ATO Interpretative Decision
ATO ID 2003/891
Income Tax
Indirect value shifting: land transferred at costFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does the exclusion from the indirect value shifting rules in section 727-220 of the Income Tax Assessment Act 1997 (ITAA 1997) (for the transfer of an asset for at least its cost) apply, when land is transferred at cost and the cost is more than the market value of the land?
Decision
No. The exclusion in section 727-220 of the ITAA 1997 does not apply when land is transferred for more than its market value, because value does not shift from the transferor of the land to the transferee.
Facts
Company C controls both company G and company L. There is no entity that controls company C.
A non arm's length transaction was entered into after 30 June 2002 under which company G transferred land held on capital account to company L for $10 million. At the time when company G transferred it to company L, the land's cost base was $10 million and its market value was $8 million.
All of company C's interests in company G were acquired before company G acquired the land that was transferred. Company C is the only affected owner (under Division 727 of the ITAA 1997) of company G.
Reasons for Decision
An indirect value shift (IVS) may have consequences under section 727-100 of the ITAA 1997 when the losing entity is a company or trust, the losing and gaining entity are controlled by the same entity or they have common owners and they were not dealing at arm's length in providing some of the benefits. If an IVS has consequences, it may result in the reduction of realised losses or gains, or in adjustments to the tax values of interests in the entities that have gained or lost value as a result of the IVS.
Pursuant to section 727-150 of the ITAA 1997 there will be an IVS when the market value of economic benefits provided by one entity (the losing entity) to another entity (the gaining entity) exceeds the market value of benefits provided by the gaining entity in connection with a scheme. The benefits provided by the losing entity are referred to as the 'greater benefits.'
An IVS will have no consequences under section 727-220 of the ITAA 1997 if the following requirements are satisfied:
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- The greater benefits must consist entirely of:
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- the losing entity transferring a CGT asset to the gaining entity; or
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- a right to have the losing entity transfer an asset to the gaining entity.
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- There must be lesser benefits and, at the time of the IVS, the total market value of the lesser benefits must not be less than the greatest of:
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- the asset's cost base at that time
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- the asset's cost
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- the asset's market value immediately before the most recent time an affected owner has acquired a direct or indirect equity interest in the entity, since the entity acquired the asset.
If section 727-220 of the ITAA 1997 were to apply in this case, the IVS would have no consequences for company C's equity interests held in company L and company G.
In this transaction, company L (the losing entity) has provided $10 million consideration (the greater benefits) to company G (the gaining entity) for land valued at $8 million (the lesser benefits). Section 727-220 would not apply in relation to the transfer of the land, because the 'greater benefits' do not consist of the losing entity transferring land to the gaining entity.
The exclusion in section 727-220 does not apply to the transfer of the land for more than its market value, because value has not shifted from the transferor of the land to the transferee. As a result, the IVS will be covered by Subdivision 727-F of the ITAA 1997 if no other exclusion applies.
Date of decision: 17 September 2003Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
Division 727
Subdivision 727-F
section 727-100
section 727-150
section 727-220
Keywords
Capital gains tax
CGT exemptions
CGT share value shifting arrangements
ISSN: 1445-2782