does not create taxing events giving rise to gains or losses.

727-15 When does an indirect value shift have consequences under this Division?

(1) Indirect value shift is defined very broadly, but the application of this Division is limited in various ways.

(2) The losing entity must be a company or trust (except a superannuation entity). However, the gaining entity can be any kind of entity, including an individual.

(3) This Division does not apply if entities deal with each other at arm's length, or provide economic benefits in return for full market value.

(4) The losing entity and the gaining entity must be connected by having had the same ultimate controller. In the case of closely held entities, they may instead be connected by having had a high level of common ownership.

(5) The only interests affected are those owned by entities involved in the indirect value shift or by their associates.

(6) There are a range of exclusions, such as:

(a) exclusions for minor indirect value shifts; and

(b) a series of rules designed to provide safe harbour treatment for common transactions relating to services; and

(c) anti overlap provisions to prevent double counting.

(7) Rules of thumb are included to make it easier to determine the market value of some kinds of economic benefits.

(8) To reduce compliance costs for:

(a) entities in the Simplified Tax System; and

(b) entities that meet the CGT small business net asset threshold ($5 million);

interests owned by those entities are not affected by this Division.

[The next section is section 727-25.]

727-25 Effect of this Division on realisations at a loss that occur before the nature or extent of an indirect value shift can be fully determined

(1) To determine whether a scheme gives rise to an indirect value shift, it must be possible to identify all the economic benefits under the scheme, and the providers and recipients of those benefits.

(2) Before then, interests that might be affected by the scheme may be realised at a loss. Subdivision 727-K contains special rules that apply if that happens.

Subdivision 727-A - Scope of the indirect value shifting rules

Table of sections

727-95 Main object

727-100 When an indirect value shift has consequences under this Division

727-105 Ultimate controller test

727-110 Common-ownership nexus test (if both losing and gaining entities are closely held)

727-125 No consequences if losing entity is a superannuation entity

727-95 Main object

The main object of this Division is:

(a) to prevent inappropriate losses from arising on the realisation of direct or indirect equity or loan interests in an entity from which there has been a net shift of value because of a non arm's length dealing; and

(b) to prevent inappropriate gains from arising on the realisation of direct or indirect equity interests in the entity to which that value has been shifted;

in cases where the 2 entities are related as set out in this Division.

727-100 When an indirect value shift has consequences under this Division

An *indirect value shift (see Subdivision 727-B) has consequences under this Division if, and only if:

(a) the *losing entity is at the time of the indirect value shift a company or trust (except one listed in section 727-125 (about superannuation entities)); and

(b) in relation to either or both of the following:

(i) the losing entity *providing one or more economic benefits to the gaining entity *in connection with the *scheme from which the indirect value shift results;

(ii) the gaining entity providing one or more economic benefits to the losing entity in connection with the scheme;

the 2 entities are not dealing with each other at *arm's length; and

(c) either or both of sections 727-105 and 727-110 are satisfied; and

(d) no exclusion in Subdivision 727-C applies.

Note 1: The consequences for direct and indirect interests in the losing entity or in the gaining entity are set out in Subdivision 727-F. If those consequences are to be worked out using the realisation time method (under Subdivision 727-G), there are further exclusions for certain 95% services indirect value shifts: see section 727-700.

Note 2: An indirect value shift does not have consequences for interests in the losing entity or gaining entity owned immediately before the IVS time by an entity that:

· is eligible to be an STS taxpayer for each income year that includes any of the IVS period; or

· would satisfy the maximum net asset value test in section 152-15 throughout the IVS period.

See subsection 727-470(2).

727-105 Ultimate controller test

It must be the case that, at some time during the *IVS period:

(a) the *losing entity and the *gaining entity have the same *ultimate controller; or

(b) the ultimate controller of the losing entity is the same entity that was the ultimate controller of the gaining entity at a different time during that period; or

(c) the gaining entity is the ultimate controller of the losing entity; or

(d) the losing entity is the ultimate controller of the gaining entity.

For the concept of IVS period , see section 727-150.

For the concept of ultimate controller , see section 727-350.

727-110 Common-ownership nexus test (if both losing and gaining entities are closely held)

(1) Or, it must be the case that:

(a) at some time during the *IVS period, neither the *losing entity nor the *gaining entity has 300 or more members (in the case of a company) or 300 or more beneficiaries (in the case of a trust); and

(b) the losing entity and the gaining entity have a *common ownership nexus within the IVS period.

For the concept of IVS period , see section 727-150.

For the concept of common-ownership nexus , see section 727-400.

(2) Section 124-810 (under which certain companies and trusts are not regarded as having 300 or more members or beneficiaries) also applies for the purposes of this Division.

(3) In addition, this Division applies to a *non fixed trust as if it did not have 300 or more beneficiaries.

727-125 No consequences if losing entity is a superannuation entity

An *indirect value shift has no consequences under this Division if the *losing entity is one of these in relation to the income year in which the indirect value shift happens:

(a) a *complying superannuation fund; or

(b) a *non complying superannuation fund; or

(c) a *complying approved deposit fund; or

(d) a *non complying approved deposit fund; or

(e) a *pooled superannuation trust.

Subdivision 727-B - What is an indirect value shift

Table of sections

727-150 How to determine whether a scheme results in an indirect value shift

727-155 Providing economic benefits

727-160 When an economic benefit is provided in connection with a scheme

727-165 Preventing double-counting of economic benefits

727-150 How to determine whether a scheme results in an indirect value shift

(1) A *scheme can result in one or more *indirect value shifts only if one or more economic benefits have been, are being, or are to be, *provided *in connection with the scheme.

(2) The question whether the *scheme has that result must be determined by reference to the facts and circumstances that exist at the earliest time (either when the scheme is entered into or later) when it is reasonable to conclude that:

(a) all the economic benefits that have been, are being, or are to be, *provided *in connection with the scheme can be identified; and

(b) for each of those economic benefits:

(i) the entity that has provided, is providing, or is to provide, the economic benefit can be identified; and

(ii) the entity to which the economic benefit has been, is being, or is to be, provided can be identified; and

(iii) if the economic benefit is to be provided-those entities are in existence, and the providing of the economic benefit is not contingent; and

(c) there are no other economic benefits that are to be provided in connection with the scheme if some contingency is met.

That time is called the IVS time for the scheme.

Note: In most cases, the IVS time will be at or soon after the scheme is entered into. However, if:

· direct or indirect interests in a company or trust are realised at a loss when the IVS time for the scheme has not yet happened (even if it never happens); and

· the company or trust has provided, is providing, is to provide, or might provide, economic benefits in connection with the scheme;

there may be consequences for those interests similar to those of an indirect value shift resulting from the scheme. See Subdivision 727-K.

(3) The *scheme results in an indirect value shift from one entity (the losing entity ) to another entity (the gaining entity ) if the total market value of the one or more economic benefits (the greater benefits ) that the losing entity has *provided, is providing, or is to provide, to the gaining entity *in connection with the scheme exceeds:

(a) the total market value of the one or more economic benefits ( lesser benefits ) that the gaining entity has provided, is providing, or is to provide, to the losing entity in connection with the scheme; or

(b) if there are no economic benefits covered by paragraph (a)-nil.

That excess is the amount of the indirect value shift.

(4) The market value of an economic benefit is to be determined as at the earliest time when it is reasonable to conclude that:

(a) the economic benefit can be identified; and

(b) paragraph (2)(b) is satisfied for that benefit.

For more rules affecting how the market value of an economic benefit is determined, see Subdivision 727-D.

(5) Neither the *losing entity nor the *gaining entity needs to be a party to the *scheme. A benefit can be provided by act or omission.

(6) The indirect value shift happens at the *IVS time.

(7) The IVS period for a *scheme starts immediately before the scheme is entered into and ends at the *IVS time.

(8) A contingency that is artificial, or is virtually certain to be met, is treated under this Division as if it had been met.

727-155 Providing economic benefits

Examples

(1) These are some examples of an entity providing an economic benefit to another entity:

(a) the first entity pays an amount to the other entity (in this case the market value of the benefit is the amount of the payment);

(b) the first entity provides an asset or services to the other entity;

(c) the first entity does something that creates an asset in the hands of the other entity (for example, a company issues shares to its members);

(d) the first entity incurs a liability to the other entity, or increases a liability it already owes to the other entity;

(e) the first entity terminates all or part of a liability owed by the other entity;

(f) the first entity does something that increases the market value of an asset that the other entity holds.

(2) These examples are not intended to limit the meaning of providing an economic benefit.

Things treated as economic benefits

(3) This Division applies as if the ending of:

(a) a *primary equity interest or *secondary equity interest in an entity; or

(b) a right that the owner of a *primary equity interest or *secondary equity interest in an entity has because of owning the interest;

were an economic benefit that the owner of the interest provides to that entity.

727-160 When an economic benefit is provided in connection with a scheme

(1) An economic benefit has been, is being, is to be, or might be, *provided by an entity to another entity in connection with a *scheme if, and only if:

(a) the benefit has been, is being, is to be, or might be, provided under the scheme; or

(b) the providing of the benefit is reasonably attributable to:

(i) something that has been, is being, is to be, or might be, done or omitted under the scheme (whether before, at the time of, or after, the providing of the benefit) by an entity that is either of those entities or a third entity; or

(ii) 2 or more such things.

(2) An entity referred to in paragraph (1)(b) need not be a party to the *scheme. A benefit can be provided by act or omission.

Rights to have economic benefits provided

(1) If an economic benefit that has been, is being, is to be, or might be, *provided as mentioned in subsection 727-150(3) or 727-855(1) consists of a right to have economic benefits provided, that subsection applies to the right but does not also apply to those economic benefits.

Example: Acme Ltd enters into an agreement with Paragon Pty Ltd under which Acme is to provide services to Paragon over a 5 year period in return for payments.

Paragon's rights under the agreement are economic benefits that Acme provides to Paragon when the agreement is made. The services are economic benefits that Acme is to provide to Paragon.

Because of this subsection, the market value of the rights is taken into account in working out whether there has been an indirect value shift, but the market value of the services is not.

Effect of an economic benefit on interests in the entity to which it is provided

(2) If an economic benefit has been, is being, or is to be, *provided to an entity, then, for the purposes of subsection 727-150(3) or 727-855(1), disregard an economic benefit to the extent that:

(a) it consists of an increase in the market value of:

(i) an *equity or loan interest in the entity; or

(ii) an *indirect equity or loan interest in the entity; and

(b) the increase is reasonably attributable to the first mentioned benefit.

Subdivision 727-C - Exclusions

Guide to Subdivision 727-C

727-200 What this Subdivision is about

Some indirect value shifts do not have consequences under this Division.

Note 1: If the consequences of an indirect value shift are to be worked out using the realisation time method (under Subdivision 727-G), there are further exclusions for certain 95% services indirect value shifts: see section 727-700.

Note 2: For cases where there may be both a direct value shift and an indirect value shift, see Subdivision 727-L.

Table of sections

General

727-215 Amount does not exceed $50,000

727-220 Disposal of asset at cost, or at undervalue if full value is not reflected in adjustable values of equity or loan interests in the losing entity

Indirect value shifts involving services

727-230 Services provided by losing entity to gaining entity for at least their direct cost

727-235 Services provided by gaining entity to losing entity for no more than a commercially realistic price

727-240 What services certain provisions apply to

727-245 How to work out certain amounts for the purposes of sections 727-230 and 727-235

Anti-overlap provisions

727-250 Distribution by an entity to a member or beneficiary

Miscellaneous

727-260 Shift down a wholly-owned chain of entities

[This is the end of the Guide.]

General

727-215 Amount does not exceed $50,000

(1) An *indirect value shift does not have consequences under this Division if the amount of it does not exceed $50,000.

(2) However, subsection (1) does not apply to an *indirect value shift (and is taken never to have applied to it) if:

(a) before, at the same time as, or after it, another indirect value shift happens for which the same entity is the losing entity as for the first indirect value shift; and

(b) having regard to all relevant circumstances, it is reasonable to conclude that the sole or main reason why one of the indirect value shifts happened under a different *scheme from the other was so that its amount would not exceed $50,000.

727-220 Disposal of asset at cost, or at undervalue if full value is not reflected in adjustable values of equity or loan interests in the losing entity

(1) An *indirect value shift does not have consequences under this Division if the conditions in this section are met.

(2) The *greater benefits must consist entirely of:

(a) the *losing entity transferring a *CGT asset to the *gaining entity; or

(b) a right to have the losing entity transfer an asset to the gaining entity.

(3) There must be *lesser benefits and, as at the *IVS time, the total market value of the lesser benefits must not be less than the greatest of these amounts:

(a) the asset's *cost base at that time;

(b) the asset's cost;

(c) the asset's market value immediately before the most recent time (if any), since the *losing entity *acquired the asset, when an *affected owner has acquired:

(i) a *primary equity interest in the losing entity; or

(ii) an *indirect primary equity interest in the losing entity.

(4) A *primary equity interest in an entity is an indirect primary equity interest in another entity if, and only if:

(a) the first entity owns a primary equity interest in the other entity; or

(b) the first entity owns a primary equity interest that is an indirect primary equity interest in the other entity because of one or more other applications of this subsection.

[The next section is section 727-230.]

Indirect value shifts involving services

727-230 Services provided by losing entity to gaining entity for at least their direct cost

An *indirect value shift does not have consequences under this Division if:

(a) to the extent of at least 95% of their total market value, the *greater benefits consist entirely of:

(i) a right to have services that are covered by section 727-240 provided directly by the losing entity to the gaining entity; or

(ii) services that are covered by section 727-240 and have been, are being, or are to be, so provided;

or both; and

(b) there are *lesser benefits and, as at the *IVS time, the total market value of the lesser benefits is not less than the total of:

(i) the present value of the direct cost to the losing entity of providing the services; and

(ii) the present value of a reasonable allocation of the total direct cost to the losing entity of providing services that include the first mentioned services (so far as it is not already covered by subparagraph (i)).

To work out the costs and present values referred to in paragraph (b),

see section 727-245.

727-235 Services provided by gaining entity to losing entity for no more than a commercially realistic price

(1) An *indirect value shift does not have consequences under this Division if:

(a) there are *lesser benefits and, to the extent of at least 95% of their total market value, the lesser benefits consist entirely of:

(i) a right to have services that are covered by section 727-240 provided directly by the gaining entity to the losing entity; or

(ii) services that are covered by section 727-240 and have been, are being, or are to be, so provided;

or both; and

(b) as at the *IVS time, the total market value of the greater benefits is not more than the total of:

(i) the present value of the direct cost to the gaining entity of providing the services; and

(ii) the present value of a reasonable allocation of the total direct cost to the gaining entity of providing services that include the first mentioned services (so far as it is not already covered by subparagraph (i)); and

(iii) the present value of a reasonable allocation of the indirect cost to the gaining entity of providing the first mentioned services; and

(iv) the mark up worked out under subsection (2) or (3) of this section.

To work out the costs and present values referred to in paragraph (1)(b),
see section 727-245.

(2) If it is reasonable to estimate that an entity providing the same quantity of services of the same kind in the same market would charge for them on the basis of a particular percentage mark up, or on the basis of a percentage mark up within a particular range, the mark up for the purposes of subparagraph (1)(b)(iv) is:

• the total of the respective present values of the costs mentioned in subparagraphs (1)(b)(i), (ii) and (iii);

multiplied by:

• that percentage mark up, or the highest percentage in that range.

(3) Otherwise, the mark up for the purposes of subparagraph (1)(b)(iv) is 10% of the total of the respective present values of the costs mentioned in subparagraphs (1)(b)(i), (ii) and (iii).

727-240 What services certain provisions apply to

(1) Sections 727-230, 727-235, 727-700 and 727-725 apply only to services consisting of:

(a) doing work (including professional work and giving professional advice or any other kind of advice); or

Note: Examples include accounting or legal services; advertising services and financial management services.

(b) providing (including allowing use of) facilities for entertainment, recreation or instruction; or

(c) leasing, renting, hiring, or allowing the use of, any asset; or

(d) packaging, transporting or storing any property; or

(e) providing insurance; or

(f) services provided, by a banker to a customer, in the course of the banker carrying on the business of banking; or

(g) lending money or providing any other form of financial accommodation.

(2) It does not matter whether services covered by paragraph (1)(a) also involve supplying property.

727-245 How to work out certain amounts for the purposes of sections 727-230 and 727-235

(1) The costs mentioned in paragraph 727-230(b) or 727-235(1)(b) are to be worked out:

(a) in accordance with generally accepted accounting practices; and

(b) to the extent that the services are to be provided in the future, on the basis of a reasonable estimate of those costs.

(2) To avoid doubt, the direct cost or indirect cost mentioned in paragraph 727-230(b) or 727-235(1)(b) does not include:

(a) to the extent that the services consist of or include lending money or providing any other form of financial accommodation-the amount of the loan or other accommodation; or

(b) to the extent that the services consist of or include leasing, renting, hiring, or allowing the use of, any asset:

(i) the cost of acquiring the asset; or

(ii) the cost of acquiring an interest in, or right in respect of, the asset in order to provide the services.

Example: Acme Ltd is the holding company of Group Financier Pty Ltd. Group Financier Pty Ltd borrows $20 million at 7% per annum, and on lends it to other subsidiaries of Acme Ltd at 8% per annum.

The $20 million does not form part of Group Financier Pty Ltd's direct cost of the services it provides to the other subsidiaries in the form of the on lending. However, the 7% interest that Group Financier Pty Ltd pays on the $20 million does form part of that direct cost.

(3) The present values mentioned in paragraph 727-230(b) or 727-235(1)(b) are to be worked out using a discount rate equal to the rate that, for the purposes of section 109N of Income Tax Assessment Act 1936, is the benchmark interest rate for the income year in which the *IVS time occurs.

Note: That section is about distributions to entities connected with a private company.

Anti-overlap provisions

727-250 Distribution by an entity to a member or beneficiary

(1) An *indirect value shift does not have consequences under this Division if:

(a) the *greater benefits consist entirely of:

(i) a distribution of income or capital that the *losing entity makes to the *gaining entity; or

(ii) a right to a distribution of income or capital that the losing entity is to make to the gaining entity;

because the gaining entity holds *primary equity interests in the losing entity; and

(b) either:

(i) an amount covered by one or more of subsections (2), (3) and (4); or

(ii) the total of 2 or more such amounts;

equals or exceeds the amount of the distribution.

Conditions

(2) This subsection covers an amount that the assessable income or exempt income of the gaining entity for any income year includes because of the distribution or right.

(3) This subsection covers an amount by which the *cost base or *reduced cost base (or both) of some or all of the *primary equity interests referred to in subsection (1) changes because of the distribution or right.

(4) This subsection covers an amount that, because of the distribution or right, is taken into account:

(a) under section 116-20 in working out the *capital proceeds of a *CGT event that happens during any income year to some or all of the *primary equity interests referred to in subsection (1); or

(b) in working out a *capital gain that an entity makes from CGT event E4 or G1 happening during any income year to some or all of those primary equity interests; or

(c) in working out whether a loss or gain is *realised for income tax purposes by a *realisation event that happens to some or all of those primary equity interests (in their character as *trading stock or *revenue assets).

Application of section to deemed dividend

(5) If a *corporate tax entity makes a *distribution that is not otherwise a distribution of income or capital, this section applies as if the distribution were a distribution of income or capital the entity made.

Note: Subsection (5) extends this section to cover something that is taken to be a dividend paid by a company. Compare item 1 of the table in subsection 960-120(1).

[The next section is section 727-260.]

Miscellaneous

727-260 Shift down a wholly-owned chain of entities

(1) An *indirect value shift does not have consequences under this Division if the *gaining entity is a *wholly owned subsidiary of the *losing entity throughout the *IVS period.

Exception: impact on market value of primary loan interest

(2) However, subsection (1) does not apply if the *indirect value shift has produced a *disaggregated attributable decrease, in the market value of an *affected interest in the *losing entity that is also a *primary loan interest in an entity covered by subsection (3), for the owner of the interest.

(3) This subsection covers:

(a) the *losing entity; and

(b) an entity that owns *primary equity interests in an entity that this subsection covers because of one or more previous applications of it.

Subdivision 727-D - Working out the market value of economic benefits

Table of sections

727-300 What the rules in this Subdivision are for

727-315 Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000

727-300 What the rules in this Subdivision are for

This Subdivision is used in determining whether there has been an *indirect value shift and, if so:

(a) whether it has consequences under this Division; and

(b) if it does, the amount of it.

[The next section is section 727-315.]

727-315 Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000

(1) This Division applies to an economic benefit consisting of:

(a) an entity transferring to another entity a *depreciating asset (except a building or structure) for which the transferring entity has deducted or can deduct an amount under Division 40; or

(b) a right to have an entity transfer such a depreciating asset to another entity;

as if the economic benefit's market value were equal to the greater (the residual value ) of:

(c) the asset's *adjustable value at the time when the economic benefit was or is *provided; and

(d) the value assigned to the asset at that time in the transferring entity's books;

but only if:

(e) as at that time, the *cost of the unit to the transferring entity is less than $1,500,000; and

(f) it is reasonable for the transferring entity to conclude that the unit's actual market value at that time was, is, or will be, not less than 80%, and not more than 120%, of the residual value; and

(g) both the transferring entity and the other entity choose to have the market value of that economic benefit treated as being equal to the residual value.

(2) If:

(a) each of 2 or more economic benefits of the kind mentioned in subsection (1) has been, is being, is to be, or might be, provided by the same transferring entity, to the same other entity, *in connection with the same *scheme; and

(b) it is reasonable for the transferring entity to conclude that the total of the *depreciating assets' actual market values at the respective times when the economic benefits were or are *provided was, is, or will be, not less than 80%, and not more than 120%, of the total of their respective residual values under subsection (1);

paragraph (1)(f) is taken to be satisfied for each of the economic benefits.

Subdivision 727-E - Key concepts

Table of sections

Ultimate controller

727-350 Ultimate controller

727-355 Control (for value shifting purposes) of a company

727-360 Control (for value shifting purposes) of a fixed trust

727-365 Control (for value shifting purposes) of a non-fixed trust

727-370 Preventing double counting for percentage stake tests

727-375 Tests in this Subdivision are exhaustive

Common-ownership nexus and ultimate stake of a particular percentage

727-400 When 2 entities have a common-ownership nexus within a period

727-405 Ultimate stake of a particular percentage in a company

727-410 Ultimate stake of a particular percentage in a fixed trust

727-415 Rules for tracing

Ultimate controller

727-350 Ultimate controller

An entity is an ultimate controller of another entity if, and only if:

(a) the first entity *controls (for value shifting purposes) the other entity; and

(b) there is no entity that controls (for value shifting purposes) both the first entity and the other entity.

727-355 Control (for value shifting purposes) of a company

50% stake test

(1) An entity controls ( for value shifting purposes ) a company if the entity, or the entity and its *associates between them:

(a) can exercise, or can control the exercise of, at least 50% of the voting power in the company (either directly, or indirectly through one or more interposed entities); or

(b) have the right to receive (either directly, or indirectly through one or more interposed entities) at least 50% of any dividends that the company may pay; or

(c) have the right to receive for (either directly, or indirectly through one or more interposed entities) at least 50% of any distribution of capital of the company.

40% stake test

(2) An entity also controls ( for value shifting purposes ) a company if the entity, or the entity and its *associates between them:

(a) can exercise, or can control the exercise of, at least 40% of the voting power in the company (either directly, or indirectly through one or more interposed entities); or

(b) have the right to receive (either directly, or indirectly through one or more interposed entities) at least 40% of any dividends that the company may pay; or

(c) have the right to receive (either directly, or indirectly through one or more interposed entities) at least 40% of any distribution of capital of the company;

unless an entity (other than the first entity and its associates) either alone or together with its associates in fact controls the company.

Actual control test

(3) An entity also controls ( for value shifting purposes ) a company if the entity, either alone or together with its *associates, in fact controls the company.

727-360 Control (for value shifting purposes) of a fixed trust

40% stake test

(1) An entity controls ( for value shifting purposes ) a *fixed trust if the entity, or the entity and its *associates between them, have the right to receive (either directly, or indirectly through one or more interposed entities) at least 40% of any distribution of trust income, or trust capital, to beneficiaries of the trust.

Other tests

(2) An entity also controls ( for value shifting purposes ) a *fixed trust if:

(a) the entity, or an *associate of the entity, whether alone or with other associates (the relevant entity ), has the power to obtain the beneficial enjoyment of the trust's capital or income (whether or not by exercising its power of appointment or revocation, and whether with or without another entity's consent); or

(b) the relevant entity is able to control the application of the trust's capital or income in any manner (whether directly or indirectly); or

(c) the relevant entity is able to do a thing mentioned in paragraph (a) or (b) under a *scheme; or

(d) a trustee of the trust is accustomed or is under an obligation (whether formally or informally), or might reasonably be expected, to act in accordance with the relevant entity's directions, instructions or wishes; or

(e) the relevant entity is able to remove or appoint a trustee of the trust.

727-365 Control (for value shifting purposes) of a non-fixed trust

Trustee tests

(1) An entity controls ( for value shifting purposes ) a *non fixed trust if:

(a) the entity or an *associate of the entity is a trustee of the trust; or

(b) the entity, or the entity and its *associates between them, can remove or appoint the trustee, or one or more of the trustees, of the trust; or

(c) a trustee of the trust is accustomed to act, is under an obligation (whether formally or informally) to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of:

(i) the entity or an *associate of the entity; or

(ii) 2 or more entities, at least one of which is the entity or an associate of the entity.

Tests based on control of the trust income or capital

(2) An entity also controls ( for value shifting purposes ) a *non fixed trust if the entity, or the entity and its *associates between them:

(a) have the power to obtain the beneficial enjoyment of trust income or capital; or

(b) can control in any way at all, whether directly or indirectly, the application of trust income or capital; or

(c) can, under a *scheme, gain the enjoyment or control referred to in paragraph (a) or (b).

(3) An entity also controls ( for value shifting purposes ) a *non fixed trust if:

(a) the entity, or any of its *associates, can benefit under the trust otherwise than because of a *fixed entitlement to a share of the income or capital of the trust; or

(b) if the entity, or the entity and its *associates between them, have the right to receive (either directly, or indirectly through one or more interposed entities) at least 40% of any distribution of trust income, or trust capital.

727-370 Preventing double counting for percentage stake tests

If an interest giving an entity, or an entity and its *associates:

(a) the ability to exercise, or control the exercise of, any of the voting power in a company; or

(b) the right to receive dividends that a company may pay; or

(c) the right to receive a distribution of capital of a company; or

(d) the right to receive a distribution of trust income or trust capital;

is both direct and indirect, and (apart from this section) would be counted more than once in applying subsection 727-355(1) or (2) or section 727-360, only the direct interest is to be counted.

727-375 Tests in this Subdivision are exhaustive

An entity does not control ( for value shifting purposes ) a company or trust except as provided in this Subdivision.

Common-ownership nexus and ultimate stake of a particular percentage

727-400 When 2 entities have a common-ownership nexus within a period

(1) 2 entities have a common-ownership nexus within a period if, and only if, they satisfy the test in any of the one or more items in the table applicable to them.

Common-ownership nexus within a period

Item

If the entities are:

This is the test:

1

both companies

There must be 2 or more*ultimate owners who:

(a) at some time during that period, because of the same test in section 727-405, have*ultimate stakes, of percentages totalling at least 80%, in one of the companies; and

(b) at that or a different time during that period, because of that same test, have* ultimate stakes, of percentages totalling at least 80%, in the other company

Also, subsection (2) of this section must be satisfied

2

both*fixed trusts

There must be 2 or more*ultimate owners who:

(a) at some time during that period, because of the same test in section 727-410, have*ultimate stakes, of percentages totalling at least 80%, in one of the trusts; and

(b) at that or a different time during that period, because of that same test, have* ultimate stakes, of percentages totalling at least 80%, in the other trust

Also, subsection (2) of this section must be satisfied

3

a company and a*fixed trust

There must be 2 or more*ultimate owners who:

(a) at some time during that period, because of the same test in section 727-405, have*ultimate stakes, of percentages totalling at least 80%, in the company; and

(b) at that or a different time during that period, because of the same test in section 727-410, have* ultimate stakes, of percentages totalling at least 80%, in the trust

Also, subsection (2) of this section must be satisfied

4

a company and a*non-fixed trust

There must be 2 or more*ultimate owners:

(a) each of whom*controls (for value shifting purposes) the non-fixed trust because of section 727-365 at the same time during that period; and

(b) who, at that or a different time during that period, have*ultimate stakes, of percentages totalling at least 80%, in the company because of the same test in section 727-405

5

a*fixed trust and a*non-fixed trust

There must be 2 or more*ultimate owners:

(a) each of whom*controls (for value shifting purposes) the non-fixed trust because of section 727-365 at the same time during that period; and

(b) who, at that or a different time during that period, have*ultimate stakes, of percentages totalling at least 80%, in the fixed trust because of the same test in section 727-410

Additional condition about profile of percentage ultimate stakes held by 2 or more ultimate owners

(2) In order to satisfy the test in item 1, 2 or 3 in the table in subsection (1), at least one of subsections (3), (4) and (5) must be satisfied.

(3) For at least one of the *ultimate owners referred to in that item, the percentage of the *ultimate stake that owner has as mentioned in paragraph (a) in the last column of that item must be at least 40%, and so must the percentage of the ultimate stake that owner has as mentioned in paragraph (b) in the last column of that item.

(4) Alternatively, for each of those *ultimate owners, the percentage of the *ultimate stake that owner has as mentioned in that paragraph (a) must be the same as the percentage of the ultimate stake that owner has as mentioned in that paragraph (b).

(5) Alternatively, the number of those *ultimate owners must not exceed 16.

727-405 Ultimate stake of a particular percentage in a company

(1) This section sets out 3 tests of whether an entity has an ultimate stake of a particular percentage (the test percentage ) in a company.

Note: In applying the tests, follow the rules in section 727-415.

Voting power

(2) The first test is that, after tracing, to the *ultimate owners who ultimately hold it, the direct and indirect ownership of all *shares in the company that carry the right to exercise voting power in the company, that ownership is held by the entity to the extent of the test percentage of that voting power.

Dividends

(3) The second test is that, after tracing, to the *ultimate owners who ultimately hold it, the direct and indirect ownership of all *shares in the company that carry the right to receive any dividends that the company may pay, that ownership is held by the entity to the extent of the test percentage of those dividends.

Capital distributions

(4) The third test is that, after tracing, to the *ultimate owners who ultimately hold it, the direct and indirect ownership of all *shares in the company that carry the right to receive any distribution of capital of the company, that ownership is held by the entity to the extent of the test percentage of the distribution.

Certain shares ignored

(5) In tracing the ownership of *shares in a company, ignore *shares whose *dividends can reasonably be regarded as being equivalent to the payment of interest on a loan having regard to:

(a) how the dividends are calculated; and

(b) the conditions applying to the payment of the dividends; and

(c) any other relevant matters.

727-410 Ultimate stake of a particular percentage in a fixed trust

(1) This section sets out 2 tests of whether an entity has an ultimate stake of a particular percentage (the test percentage ) in a *fixed trust.

Note: In applying the tests, follow the rules in section 727-415.

Income distributions

(2) The first test is that, after tracing, to the *ultimate owners who ultimately hold them, the direct and indirect rights to receive distributions of trust income, those rights are held by the entity to the extent of the test percentage of each such distribution.

Capital distributions

(3) The second test is that, after tracing, to the *ultimate owners who ultimately hold them, the direct and indirect rights to receive distributions of trust capital, those rights are held by the entity to the extent of the test percentage of each such distribution.

727-415 Rules for tracing

(1) In applying sections 727-400, 727-405 and 727-410, follow the rules in this section.

Interposed entities

(2) Tracing is to be done through any interposed entities.

Ownership or rights held jointly

(3) If some of the ownership or rights of a particular kind in relation to a company or trust are held by 2 or more entities jointly or in common, each of the entities is treated as holding a proportion of the ownership or rights so held. The proportion is to be worked out on a reasonable basis, so that the total of the proportions equals the total of the ownership or rights so held.

Ownership or rights held by associate

(4) If, at a particular time:

(a) an *ultimate owner is an *associate of another ultimate owner; and

(b) the associate ultimately holds some of the ownership or rights of a particular kind in relation to a company or trust;

then, in determining whether the other ultimate owner is one of 2 or more ultimate owners because of whom the conditions in an item in the table in section 727-400 are satisfied, the ownership or rights of that kind in relation to the company or trust held by the associate at that time:

(c) to the extent of a particular percentage, may be treated as being instead held by the other ultimate owner; and

(d) to the extent so treated, cannot be treated as being instead held by any other ultimate owner of whom the first ultimate owner is an associate.

(5) If one or more applications of subsection (4) are necessary to establish that an *ultimate owner is one of 2 or more ultimate owners because of whom the conditions in an item in the table in section 727-400 are satisfied, that subsection must be applied accordingly.

Subdivision 727-F - Consequences of an indirect value shift

Guide to Subdivision 727-F

727-450 What this Subdivision is about

This Subdivision tells you:

• which method to use to work out the consequences of an indirect value shift for equity or loan interests, and indirect equity or loan interests, in the losing entity and in the gaining entity; and

• which interests, and which owners, are affected.

Table of sections

Operative provisions

727-455 Consequences of the indirect value shift

Affected interests

727-460 Affected interests in the losing entity

727-465 Affected interests in the gaining entity

727-470 Exceptions

727-520 Equity or loan interest and related terms

727-525 Indirect equity or loan interest

Affected owners

727-530 Who are the affected owners

Choices about method to be used

727-550 Choosing the adjustable value method

727-555 Giving other affected owners information about the choice

[This is the end of the Guide.]

Operative provisions

727-455 Consequences of the indirect value shift

The consequences (if any) of an *indirect value shift must be worked out using the *realisation time method unless the *adjustable value method is chosen in accordance with section 727-550.

Note: Later provisions of this Subdivision set out the interests to which those consequences apply (see sections 727-460 to 727-525), which are in turn determined by who are the affected owners (see section 727-530).

Affected interests

727-460 Affected interests in the losing entity

These are the affected interests in the*losing entity:

(a) each *equity or loan interest that an *affected owner owns in the losing entity immediately before the *IVS time; and

(b) each equity or loan interest that:

(i) an affected owner owns in another affected owner immediately before the IVS time; and

(ii) is an *indirect equity or loan interest in the losing entity;

(except one covered by an exception in section 727-470).

727-465 Affected interests in the gaining entity

If immediately before the *IVS time the *gaining entity is a company or trust (except one listed in section 727-125 (about superannuation entities)), these are the affected interests in the gaining entity:

(a) each *equity or loan interest that an *affected owner owns in the gaining entity immediately before the *IVS time; and

(b) each equity or loan interest that:

(i) an affected owner owns in another affected owner immediately before the IVS time; and

(ii) is an *indirect equity or loan interest in the gaining entity.

(except one covered by an exception in section 727-470).

727-470 Exceptions

Mere active participants

(1) An *equity or loan interest that an *active participant in the *scheme owns in another active participant immediately before the *IVS time is not an *affected interest in the *losing entity or in the *gaining entity unless one of the active participants is also covered by 1, 2, 3 or 4 in the table in subsection 727-530(1) (about who is an affected owner).

Entity that is eligible to be an STS taxpayer, or satisfies the maximum net asset value test for small business relief

(2) An *equity or loan interest that an entity (the owner ) owns immediately before the *IVS time is not an *affected interest in the *losing entity or in the *gaining entity if the owner:

(a) is eligible to be an *STS taxpayer for each income year that includes any of the *IVS period; or

(b) would satisfy the maximum net asset value test in section 152-15 throughout the *IVS period.

(3) If the owner is not in existence for part of the *IVS period, disregard that part in applying subsection (2).

Interests in superannuation entities not covered

(4) An *equity or loan interest in an *affected owner is not an *affected interest in the *losing entity or in the *gaining entity if the affected owner is an entity listed in section 727-125 (about superannuation entities) in relation to the income year in which the *IVS time happens.

[The next section is section 727-520.]

727-520 Equity or loan interest and related terms

(1) An equity or loan interest in an entity is a *primary interest, or a *secondary interest, in the entity.

(2) A primary interest in an entity is a *primary equity interest, or a *primary loan interest, in the entity.

(3) The meaning of primary equity interest in an entity is set out in the table.

Primary equity interests

Item

In the case of this kind of entity:

Primary equity interest means:

1

a company

a*share in the company; or

an interest as joint owner (including as tenant in common) of a*share in the company

2

a trust

any of these:

(a) an interest in the trust income or trust capital; or

(b) any other interest in the trust; or

(c) an interest as joint owner (including as tenant in common) of an interest covered by paragraph (a) or (b)

(4) A primary loan interest in an entity is:

(a) a *loan to the entity; or

(b) an interest as joint owner (including as tenant in common) of a loan to the entity.

(5) A secondary interest in an entity is a *secondary equity interest, or a *secondary loan interest, in the entity.

(6) A secondary equity interest in an entity is a right or option:

(a) to *acquire an existing *primary equity interest in the entity; or

(b) to have the entity issue a new primary equity interest.

(7) A secondary loan interest in an entity is a right or option:

(a) to *acquire an existing *primary loan interest in the entity; or

(b) to have the entity issue a new primary loan interest.

727-525 Indirect equity or loan interest

An *equity or loan interest in an entity is an indirect equity or loan interest in another entity if, and only if:

(a) the first entity owns an equity or loan interest in the other entity; or

(b) the first entity owns an equity or loan interest that is an indirect equity or loan interest in the other entity because of one or more other applications of this section.

[The next section is section 727-530.]

Affected owners

727-530 Who are the affected owners

(1) The table sets out the affected owners for the *indirect value shift.

Affected owners

Item

In this case:

The affected owners include:

1

At least one condition in section 727-105 (ultimate controller test) is satisfied

each*ultimate controller because of which a condition in that section is satisfied; and

each entity that, at a time during the*IVS period when such an ultimate controller*controlled (for value shifting purposes) thelosing entity, was an*intermediate controller of thelosing entity; and

each entity that, at a time during the IVS period when such an ultimate controller controlled (for value shifting purposes) thegaining entity, was an intermediate controller of thegaining entity

2

The conditions in section 727-110 (common-ownership nexus test) are satisfied in respect of:

(a) one or more times; or

(b) one or more sets of 2 times

each*ultimate owner who is one of 2 or more ultimate owners because of whom the condition in the applicable item of that table is satisfied in respect of any of those times; and

each entity through which ownership or rights are traced to such an ultimate owner in applying the applicable item of that table in respect of any of those times

3

Any case

the*losing entity and the*gaining entity

4

Any case

each entity that, at any time after the*scheme was entered into, is an*associate of an entity that is an affected owner because of item 1, 2 or 3 of this table

5

Any case

each*active participant in the*scheme

(2) An entity is an intermediate controller of another entity if, and only if:

(a) the first entity *controls (for value shifting purposes) the other entity; and

(b) the first entity is *controlled (for value shifting purposes) by an *ultimate controller of the other entity.

Active participants (if both losing and gaining entities are closely held)

(3) An entity (the first entity ) is an active participant in the *scheme if:

(a) at some time during the *IVS period, neither the losing entity nor the gaining entity has 300 or more members (in the case of a company) or 300 or more beneficiaries (in the case of a trust); and

(b) the first entity:

(i) actively participated in, or directly facilitated, the entering into of the *scheme; or

(ii) at some time during the *IVS period actively participated in, or directly facilitated, the carrying out of the scheme;

(whether or not it did so at the direction of some other entity); and

(c) at some time during the *IVS period, the first entity owned:

(i) an *equity or loan interest in the losing entity or in the gaining entity; or

(ii) an *indirect equity or loan interest in the losing entity or in the gaining entity; and

(d) the first entity is neither the losing entity nor the gaining entity.

Note: Subsections 727-110(2) and (3) contain rules about when an entity is treated as having or not having 300 or more members or beneficiaries.

Choices about method to be used

727-550 Choosing the adjustable value method

(1) This section sets out rules for:

(a) choosing to use the *adjustable value method to work out the consequences of an *indirect value shift; or

(b) choosing (when using the adjustable value method) not to work out on a *loss focussed basis the reductions in the *adjustable values of *affected interests.

Who makes the choice

(2) The choice must be made in accordance with the table.

Who makes the choice

Item

In this case:

The choice must be made by:

1

If the conditions in section 727-110 (common-ownership nexus test) are satisfied

jointly by the*ultimate owners because of whom the condition in the applicable item of the table in section 727-400 is satisfied

2

Item 1 does not apply, and there is an entity:

(a) who is the sole*ultimate controller because of whom the conditions in section 727-105 (ultimate controller test) are satisfied; or

(b) who would be that sole ultimate controller if sections 727-355 to 727-375 were applied ignoring that entity's*associates

that entity

3

Neither of items 1 and 2 applies

jointly by the 2 or more*ultimate controllers because of whom the conditions in section 727-105 (ultimate controller test) are satisfied

When choice must be made

(3) The choice must be made within 2 years after the first *realisation event that happens to an *affected interest at or after the IVS time.

Choice binds all affected owners

(4) The choice binds all *affected owners for the *indirect value shift.

727-555 Giving other affected owners information about the choice

(1) An entity that makes a choice under section 727-550 (including a choice made jointly with one or more other entities) must inform all entities that it knows to be *affected owners for the *indirect value shift about the content of the choice. The entity must do so in writing within one month after making the choice.

Penalty: 30 penalty units.

(2) If:

(a) a choice under section 727-550 is made jointly by 2 or more entities; and

(b) one of the entities complies with subsection (1);

no other entity need comply with that subsection in relation to that choice.

(3) If an *affected owner for an *indirect value shift has reason to believe that an entity may have made a choice under section 727-550 (including a choice made jointly with one or more other entities), the affected owner may give the entity a written notice asking whether the entity has made such a choice.

(4) Within one month after receiving a notice under subsection (3), an entity must inform the *affected owner in writing whether the entity has made a choice under section 727-550 and, if so, about the content of the choice.

Penalty: 30 penalty units.

(5) The Commissioner may extend the period for complying with a provision of this section.

Subdivision 727-G - The realisation time method

727-600 What this Subdivision is about

Under the realisation time method:

• losses on realisation of affected interests in the losing entity are reduced; and

• gains on realisation of affected interests in the gaining entity are reduced, within limits worked out by reference to the reductions in losses on affected interests in the losing entity; and

• certain 95% services indirect value shifts are disregarded.

This Subdivision also explains how its reduction of a loss or gain affects CGT assets, trading stock and revenue assets.

Table of sections

Operative provisions

Table of sections

725-240 CGT consequences; meaning of adjustable value

727-610 Consequences of indirect value shift

727-615 Reduction of loss on realisation event for affected interest in losing entity

727-620 Reduction of gain on realisation event for affected interest in gaining entity

727-625 Total gain reductions not to exceed total loss reductions

727-630 How cap in section 727-625 applies if affected interest is also trading stock or a revenue asset

727-635 Splitting an equity or loan interest

727-640 Merging equity or loan interests

727-645 Effect of CGT roll over

Further exclusion for certain 95% services indirect value shifts if realisation time method must be used

727-700 When 95% services indirect value shift is excluded

95% services indirect value shifts that are not excluded

727-705 Another provision of the income tax law affects amount related to services by at least $100,000

727-710 Ongoing or recent service arrangement reduces value of losing entity by at least $100,000

727-715 Service arrangements reduce value of losing entity that is a group service provider by at least $500,000

727-720 Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000

727-725 Meaning of predominantly-services indirect value shift

[This is the end of the Guide.]

Operative provisions

727-610 Consequences of indirect value shift

(1) This Subdivision sets out the realisation time method of working out the consequences (if any) of an *indirect value shift.

(2) If those consequences are to be worked out using that method, this Subdivision applies to each *realisation event:

(a) by which a loss would, apart from this Division, be *realised for income tax purposes; and

(b) that happens to an *affected interest in the *losing entity; and

(c) that is the first realisation event that happens to that interest at or after the *IVS time; and

(d) that happens:

(i) if the amount of the indirect value shift is $500,000 or more-at any time after the IVS time; or

(ii) otherwise-within 4 years after the IVS time.

(3) If:

(a) those consequences are to be worked out using that method; and

(b) the *gaining entity is a company or trust (except one listed in section 727-125 (about superannuation entities)) immediately before the *IVS time;

this Subdivision applies to each *realisation event:

(c) by which a gain would, apart from this Division, be *realised for income tax purposes; and

(d) that happens to an *affected interest in the *gaining entity; and

(e) that is the first realisation event that happens to that interest at or after the IVS time.

(4) The consequences for the *affected interest depend on its character. There are consequences for the interest in its character as a *CGT asset. However, if the interest is also *trading stock or a *revenue asset, there are additional consequences for it in that character.

(5) In working out the consequences for an *affected interest in the *losing entity or *gaining entity, in the interest's character as *trading stock, a *realisation event is disregarded for the purposes of identifying under paragraph (2)(c) or (3)(e) the first realisation event that happens to that interest at or after the *IVS time, if:

(a) the realisation event consists of the ending of an income year; and

(b) the *value of the interest as trading stock on hand of an entity at the end of the income year is the interest's *cost; and

(c) the interest became part of the entity's trading stock on hand during that income year, or the value of the interest as trading stock of the entity on hand at the start of the income year was also the interest's cost.

727-615 Reduction of loss on realisation event for affected interest in losing entity

If this Subdivision applies to a *realisation event that happens to an *affected interest in the *losing entity, a loss that would, apart from this Division, be *realised for income tax purposes by the event is reduced by an amount that is reasonable having regard to:

(a) a reasonable estimate of the amount (if any) by which the *indirect value shift has reduced the interest's market value; and

(b) if the interest is also an affected interest in the *gaining entity-a reasonable estimate of the extent (if any) to which the interest's market value at the time of the realisation event still reflects the effect of the indirect value shift on the market value of *equity or loan interests in the gaining entity.

727-620 Reduction of gain on realisation event for affected interest in gaining entity

If this Subdivision applies to a *realisation event that happens to an *affected interest in the *gaining entity, a gain that would, apart from this Division, be *realised for income tax purposes by the event is reduced by an amount that is reasonable having regard to:

(a) a reasonable estimate of the amount (if any) by which the *indirect value shift has increased the interest's market value; and

(b) a reasonable estimate of the extent (if any) to which the interest's market value at the time of the realisation event still reflects the effect of the indirect value shift on the market value of *equity or loan interests in the gaining entity.

727-625 Total gain reductions not to exceed total loss reductions

(1) This section ensures that the total ( total gain reductions ) of the amounts by which section 727-620 reduces gains *realised for income tax purposes by *realisation events happening at the same time does not exceed the total ( total loss reductions ) of:

(a) the amounts by which section 727-615 reduces losses that:

(i) would, apart from this Division, be *realised for income tax purposes by *realisation events happening before or at that time; and

(ii) have not already been taken into account in a previous application of this section; and

(b) the amounts by which section 727-850 (as applying to the *scheme from which the *indirect value shift results) reduces losses that:

(i) would, apart from this Division, be realised for income tax purposes by realisation events happening before the *IVS time to *equity or loan interests, or *indirect equity or loan interests, in the *losing entity; and

(ii) have not already been taken into account in a previous application of this section.

(2) If, apart from this section, the total gain reductions would exceed the total loss reductions, the amount by which section 727-620 reduces each of the gains is itself reduced by the amount worked out using this formula:

(((Total gain reductions) - (Total loss reductions)) / (Number of interests))

(3) For the purposes of the formula:

number of interests means the number of *affected interests in the *gaining entity to which *realisation events happened at that time.

727-630 How cap in section 727-625 applies if affected interest is also trading stock or a revenue asset

(1) This section affects how to work out the total gain reductions and the total loss reductions for the purposes of section 727-625 if:

(a) a *realisation event covered by that section happens to an *equity or loan interest, or to an *indirect equity or loan interest, in the *losing entity or in the *gaining entity; and

(b) the interest is also *trading stock or a *revenue asset at the time of the event.

Trading stock

(2) In the case of an *equity or loan interest, or an *indirect equity or loan interest, in the *losing entity that is *trading stock at that time:

(a) the amount (if any) by which section 727-615 or 727-850 reduces a loss worked out under section 977-25 or 977-30 (about realisation events for trading stock) that would, apart from this Division, be *realised for income tax purposes by the event is taken into account; and

(b) the amount (if any) by which section 727-615 or 727-850 reduces a loss worked out under section 977-10 (about realisation events for CGT assets) that would, apart from this Division, be *realised for income tax purposes by the event is not taken into account;

in working out the total loss reductions.

(3) In the case of an *affected interest in the *gaining entity that is *trading stock at that time:

(a) the amount (if any) by which section 727-620 reduces a gain worked out under section 977-35 or 977-40 (about realisation events for trading stock) that would, apart from this Division, be *realised for income tax purposes by the event is taken into account; and

(b) the amount (if any) by which section 727-620 reduces a gain worked out under section 977-15 (about realisation events for CGT assets) that would, apart from this Division, be *realised for income tax purposes by the event is not taken into account;

in working out the total gain reductions.

Revenue asset

(4) In the case of an *equity or loan interest, or an *indirect equity or loan interest, in the *losing entity that is a *revenue asset at that time, the greater of the following is taken into account in working out the total loss reductions:

(a) the amount (if any) by which section 727-615 or 727-850 reduces a loss worked out under section 977-55 (about realisation events for revenue assets) that would, apart from this Division, be *realised for income tax purposes by the event;

(b) the amount (if any) by which section 727-615 or 727-850 reduces a loss worked out under section 977-10 (about realisation events for CGT assets) that would, apart from this Division, be *realised for income tax purposes by the event.

(5) In the case of an *affected interest in the *gaining entity that is a *revenue asset at that time, the greater of the following amounts is taken into account in working out the total gain reductions:

(a) the amount (if any) by which section 727-620 reduces a gain worked out under section 977-55 (about realisation events for revenue assets) that would, apart from this Division, be *realised for income tax purposes by the event;

(b) the amount (if any) by which section 727-620 reduces a gain worked out under section 977-15 (about realisation events for CGT assets) that would, apart from this Division, be *realised for income tax purposes by the event.

727-635 Splitting an equity or loan interest

If an *equity or loan interest in the *losing entity or in the *gaining entity is split into 2 or more equity or loan interests at or after the *IVS time:

(a) each of the 2 or more interests inherits whatever characteristics would have been relevant to applying this Subdivision to the first interest if the split had not happened; and

(b) those characteristics include characteristics the first interest has inherited because of any other application or applications of this section or section 727-640; and

(c) if a characteristic of the first interest involves an amount or quantity, the amount or quantity for that characteristic as inherited by each of the 2 or more interests is a reasonable proportion of the amount or quantity for that characteristic of the first interest.

727-640 Merging equity or loan interests

If 2 or more *equity or loan interests (the original interests ) in the *losing entity or in the *gaining entity are merged into 1 or more *equity or loan interests (the new interests ) at or after the *IVS time:

(a) each of the new interests inherits whatever characteristics would have been relevant to applying this Subdivision to the original interests if the merging had not happened; and

(b) those characteristics include characteristics inherited by any of the original interests because of any other application or applications of this section or section 727-635; and

(c) if a characteristic of any of the original interests involves an amount or quantity, the amount or quantity for that characteristic as inherited by any of the new interests is a reasonable proportion of the amount or quantity for that characteristic of the original interest.

727-645 Effect of CGT roll-over

(1) If:

(a) this Subdivision applies to a *realisation event that is a *CGT event that happens to an *affected interest in the *losing entity; and

(b) section 727-615 reduces a loss that would, apart from this Division, be *realised for income tax purposes by the CGT event; and

(c) there is a roll over for the CGT event;

the interest's *reduced cost base at the time of the CGT event is taken to have been reduced by the amount by which section 727-615 reduces that loss, but is so taken only for the purposes of working out:

(d) the interest's reduced cost base, from time to time after the roll over, for the entity that *acquired the interest because of the CGT event; and

(e) in the case of a *replacement asset roll over-the reduced cost base of the replacement CGT asset, from time to time after the roll over, for the entity that *disposed of the interest.

Note: Because of the roll over, the loss reduction under section 727-615 will have no tax effect. This subsection ensures that the loss reduction is passed on, through the reduction in reduced cost base, to prevent or reduce a loss arising on a later CGT event.

(2) If:

(a) this Subdivision applies to a *realisation event that is a *CGT event that happens to an *affected interest in the *gaining entity; and

(b) section 727-620 reduces a gain that would, apart from this Division, be *realised for income tax purposes by the CGT event; and

(c) there is a roll over for the CGT event;

the interest's *cost base at the time of the CGT event is taken to have been uplifted by the amount by which section 727-620 reduces that gain, but is so taken only for the purposes of working out:

(d) the interest's cost base, from time to time after the roll over, for the entity that *acquired the interest because of the CGT event; and

(e) in the case of a *replacement asset roll over-the cost base of the replacement CGT asset, from time to time after the roll over, for the entity that *disposed of the interest.

Note: Because of the roll over, the gain reduction under section 727-620 will have no tax effect. This subsection ensures that the gain reduction is passed on, through the uplift in cost base, to prevent or reduce a gain arising on a later CGT event.

[The next section is section 727-700.]

Further exclusion for certain 95% services indirect value shifts if realisation time method must be used

727-700 When 95% services indirect value shift is excluded

(1) If the *indirect value shift is a *95% services indirect value shift, this Subdivision does not apply to a *realisation event that:

(a) happens to an *affected interest in the *losing entity that is owned by an entity (the owner ); and

(b) is covered by subsection 727-610(2);

unless:

(c) the conditions in section 727-705 are met for the indirect value shift; or

(d) the conditions in section 727-710, 727-715 or 727-720 are met for the indirect value shift and for that realisation event.

(2) An *indirect value shift is a 95 % services indirect value shift if, and only if, to the extent of at least 95% of their total market value, the *greater benefits consist entirely of:

(a) a right to have services that are covered by section 727-240 provided directly by the *losing entity to the *gaining entity; or

(b) services that are covered by section 727-240 and have been, are being, or are to be, so provided;

or both.

(3) This section does not limit any other exclusion in this Subdivision or in Subdivision 727-C.

95% services indirect value shifts that are not excluded

727-705 Another provision of the income tax law affects amount related to services by at least $100,000

The conditions in this section are met if:

(a) the *losing entity or the *gaining entity lodges an *income tax return for an income year during some or all of which the owner owned the interest; and

(b) a provision of this Act:

(i) reduces or excludes an amount that is included in the return; or

(ii) increases an amount that is so included; or

(iii) includes an amount not included in the return;

for the purposes of working out the taxable income, a *tax loss, or a *net capital loss, of that entity for that income year; and

(c) the amount is related to the right mentioned in paragraph 727-700(2)(a), or to some or all of the services mentioned in paragraph 727-700(2)(a) or (b), from the point of view of the losing entity providing the services or of the gaining entity receiving them; and

(d) if the amount is so reduced or increased-the reduction or increase is at least $100,000; and

(e) if the amount is so excluded or included-the amount is at least $100,000; and

(f) at some time after the return is lodged, the entity that lodged it is aware, or ought reasonably to be aware, of the reduction, exclusion, increase or inclusion.

Example: If the Commissioner has notified an entity affected by a determination under Part IVA of the Income Tax Assessment Act 1936, the entity ought reasonably to be aware of the effect of the determination.

727-710 Ongoing or recent service arrangement reduces value of losing entity by at least $100,000

(1) Either or both of these must be true:

(a) when the *realisation event mentioned in subsection 727-700(1) happens, some or all of the services mentioned in paragraph 727-700(2)(a) or (b) have not yet been provided; or

(b) some or all of those services have been provided in the income year (of the *losing entity) in which the realisation event happens, or in the previous income year.

(2) It must be reasonable to conclude that the total (the total market value ) of the market values, immediately before the *realisation event, of *primary interests in the *losing entity then owned by *affected owners is less than it would have been if none of the following had happened:

(a) the *95% services indirect value shift; and

(b) all other *predominantly services indirect value shifts that satisfy subsection (1) (or that would satisfy it if they were *95% services indirect value shifts).

(3) It must also be reasonable to conclude that the total market value is less than it would have been by at least:

(a) $100,000, if the total of the *adjustable values, immediately before the *realisation event, of the *primary interests referred to in subsection (2) is less than or equal to $2,000,000; or

(b) 5% of the total of those *adjustable values, if that total is greater than $2,000,000 and less than or equal to $10,000,000; or

(c) $500,000, if that total is greater than $10,000,000.

(4) For the purposes of subsections (2) and (3), disregard an *indirect value shift referred to in paragraph (2)(a) or (b) if services are provided directly by the *losing entity to the *gaining entity under the *scheme before the income year (of the losing entity) before the one in which the *realisation event happened.

727-715 Service arrangements reduce value of losing entity that is a group service provider by at least $500,000

(1) At some time during the period (the ownership period ) when the owner owned the interest, the sole or dominant activity of the *losing entity must consist of providing services directly to one or more entities (the group entities ) each of which is covered by one or more of the following paragraphs:

(a) the *gaining entity;

(b) an *affected owner;

(c) an entity that has at that time the same *ultimate controller as the losing entity or the gaining entity;

(d) if the conditions in section 727-110 (common ownership nexus test) are satisfied for the *indirect value shift-an entity that has with the losing entity or with the gaining entity a *common ownership nexus within that period.

(2) It must be reasonable to conclude that the total (the total market value ) of the market values, immediately before the *realisation event, of *primary interests in the *losing entity then owned by *affected owners is less than it would have been if none of the following had happened:

(a) the *95% services indirect value shift; and

(b) each *predominantly services indirect value shift for which the same entity is the losing entity as for the 95% services indirect value shift, and that happened:

(i) if the amount of the *indirect value shift is $500,000 or more-at any time during the ownership period; or

(ii) otherwise-during the ownership period but within 4 years before the realisation event, or at the same time as the realisation event.

Thresholds for reduction of the total market value

(3) It must also be reasonable to conclude that the total market value is less than it would have been by at least $500,000, and by at least the lesser of:

(a) 5% of the total of the *adjustable values of *primary interests in the *losing entity owned by *affected owners at:

(i) if subsection (4) applies-the time determined under that subsection; or

(ii) otherwise-the start of the income year in which the *realisation event happens; and

(b) the amount worked out under the table.

Alternative threshold for reduction of the total market value

Item

In this case:

The amount is:

1

The ownership period is 4 years or less

worked out using this formula:

($5,000,000 * ((Number of days in that period) / 365))

2

The ownership period is more than 4 years

$25,000,000

(4) If the owner of the interest is an *affected owner because of item 1, 2, 3 or 4 in the table in subsection 727-530(1) (about who is an affected owner), the time for the purposes of subparagraph (3)(a)(i) of this section is the latest of:

(a) the start of the income year in which the *realisation event happens; and

(b) the most recent time (if any), before or at the time of the *realisation event, when at least one of the group entities has the same *ultimate controller as the losing entity or the gaining entity; and

(c) the start of the most recent period (if any):

(i) that ended before or at the time of the realisation event; and

(ii) within which at least one of the group entities has with the losing entity or with the gaining entity a *common ownership nexus.

727-720 Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000

(1) It must be the case that at no time during the period when the owner owned the interest did the sole or dominant activity of the *losing entity consist of providing services as mentioned in subsection 727-715(1).

(2) It must be reasonable to conclude that the total (the total market value ) of the market values, immediately before the *realisation event, of *primary interests in the *losing entity then owned by *affected owners is less than it would have been if none of the following had happened:

(a) the *95% services indirect value shift;

(b) each *predominantly services indirect value shift that meets either of these conditions:

(i) its amount was less than $500,000 and it happened within 4 years before the realisation event, or at the same time as the realisation event;

(ii) its amount was $500,000 or more and it happened at any time before the realisation event, or at the same time as the realisation event;

and that meets all of these conditions:

(iii) the same entity is the losing entity for it as for the 95% services indirect value shift;

(iv) it happened under a different *scheme from the 95% services indirect value shift; and

(v) having regard to all relevant circumstances, it is reasonable to conclude that the sole or main reason why it happened under a different scheme was to prevent the conditions in section 727-705, 727-710, 727-715 or this section from being met.

(3) It must also be reasonable to conclude that the total market value is less than it would have been by at least:

(a) $500,000, if the total of the *adjustable values, immediately before the *realisation event, of the *primary interests referred to in subsection (2) is less than or equal to $10,000,000; or

(b) 5% of the total of those *adjustable values, if that total is greater than $10,000,000 and less than or equal to $100,000,000; or

(c) $5,000,000, if that total is greater than $100,000,000.

(4) The providing of the services mentioned in paragraph 727-700(2)(a) or (b) by the losing entity must not be in the ordinary course of its business.

727-725 Meaning of predominantly-services indirect value shift

An *indirect value shift is a predominantly-services indirect value shift if, and only if, the *greater benefits consist entirely or predominantly of:

(a) a right to have services that are covered by section 727-240 provided directly by the *losing entity to the *gaining entity; or

(b) services that are covered by section 727-240 and have been, are being, or are to be, so provided;

or both.

Subdivision 727-H - The adjustable value method

Guide to Subdivision 727-H

727-750 What this Subdivision is about

Under the adjustable value method:

• the adjustable values of affected interests in the losing entity are reduced; and

• the adjustable values of affected interests in the gaining entity are uplifted, within limits worked out by references to the reductions in the adjustable values of affected interests in the losing entity.

The consequences of that are:

• the cost base and reduced cost base of the interests are reduced or uplifted (or both); and

• if the interests are also trading stock or revenue assets, there are further consequences for them in their character as such.

Table of sections

727-755 Consequences of indirect value shift

Reductions of adjustable value

727-770 Reduction under the adjustable value method

727-775 Has there been a disaggregated attributable decrease?

727-780 Working out the reduction on a loss-focussed basis

Uplifts of adjustable value

727-800 Uplift under the attributable increase method

727-805 Has there been a disaggregated attributable increase?

727-810 Scaling down formula

Consequences of the method for various kinds of assets

727-830 CGT assets

727-835 Trading stock

727-840 Revenue assets

[This is the end of the Guide.]

727-755 Consequences of indirect value shift

(1) This Subdivision sets out the adjustable value method of working out the consequences (if any) of an *indirect value shift.

(2) If those consequences are to be worked out using that method:

(a) the *adjustable value of each *affected interest in the *losing entity is reduced as provided in this Subdivision; and

(b) if the *gaining entity is a company or trust (except one listed in section 727-125 (about superannuation entities)) immediately before the *IVS time, the *adjustable value of each *affected interest in the *gaining entity is uplifted as provided in this Subdivision.

(3) The consequences for the *affected interest depend on its character. There are consequences for the interest in its character as a *CGT asset. However, if the interest is also *trading stock or a *revenue asset, there are additional consequences for it in that character.

[The next section is section 727-770.]

Reductions of adjustable value

727-770 Reduction under the adjustable value method

(1) This section sets out how to work out the amount (if any) by which the *adjustable value of an *affected interest in the *losing entity is reduced.

(2) First, work out under section 727-775 whether the *indirect value shift has produced for the owner of the interest a *disaggregated attributable decrease in the market value of the interest.

(3) If it has not, the interest's *adjustable value is not reduced because of the *indirect value shift.

(4) If it has, the amount (if any) by which the interest's *adjustable value is reduced is worked out on a *loss focussed basis under section 727-780.

(5) However, if a choice is made in accordance with section 727-550 for the reduction not to be worked out on a *loss focussed basis, the reduction is equal to the *disaggregated attributable decrease.

Reduction not to exceed reasonable amount

(6) If the reduction worked out as provided in subsection (4) or (5) is not reasonable in the circumstances, having regard to the objects of this Division, the interest's *adjustable value is instead reduced by so much of that reduction as is reasonable in the circumstances, having regard to those objects.

Note: The main object of this Division is set out in section 727-95.

727-775 Has there been a disaggregated attributable decrease?

(1) This section sets out how to determine whether an *indirect value shift has produced, for the owner of an *equity or loan interest, a disaggregated attributable decrease in the market value of the interest and, if so, the amount of it.

(2) Work out the market value of the interest at the *IVS time, but disregarding:

(a) all effects on the market value of the interest during the *IVS period, except effects that are reasonably attributable to the *indirect value shift; and

(b) the effects (if any) of the indirect value shift on the market value of *equity or loan interests, or *indirect equity or loan interests, in the gaining entity.

(This result is called the notional resulting market value .)

Note: Paragraph (2)(b) is necessary because the market value of the interest may also have been affected by the increase in the market value of interests in the gaining entity, because the entity in which the interest is held had direct or indirect interests in both the losing entity and the gaining entity.

In such a case, the reduction in adjustable value under this Division will usually be offset by an uplift under this Division.

(3) If the notional resulting market value is less than the market value (the old market value ) of the interest:

(a) at the start of the *IVS period; or

(b) if the owner last began to own the interest during that period-when the owner last began to own the interest;

the difference is the disaggregated attributable decrease .

(4) The *indirect value shift has not produced a disaggregated attributable decrease for the owner of the interest if the notional resulting market value is greater than or equal to the old market value.

(5) The market value of the interest at a particular time may be worked out under subsection (2) or (3) by making a reasonable estimate of that market value.

727-780 Working out the reduction on a loss-focussed basis

(1) Use the table in subsection (2) of this section to work out on a loss-focussed basis the amount (if any) by which the interest's *adjustable value is reduced.

(2) This involves comparing the old market value, and the notional resulting market value, with the interest's *adjustable value (the old adjustable value ) immediately before the *IVS time.

Reduction under the attributable decrease method

Item

If the old market value:

And the notional resulting market value:

This is the result:

1

isgreater than or equal tothe old adjustable value

isless than the old adjustable value

the*adjustable value is reduced to the notional resulting market value

2

isgreater than or equal to the old adjustable value

isgreater than or equal tothe old adjustable value

the*adjustable value isnot reduced because of the*indirect value shift

3

isless than the old adjustable value

isless than the old adjustable value

the*adjustable value is reduced by the amount of the*disaggregated attributable decrease

Note 1: Because of item 1, the indirect value shift cannot cause a loss to arise on disposal of the interest.

Note 2: Because of item 3 the loss already embedded in the interest is preserved, but the indirect value shift does not increase it.

[The next section is section 727-800.]

Uplifts of adjustable value

727-800 Uplift under the attributable increase method

(1) This section sets out how to work out the amount (if any) by which the *adjustable value of an *affected interest in the *gaining entity is uplifted.

(2) First, work out under section 727-805 whether the *indirect value shift has produced for the owner of the interest a *disaggregated attributable increase in the market value of the interest.

(3) If it has not, the interest's *adjustable value is not uplifted because of the *indirect value shift.

(4) If it has, the *adjustable value is uplifted by the amount worked out using the scaling down formula in section 727-810, subject to the rest of this section.

Note: The uplift will be less than or equal to the disaggregated attributable increase.

Cap if interest has both a disaggregated attributable increase and a disaggregated attributable decrease

(5) If the *indirect value shift has also produced for the owner of the interest a *disaggregated attributable decrease in the market value of the interest, the interest's *adjustable value:

(a) is not uplifted if it is not also reduced under this Division because of the indirect value shift; and

(b) if it is also reduced under this Division because of the indirect value shift-is not uplifted by more than the reduction.

Cap based on notional distribution by gaining entity of dividends or capital equal to total reductions in adjustable value of affected interests in losing entity

(6) However, the interest's *adjustable value is not uplifted by more than the greater of these amounts:

(a) the amount (if any) that the *affected owner of the interest would receive (directly, or indirectly through one or more interposed entities) in respect of the interest if:

(i) the *gaining entity were to pay as *dividends, at the time (the payment time ) immediately before the *IVS time, an amount (the total reduction amount ) equal to the total of the amounts by which the *adjustable values of *equity or loan interests in the *losing entity are reduced under this Subdivision because of the *indirect value shift; and

(ii) those dividends were successively paid or distributed at the payment time by each entity interposed between the gaining entity and that affected owner; and

(b) the amount (if any) that the *affected owner of the interest would receive (directly, or indirectly through one or more interposed entities) in respect of the interest if:

(i) the gaining entity were to pay the total reduction amount at the payment time as a distribution of capital; and

(ii) that capital was successively paid or distributed at the payment time by each entity interposed between the gaining entity and that affected owner.

Uplift not to exceed reasonable amount

(7) If the uplift worked out as provided in subsections (4), (5) and (6) is not reasonable in the circumstances, having regard to the objects of this Division, the interest's *adjustable value is instead uplifted by an amount that is reasonable in the circumstances, having regard to those objects.

Note: The main object of this Division is set out in section 727-95.

727-805 Has there been a disaggregated attributable increase?

(1) This section sets out how to determine whether an *indirect value shift has produced, for the owner of an *equity or loan interest, a disaggregated attributable increase in the market value of the interest and, if so, the amount of it.

(2) Make a reasonable estimate of the market value of the interest at the *IVS time, but disregarding:

(a) all effects on the market value of the interest during the *IVS period, except effects that are reasonably attributable to the *indirect value shift; and

(b) the effects (if any) of the indirect value shift on the market value of *equity or loan interests, or *indirect equity or loan interests, in the losing entity.

(This result is called the notional resulting market value .)

Note: Paragraph (2)(b) is necessary because the market value of the interest may also have been affected by the decrease in the market value of interests in the losing entity, because the entity in which the interest is held had direct or indirect interests in both the losing entity and the gaining entity.

In such a case, the increase in adjustable value under this Division will usually be offset by a reduction under this Division.

(3) If the notional resulting market value is greater than a reasonable estimate of the market value (the old market value ) of the interest:

(a) at the start of the *IVS period; or

(b) if the owner last began to own the interest during that period-when the owner last began to own the interest;

the difference is the disaggregated attributable increase .

(4) The *indirect value shift has not produced a disaggregated attributable increase for the owner of the interest if the notional resulting market value is less than or equal to the old market value.

727-810 Scaling-down formula

(1) The scaling down formula for the purposes of section 727-800 is:

((The disaggregated attributable increase) * ((Total reductions for affected interests) / (Total disaggregated attributable decreases)))

Note: The numerator in the fraction can never exceed the denominator. This means that the fraction can never exceed 1, so the uplift will never exceed the disaggregated attributable increase.

(2) For the purposes of the formula:

total disaggregated attributable decreases means the total of:

(a) all *disaggregated attributable decreases that the *indirect value shift has produced, in the market values of *affected interests in the *losing entity, for the entities that owned those interests immediately before the *IVS time; and

(b) if:

(i) section 727-850 (as applying to the *scheme from which the indirect value shift results) reduces losses that are *realised for income tax purposes by *realisation events happening before the *IVS time to *equity or loan interests, or to *indirect equity or loan interests, in the losing entity; and

(ii) the indirect value shift is the only indirect value shift, or is the greater or greatest of 2 or more indirect value shifts, that results from the scheme and for which the losing entity is the losing entity;

for each of those realisation events, the amounts that would, if:

(iii) the *presumed indirect value shift were an indirect value shift; and

(iv) the IVS time for the presumed indirect value shift were the time of that realisation event;

be the disaggregated attributable decreases that the presumed indirect value shift has produced, in the market value of the equity or loan interests to which that realisation event happened, for the entities that owned those interests immediately before the time of that realisation event.

total reductions for affected interests means the total of:

(a) all reductions under this Division, because of the indirect value shift, of *adjustable values of affected interests in the losing entity; and

(b) if paragraph (b) of the definition of total disaggregated attributable decreases applies-the amounts by which section 727-850 reduces the losses (if any) referred to in that paragraph.

[The next section is section 727-830.]

Consequences of the method for various kinds of assets

727-830 CGT assets

(1) The *cost base of an *equity or loan interest is reduced or uplifted immediately before the *IVS time to the extent that this Division provides for the *adjustable value of the interest to be reduced or uplifted.

(2) The *reduced cost base of an *equity or loan interest is reduced or uplifted immediately before the *IVS time to the extent that this Division provides for the *adjustable value of the interest to be reduced or uplifted.

(3) However, the *cost base or *reduced cost base is uplifted only to the extent that the amount of the uplift is still reflected in the market value of the interest when a later *CGT event happens to the interest.

(4) To work out:

(a) whether the *cost base or *reduced cost base of the interest is reduced or uplifted; and

(b) if so, by how much;

assume that the adjustable value from time to time of that or any other *equity or loan interest is its cost base or reduced cost base, as appropriate.

(5) If this Division provides for the *adjustable value of an *equity or loan interest to be both reduced and uplifted:

(a) the reduction and uplift for which subsection (1) or (2) of this section provides offset each other to the extent of whichever of them is the lesser; but

(b) if subsection (3) of this section cancels or reduces the uplift, this subsection is taken always to have applied on that basis.

Reductions and uplifts also apply to pre-CGT assets

(6) A reduction or uplift occurs regardless of whether the entity that owns the interest *acquired it before, on or after 20 September 1985.

727-835 Trading stock

(1) This section deals with:

(a) how this Division applies to an *equity or loan interest that is *trading stock of an entity at the time (the adjustment time ) immediately before the *IVS time; and

(b) the income tax consequences of this Division reducing or uplifting the *adjustable value of the interest.

(2) The interest's adjustable value at a particular time is:

(a) if the interest has been *trading stock of the entity ever since the start of the income year of the entity in which that time occurs-its *value as trading stock at the start of the income year; or

(b) otherwise-its cost.

(3) If this Division reduces or uplifts the interest's *adjustable value, the entity is treated as if:

(a) immediately before the adjustment time, the entity had sold the interest to someone else (at *arm's length and in the ordinary course of business) for its *adjustable value immediately before that time; and

(b) immediately after the adjustment time, the entity had bought the interest back for the reduced or uplifted adjustable value.

Note: The notional sale and repurchase are separated in time. As a result, if this section is applied to another indirect value shift that happens later in the same income year, the interest's adjustable value will be the cost on the notional repurchase: see paragraph (2)(b).

(4) However, the increase in the cost of an interest because of paragraph (3)(b) is taken into account from time to time only to the extent that the amount of the increase is still reflected in the market value of the interest.

Note: The situations where the increase in cost would be taken into account include:

· in working out your deductions for the cost of trading stock acquired during the income year in which the increase happens; and

· the end of an income year if the interest's closing value as trading stock is worked out on the basis of its cost; and

· the start of the income year in which the interest is disposed of, if that happens in a later income year and the interest's closing value as trading stock at the end of the previous income year was worked out on the basis of its cost.

(5) If this Division provides for the *adjustable value of the interest to be both reduced and uplifted:

(a) the reduction and uplift offset each other to the extent of whichever of them is the lesser, and subsection (3) of this section applies accordingly; but

(b) to the extent that the amount of the uplift is no longer reflected in the market value of the interest, this section is taken always to have applied on the basis that the amount of the uplift was reduced to the same extent.

727-840 Revenue assets

(1) This section deals with:

(a) how this Division applies to an *equity or loan interest that is a *revenue asset of an entity at the time (the adjustment time ) immediately before the *IVS time; and

(b) the income tax consequences of this Division reducing or uplifting the *adjustable value of the interest.

(2) The interest's adjustable value at a particular time is the total of the amounts that would be subtracted from the gross disposal proceeds in calculating any profit or loss on disposal of the interest if the entity disposed of it at that time.

(3) If this Division reduces or uplifts the interest's *adjustable value, the entity is treated as if:

(a) immediately before the adjustment time, the entity had sold the interest to someone else (at *arm's length and in the ordinary course of business) for its adjustable value immediately before that time; and

(b) immediately after the adjustment time, the entity had bought the interest back for the reduced or uplifted adjustable value.

Note: The notional sale and repurchase are separated in time. As a result, if this section is applied to another indirect value shift that happens later in the same income year, the interest's adjustable value will be based on the cost on the notional repurchase: see subsection (2).

(4) However, an uplift in the *adjustable value of the interest is taken into account only to the extent that the amount of the uplift is still reflected in the market value of the interest when it is disposed of or otherwise realised.

(5) If this Division provides for the *adjustable value of the interest to be both reduced and uplifted:

(a) the reduction and uplift offset each other to the extent of whichever of them is the lesser, and subsection (3) of this section applies accordingly; but

(b) to the extent that the amount of the uplift is no longer reflected in the market value of the interest, this section is taken always to have applied on the basis that the amount of the uplift was reduced to the same extent.

Subdivision 727-K - Reduction of loss on equity or loan interests realised before the IVS time

Table of sections

727-850 Consequences of scheme under this Subdivision

727-855 Presumed indirect value shift

727-860 Conditions about the prospective gaining entity

727-865 How other provisions of this Division apply to support this Subdivision

727-870 Effect of CGT roll over

727-875 Application to CGT asset that is also trading stock or revenue asset

727-850 Consequences of scheme under this Subdivision

(1) If:

(a) as at the time when a *scheme is entered into, or a later time, an entity (the prospective losing entity ) has *provided, is providing, is to provide, or might provide, one or more economic benefits *in connection with the scheme; and

(b) the prospective losing entity is a company or trust (except one listed in section 727-125 (about superannuation entities)); and

(c) a *realisation event happens to an *equity or loan interest, or to an *indirect equity or loan interest, in the prospective losing entity at a time when no *IVS time for the scheme has yet happened (whether or not one happens later); and

(d) apart from this Division, a loss would be *realised for income tax purposes by the realisation event; and

(e) because of section 727-855, the scheme results in a *presumed indirect value shift affecting the realisation event; and

(f) section 727-860 (about prospective gaining entities) is satisfied; and

(g) no exclusion in Subdivision 727-C applies to the presumed indirect value shift because of section 727-865; and

(h) on the assumptions set out in subsection 727-865(3), the interest would be an *affected interest in the prospective losing entity;

the loss is reduced by an amount that is reasonable having regard to a reasonable estimate of the amount (if any) by which the scheme has reduced the interest's market value during the period that ends at the time of the realisation event and started at the later of:

(i) when the scheme was entered into; and

(j) the time of the last realisation event that happened to the interest.

Note 1: This Subdivision does not reduce gains from realisation events, but loss reductions under this Subdivision are taken into account in working out:

· gain reductions under Subdivision 727-G for interests in a gaining entity that are realised after the IVS time for the scheme (see section 727-625); or

· uplifts under Subdivision 727-H in the adjustable values of interests in a gaining entity (see section 727-810).

Note 2: Section 727-865 provides for how other provisions of this Division apply for the purposes of this Subdivision.

Further exclusion for certain 95% services indirect value shifts

(2) The loss is not reduced if the *presumed indirect value shift is a *95% services indirect value shift because of subsection 727-865(2), unless:

(a) the conditions in section 727-705 (as applying because of that subsection) are met for the presumed indirect value shift; or

(b) the conditions in section 727-710, 727-715 or 727-720 (as applying because of that subsection) are met for the presumed indirect value shift and for the realisation event.

727-855 Presumed indirect value shift

(1) The *scheme results in a presumed indirect value shift affecting the *realisation event if, and only if, as at the time of the realisation event, it is reasonable to conclude that the total market value of the economic benefits (the greater benefits ) that:

(a) the *prospective losing entity has *provided, is providing, is to provide, or might provide, *in connection with the *scheme, to another entity, or to each of 2 or more other entities; and

(b) can be identified (even if the other entity or entities cannot be identified or are not all in existence, or the provision of some or all of the economic benefits is contingent);

exceeds:

(c) the total market value of the economic benefits (the lesser benefits ) that:

(i) have been, are being, are to be, or might be, provided to the prospective losing entity in connection with the scheme; and

(ii) can be identified (even if the entity or entities providing the benefits cannot be identified or are not all in existence, or the provision of some or all of the economic benefits is contingent); or

(d) if there are no economic benefits covered by paragraph (c)-nil.

That excess is the amount of the presumed indirect value shift, which happens at the time of the realisation event.

(2) The market value of an economic benefit is to be determined as at the earliest time when it is reasonable to conclude that:

(a) the economic benefit can be identified; and

(b) paragraph 727-150(2)(b) is satisfied for that benefit;

if that time is before the *realisation event.

(3) Otherwise, the market value of the economic benefit is to be determined as at the time immediately before the *realisation event, taking account of any contingency to which provision of the benefit is subject at that time.

For more rules affecting how the market value of an economic benefit is determined, see Subdivision 727-D (as applying because of subsection 727-865(1)).

(4) An entity referred to in paragraph (1)(a) need not be a party to the *scheme. A benefit can be provided by act or omission.

727-860 Conditions about the prospective gaining entity

(1) By the deadline set out in subsection (5), the conditions in subsections (2) and (3) must be satisfied for at least one of these entities:

(a) the entity or entities referred to in paragraph 727-855(1)(a);

(b) if at the time of the *realisation event it is reasonable to conclude that the entity, or at least one of the entities, referred to in paragraph 727-855(1)(a) will be one of 2 or more entities, but it cannot be determined which-those 2 or more entities.

(2) Enough must be known about the identity of an entity covered by subsection (1) for it to be reasonable to conclude that, if:

(a) the *presumed indirect value shift were an *indirect value shift resulting from the *scheme; and

(b) the *IVS period for the scheme ended at the time of the *realisation event; and

(c) that entity were the *gaining entity for the indirect value shift;

(d) the *prospective losing entity were the *losing entity for the indirect value shift; and

either or both of these would be satisfied for the indirect value shift:

(e) section 727-105 (Ultimate controller test); and

(f) section 727-110 (Common ownership nexus test).

(3) Enough must be known about the identity of the entity referred to in subsection (2) for it also to be reasonable to conclude that, in relation to either or both of the following:

(a) the *prospective losing entity *providing one or more economic benefits to that entity *in connection with the *scheme; or

(b) that entity providing one or more economic benefits to the prospective losing entity in connection with the scheme;

that entity and the prospective losing entity were not, are not, will not be, or would not be, dealing with each other at *arm's length.

(4) Each entity that is covered by subsection (1), and for which subsections (2) and (3) are satisfied, is called a prospective gaining entity for the *scheme.

(5) The deadline is:

(a) if the entity that owned the *equity or loan interest immediately before the *realisation event must lodge an *income tax return for the income year in which the event happens-the time by which the return must be lodged; or

(b) otherwise-the end of the 6 months immediately after that income year.

727-865 How other provisions of this Division apply to support this Subdivision

(1) To avoid doubt, these provisions apply for the purposes of working out whether there has been a *presumed indirect value shift and, if so, the amount of it:

(a) sections 727-155, 727-160 and 727-165 (about economic benefits);

(b) section 727-315 (Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000).

(2) For the purposes of section 727-850, these provisions:

(a) Subdivision 727-C (Exclusions), except section 727-260 (about a shift down a wholly owned chain of entities);

(b) sections 727-700 to 727-725 (about 95% services indirect value shifts), except subsection 727-700(1);

apply to the *presumed indirect value shift on the assumptions set out in subsection (3).

(3) The assumptions are:

(a) the *presumed indirect value shift is an *indirect value shift resulting from the *scheme; and

(b) the *prospective losing entity for the scheme is the *losing entity for that indirect value shift; and

(c) each *prospective gaining entity for the scheme is the *gaining entity for that indirect value shift; and

(d) the *greater benefits under the presumed indirect value shift are the greater benefits under that indirect value shift; and

(e) the *lesser benefits (if any) under the presumed indirect value shift are the lesser benefits under that indirect value shift; and

(f) the time of the realisation event mentioned in paragraph 727-850(1)(c) is the *IVS time for the scheme; and

(g) the *IVS period for the scheme ends at the time of the realisation event; and

(h) section 727-105 (Ultimate controller test) is satisfied for that indirect value shift according to what it is reasonable to conclude under subsection 727-860(2) as applying to the presumed indirect value shift; and

(i) section 727-110 (Common ownership nexus test) is satisfied for that indirect value shift according to what it is reasonable to conclude under subsection 727-860(2) as applying to the presumed indirect value shift; and

(j) a reference to the realisation event mentioned in subsection 727-700(1) were a reference to the realisation event mentioned in paragraph 727-850(1)(c); and

(k) the interest to which the realisation event mentioned in paragraph 727-850(1)(c) happens were the interest referred to in paragraph 727-700(1)(a); and

(l) a reference in any of sections 727-700 to 727-725 (about 95% services indirect value shifts), except subsection 727-700(1), to the owner were a reference to the entity that, at the time of the realisation event mentioned in paragraph 727-850(1)(c), owns the interest to which the event happens.

(4) Sections 727-635 and 727-640 affect how this Subdivision applies to *equity or loan interests, and *indirect equity or loan interests, in the *prospective losing entity that are split or merged during the period:

(a) starting when the *scheme is entered into; and

(b) ending at the time of the *realisation event mentioned in paragraph 727-850(1)(c);

in the same way as those sections affect how Subdivision 727-G would apply to those interests on the assumptions set out in subsection (3) of this section.

(5) The application of a provision because of this section is additional to, and is not intended to limit, any other application of the provision.

727-870 Effect of CGT roll-over

(1) If:

(a) the *realisation event mentioned in paragraph 727-850(1)(c) is a *CGT event; and

(b) section 727-850 reduces a loss that would, apart from this Division, be *realised for income tax purposes by the CGT event; and

(c) there is a roll over for the CGT event;

the interest's *reduced cost base at the time of the CGT event is taken to have been reduced by the amount by which section 727-850 reduces that loss, but is so taken only for the purposes of working out:

(d) the interest's reduced cost base, from time to time after the roll over, for the entity that *acquired the interest because of the CGT event; and

(e) in the case of a *replacement asset roll over-the reduced cost base of the replacement CGT asset, from time to time after the roll over, for the entity that *disposed of the interest.

Note: Because of the roll over, the loss reduction under section 727-850 will have no tax effect. This subsection ensures that the loss reduction is passed on, through the reduction in reduced cost base, to prevent or reduce a loss arising on a later CGT event.

727-875 Application to CGT asset that is also trading stock or revenue asset

If an *equity or loan interest is also an item of *trading stock or a *revenue asset, this Subdivision applies to the interest once in its character as a CGT asset and again in its character as trading stock or a revenue asset.

Subdivision 727-L - Indirect value shift resulting from a direct value shift

Table of sections

727-905 How this Subdivision affects the rest of this Division

727-910 Treatment of value shifted under the direct value shift

727-905 How this Subdivision affects the rest of this Division

(1) This Subdivision affects how the rest of this Division applies to a *scheme (the IVS scheme ) that is or includes a scheme (the DVS scheme ) under which there is a *direct value shift.

(2) If the *direct value shift:

(a) has consequences under Division 725 for an entity as an *affected owner of *down interests (or would do so apart from section 725-90 (about direct value shifts that will be reversed)); and

(b) also has consequences under that Division for another entity as an affected owner of *up interests (or would do so apart from section 725-90);

the rest of this Subdivision has effect, for the purposes of Subdivisions 727 A to 727 K, in order to determine:

(c) whether the IVS scheme results in an *indirect value shift, from the first entity to the other entity, that has consequences under this Division; and

(d) whether the IVS scheme has consequences under Subdivision 727-K because it results in a *presumed indirect value shift affecting a *realisation event happening to *equity or loan interests, or to *indirect equity or loan interests, in the first entity; and

(e) those consequences.

Note: Section 725-50 sets out when a direct value shift has consequences under Division 725.

(3) If:

(a) the IVS scheme is the DVS scheme; and

(b) subsection 725-145(2) is satisfied for the *direct value shift (because one or more equity or loan interests in the target entity are issued at a discount); but

(c) subsection 725-145(3) (about an increase in the market value of one or more equity or loan interests in the target entity) is not satisfied for the direct value shift;

Subdivisions 727 A to 727 K apply to the IVS scheme only as provided in this section.

(4) Otherwise, those Subdivisions apply to the IVS scheme as provided in this section in addition to any other application they have to the scheme.

727-910 Treatment of value shifted under the direct value shift

(1) The first entity is treated as *providing economic benefits to the other entity, *in connection with the IVS scheme, at the time of a decrease (or future decrease) in the market value of any of the *down interests, to the extent that the decrease is (or will be) covered by subsection 725-155(1).

(2) Despite subsections 727-150(4) and 727-855(2) and (3), the market value of all economic benefits that subsection (1) of this section treats the first entity as providing to the other entity:

(a) is to be determined as at the time immediately before the *IVS time, or immediately before the *realisation event, as appropriate; and

(b) is equal to the total value shifted from the *down interests to the *up interests, as worked out under one or more applications of step 2 of the method statement in section 725-365 or 725-380.

(3) The 2 entities are treated as not dealing with each other at *arm's length in relation to the providing of those benefits.

(4) None of those benefits is treated as consisting of, or including, services provided or a right to have services provided.

Note: This means that the exclusions in Subdivisions 727 C and 727 G for indirect value shifts involving services will not apply.

(5) Except as provided in this section, none of the following is treated as the *providing of economic benefits *in connection with the IVS scheme:

(a) a decrease (or future decrease) in the market value of *down interests owned by the first entity or the other entity, to the extent that the decrease is (or will be) covered by subsection 725-155(1);

(b) an increase (or future increase) in the market value of *up interests owned by the first entity or the other entity, to the extent that the increase is (or will be) covered by subsection 725-145(3);

(c) an issue of *up interests at a *discount to the first entity or the other entity, to the extent that the issue is (or will be) covered by subsection 725-145(2).

Note: Value shifted from down interests owned by the other entity to up interests owned by the first entity are dealt with by a separate application of this Subdivision to those interests (because of paragraphs 727-905(2)(a) and (b).