• Legal database
Legal database

ATO Interpretative Decision

ATO ID 2003/247 (Withdrawn)

Income Tax

Income tax: general value shifting regime - direct value shift involving a debt interest in a company
FOI status: may be released
  • This ATO ID is withdrawn because the ATO view on this matter is now dealt with in the Guide to General Value Shifting Regime.
    This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

For the purposes of Division 725 of the Income Tax Assessment Act 1997 (ITAA 1997), is there a pre-shift loss for a debt interest that decreases in value under a scheme if, immediately before the decrease, the market value of the debt interest was equal to its cost base and reduced cost base?

Decision

Yes. Subsection 725-210(3) of the ITAA 1997 provides that an interest has a pre-shift loss if, immediately before the decrease time, its market value was equal to, or less than, its adjustable value. As a result, there will be consequences for the adjustable value of the debt provided the other threshold conditions mentioned in Division 725 are satisfied.

Facts

The market value of a debt owed by a company is equal to its cost base and reduced cost base.

Something is done under a scheme involving interests in the company that causes a decrease in the market value of the debt and an increase in the market value of shares in the company.

Reasons for Decision

Where there is a direct value shift involving interests in an entity under a scheme, and the tests in sections 725-50 and 725-70 of the ITAA 1997 are satisfied with respect to a particular individual, there may be consequences for interests that the individual holds that reduce in value because of something done under the scheme ('down interests').

For a 'down interest' that is not held as a revenue asset or held as trading stock, these consequences are worked out by referring to the tables in sections 725-245 and 725-250 of the ITAA 1997. Some of the items in the table in section 725-250 of the ITAA 1997 identify particular consequences for down interests having pre-shift losses.

Whether an interest has a pre-shift loss depends on the relationship between the market value of the interest, immediately before the decrease time when the interest decreases in value, and its adjustable value (for example, cost base). Where an interest has more than one adjustable value, the existence of a pre-shift loss is determined for each of those values. Subsection 725-210(3) of the ITAA 1997 provides that an interest has a pre-shift loss if, immediately before the decrease time, it has a market value that is equal to or less than its adjustable value.

So where a debt decreases in value under a scheme, and immediately before the decrease time its market value is equal to its cost base and reduced cost base, it has a pre-shift loss for each of those adjustable values.

As a result, if the value is shifted to another interest of the individual's or to an interest that is held by another affected owner, items 5 and 7 in the table in section 725-250 of the ITAA 1997 are applied to work out reductions for the cost base and reduced cost base of the debt.

Note: Where value is shifted from a debt interest that is held as a revenue asset or as trading stock, a similar table in section 725-335 of the ITAA 1997 is applied to work out reductions for the interest's adjustable values (including adjustments to cost base and reduced cost base).

Date of decision:  18 February 2002

Year of income:  Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   Division 725
   section 725-50
   section 725-70
   section 725-245
   subsection 725-210(3)
   section 725-250
   section 725-335

Keywords
CGT share value shifting arrangements
Cost base
Capital loss reduction for value shift
Reduced cost base
Cost base adjustments for value shift

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  24 April 2003

ISSN: 1445-2782

history
  Date: Version:
  18 February 2002 Original statement
You are here 23 June 2006 Archived

Back to top