Tax Law Improvement Act (No. 1) 1998 (46 of 1998)
Schedule 1 Amendment of the Income Tax Assessment Act 1997
1 Part 3-3 Division 140
Division 140 - Share value shifting
Table of Subdivisions
Guide to Division 140
140-A When is there share value shifting?
140-B Consequences of share value shifting
Guide to Division 140
140-1 What this Division is about
This Division prevents entities from obtaining a capital gains tax advantage from share value shifting schemes. They involve shifting value from one lot of shares to another lot: for example, by issuing new shares.
It sets out when an entity makes a capital gain under a scheme of this kind and how the cost base and reduced cost base of shares is varied.
140-5 Map of this Division
Map of this Division
Subdivision 140-A - When is there share value shifting?
Table of sections
140-10 Shifts in share values
140-15 What is a share value shift?
140-20 When is an entity a controller (for CGT purposes) of a company?
140-22 When an entity has an associate-inclusive control interest
140-25 When is there a material decrease in the value of a share?
140-30 Interests in shares etc.
140-10 Shifts in share values
This Division is relevant to *CGT event G2.
Note 1: CGT event G2 is set out in section 104-140.
Note 2: The making of a capital gain from the event and cost base adjustments are dealt with in Subdivision 140-B.
140-15 What is a share value shift
(1) A share value shift occurs if the requirements in subsections (2), (3) and (4) are satisfied.
(2) The company, or the entity or the entity's *associate, must do something under a *scheme involving *shares in the company. Examples are issuing new shares at a *discount, buying back shares or changing the voting rights attached to shares.
Note 1: This Division is also relevant to interests in shares and rights or options to acquire shares: see section 140-30.
Note 2: No cost base adjustments are required under this Division if the increase and decrease in market value occurred before 12 noon on 12 January 1994: see section 140-7 of the Income Tax (Transitional Provisions) Act 1997.
(3) There must be a decrease in the market value of one or more *shares (the decreased value shares ) in the company that are owned by the entity or the entity's * associate.
The shares must have been *acquired on or after 20 September 1985. The decrease must be reasonably attributable to the thing done under the *scheme, and must occur at or after the time when the thing is done under the *scheme.
(4) The requirements in subsection (5) or (6) must be satisfied.
(5) There must be an issue of *shares (the increased value shares ) at a *discount to:
(a) the entity or the entity's *associate; or
(b) if any *decreased value share is owned by the entity's associate - an associate of that associate.
(6) There must be an increase in the market value of one or more *shares (also the increased value shares ) in the company owned by:
(a) the entity or the entity's *associate; or
(b) if any *decreased value share is owned by the entity's associate - an associate of that associate.
The increase must be reasonably attributable to the thing done under the scheme, and must occur at or after the time when it is done.
Example: A company runs a family business. There are 2 shares originally issued for $2 each. They are owned by a 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. This 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.
(7) If it is reasonable to say that the increase or decrease in the market value of one or more *shares in the company is partly caused by the doing of the thing under the *scheme, this Division applies to the increase or decrease to that extent only.
Off-market buy-backs
(8) Disregard a *share value shift that occurs in this situation:
(a) a decrease in the market value of one or more *shares in the company is reasonably attributable to the company proposing to buy back those shares for less than their market value; and
(b) the company does buy back those shares; and
(c) subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936 treats their owner as having received their market value worked out as if the buy-back had not occurred and was never proposed to occur.
Note: A share value shift is disregarded under subsection (8) only if the company buys back the shares after 7.30 pm on 9 May 1995 and the buy back is not done under an excluded transitional arrangement: see subsection 140-15(8) of the Income Tax (Transitional Provisions) Act 1997.
140-20 When is an entity a controller (for CGT purposes) of a company?
An entity (the first entity ) is a controller (for CGT purposes) of a company if:
(a) the first entity has an *associate-inclusive control interest in the company of at least 50%; or
(b) the first entity has an *associate-inclusive control interest in the company of at least 40% and entities other than the first entity or associates of the first entity do not control the company; or
(c) the first entity controls the company (alone or with an *associate).
140-22 When an entity has an associate-inclusive control interest
(1) An entity has an associate-inclusive control interest in a company in the circumstances set out in Subdivision A of Division 3 of Part X of the Income Tax Assessment Act 1936.
(2) However, in working out whether an entity has an *associate-inclusive control interest of a particular percentage for the purposes of section 140-20, there are these modifications to the way Part X of that Act operates:
(a) that Part is applied to any company, including one acting as a trustee; and
(b) subsection 349(4) applies in all cases in working out which entity holds a direct control interest or a control tracing interest equal to 100%; and
(c) subsections 350(6) and (7) and 355(1) are ignored; and
(d) despite subsection 352(2), an interposed entity may be taken into account in calculating an indirect control interest if it is:
(i) a company of which the first entity or an *associate is a controller; or
(ii) a partnership or a trust; and
(e) section 354 applies as if it referred to partnerships rather than CFP's; and
(f) section 355 applies as if it referred to trusts rather than CFT's.
Note 1: Part X of the Income Tax Assessment Act 1936 defines company to exclude one in the capacity of a trustee.
Note 2: The terms direct control interest and control tracing interest are relevant to working out associate-inclusive control interests in a company: see sections 350, 351, 353, 354 and 355 of that Act.
Note 3: Under subsection 349(4) of that Act, if 2 or more entities would have a direct control interest or a control tracing interest in a company or trust equal to 100%, only one of them holds the interest.
Note 4: Subsections 350(6) and (7) deal with direct control interests in a company. They deal with interests held by Australian entities. Under subsection 355(1), certain entities are taken to hold a control tracing interest in a trust equal to 100%.
Note 5: Paragraphs 140-22(2)(d), (e) and (f) are necessary because Part X of the Income Tax Assessment Act 1936 applies only to CFE's (which comprise CFC's, CFP's and CFT's).
140-25 When is there a material decrease in the value of a share?
There is a material decrease in the market value of a *decreased value share if:
(a) the total of the percentage decreases in its market value because of *share value shifts that occur under the *scheme is at least 5%; or
(b) the total of the decreases in the market value of all shares whose market value decreased because of *share value shifts that occur under the scheme is at least $100,000.
Note: There must be a material decrease in the market value of a share for CGT event G2 to happen: see section 104-140.
140-30 Interests in shares etc.
This Division applies to an interest in a *share, or a right or option to *acquire a share or an interest in a share, in the same way as it applies to a share.
Subdivision 140-B - Consequences of share value shifting
Guide to Subdivision 140-B
140-45 What this Subdivision is about
A share value shift involves a decrease in the market value of shares acquired on or after 20 September 1985. An entity owning these shares may make a capital gain. There are also rules dealing with cost base adjustments.
Table of sections
Different consequences where share value shift is neutral
140-50 What if the share value shift is neutral for each shareholder?
Value shifted to shares acquired on or after 20 September 1985
140-55 Making a capital gain
140-60 Cost base adjustment for shares decreasing in value
140-65 Cost base adjustment for shares increasing in value
140-70 Gain referable to fall in value of shares owned by others
140-75 Gain referable to fall in value of shares owned by the entity
Value shifted to shares acquired before 20 September 1985
140-90 Making a capital gain
140-95 Adjustments to cost base and reduced cost base
[This is the end of the Guide.]
Different consequences where share value shift is neutral
140-50 What if the share value shift is neutral for each shareholder?
(1) The consequences of a *share value shift (which are set out in this Subdivision) are different if these requirements are satisfied for each entity owning *shares in the company.
(2) The *share value shift consists of:
(a) a decrease in the market value of some of the entity's *shares in the company; and
(b) one of these:
(i) an increase in the market value of some of the entity's shares in the company; or
(ii) the issue of shares at a *discount to the entity.
(3) The total decrease in market value of the entity's *shares equals:
(a) the total increase in market value of the entity's shares; or
(b) the total *discounts given in relation to the entity's shares.
(4) An entity works out what the consequences of the *share value shift are by disregarding all *shares in the company owned by other entities.
Example: Bill and Bevan are the only shareholders in a company and are associates. They own one post-CGT share each. The shares are fully paid and each has a market value of $120,000. The company issues one new share to Bill and Bevan for $100,000 each. After the new shares are issued, each share in the company has a market value of $110,000. The total decrease in the market value of the original shares equals the total discount given in relation to the new shares.
Apart from this section, Bill and Bevan would make a capital gain based on the value shifted from their existing share into the new share of the other.
Bill and Bevan will not make a capital gain from the share value shift, although cost base adjustments will be required under this Subdivision.
Value shifted to shares acquired on or after 20 September 1985
140-55 Making a capital gain
(1) This section sets out what happens if a *share value shift results in *shares that were *acquired on or after 20 September 1985 becoming *increased value shares.
Example: The ownership of shares in a company looks like this:
· a controller (for CGT purposes) of the company owns 800 class A shares and 200 class B shares;
· the controller's associate owns 100 class A shares and 700 class B shares;
· a third party owns 100 class A shares and 100 class B shares.
All shares were acquired in 1999. A share value shift causes the market value of all class A shares to fall from $100 to $50 and the market value of all class B shares to increase from $100 to $150.
(2) An entity owning *decreased value shares that have *materially decreased in market value makes a capital gain if the *shift proceeds are more than the part of those shares' *cost base worked out under subsection (5).
Note: The entity cannot make a capital loss.
(3) The shift proceeds are:
Total of the decreases in the market value of those shares * (Total discounts ind increases in market value of increased value shares acquired by other entities on or after 20 September 1985 / Total share value increase of the share value shift)
Example: To continue the example, the total of the decreases in the market value of the controller's shares is $40,000.
The only increased value shares owned by other entities are the class B shares of the controller's associate. The total increase in their market value is $35,000.
The total share value increase is the increase in market value of all shares. This is $50,000.
The controller's shift proceeds are:
$40,000 * ($35,000 / $50,000) = $28,000
Note: This represents the decrease in the market value of the controller's shares which has shifted into shares owned by the controller's associate.
(4) The total share value increase of the *share value shift is the total of:
(a) the increases in the market value of, and the *discounts given in relation to, *increased value shares; and
(b) the increases in the market value of, and the discounts given in relation to, all other shares in the company if they are reasonably attributable to the thing done under the *scheme.
(5) The part of those *shares' *cost base is:
Those shares cost base just before they decreased in value * (The shift proceeds / Those shares market value just before they decreased in value)
Example: To continue the example, suppose the cost base of the controller's class A shares just after they decreased in value is $16,000. Those shares' market value just before they decreased in value is $80,000.
The part of those shares' cost base is:
$16,000 * ($28,000 / $80,000) = $5,600
The controller makes a capital gain of:
$28,000 - $5,600 = $22,400
The controller's associate also makes a capital gain because its class A shares have materially decreased in value and part of the decrease has been shifted into the controller's shares. The gain is worked out in the same way.
The third party does not make a capital gain because its 100 class A shares are not decreased value shares.
Note: The relevant proportion of the cost base of the controller's class A shares is the same proportion as the value of those shares that has shifted into the class B shares of the controller's associate.
140-60 Cost base adjustment for shares decreasing in value
(1) The *cost base and *reduced cost base of each *decreased value share that has *materially decreased in market value are reduced by the lesser of the following:
(a) this fraction:
(The decrease in the market value of that share / The market vaue of that share just before it decreased in value) * (Total descounts and increased in market value of increased value shares acquired on or after 20 September 1985 / Total share value increase of the share value shift)
(b) the amount of the decrease in the market value of the share.
Example: To continue the example in section 140-55, the cost base and reduced cost base of each of the controller's class A shares is $20. Each one decreased in value from $100 to $50.
The $20 is reduced by:
($50 / $100) * ($45,000 / $50,000) = 9/20
This is less than $50 (the decrease in the market value of each of the controller's class A shares). So, the cost base and reduced cost base of each one are reduced from $20 to $11.
Note: The reduction is by the same proportion as the proportion of the value of the controller's class A shares that has shifted into its class B shares and the class B shares of its associate.
(2) The reduction occurs when the *share value shift happens.
140-65 Cost base adjustment for shares increasing in value
(1) The fourth element of the *cost base and *reduced cost base of each *increased value share owned by an entity (and *acquired on or after 20 September 1985) that has *materially increased in value includes this amount:
• the gain referable to the decrease in value of *decreased value shares owned by other entities: see section 140-70;
plus:
• the gain referable to the decrease in value of *decreased value shares owned by the entity: see section 140-75.
The amount is included when the *share value shift happens.
Example: To continue the example in sections 140-55 and 140-60, the controller's 200 class B shares have materially increased in value. The cost base and reduced cost base of each one is increased.
The cost base and reduced cost base of each one before the gain in value is $20. Because these shares all had the same market value before the share value shift ($100), they all increased in value by the same amount ($50) and they all have the same cost base ($20), their cost base and reduced cost base adjustment can be calculated as an aggregate.
(1A) However, the amount is included only to the extent that it is reflected in the market value of the *increased value share at the time of a later *CGT event. The amount is so included even if it is not reflected in the state or nature of the share at that time.
(2) There is a material increase in the value of an *increased value share in 2 situations.
(3) The first is if the sum of:
(a) any *discount given in relation to the share (expressed as a percentage of its market value just before it was issued) in a *share value shift that occurs under the scheme; and
(b) any percentage increases in its market value because of share value shifts that occur under the *scheme;
is at least 5%.
(4) The second is if the sum of:
(a) any *discounts given in relation to all shares in *share value shifts that occur under the scheme; and
(b) any increases in the market value of all shares whose market value increased because of *share value shifts that occur under the scheme;
is at least $100,000.
140-70 Gain referable to fall in value of shares owned by others
(1) The gain referable to the decrease in value of *decreased value shares owned by other entities is the smaller of these 2 amounts.
(2) The first amount is:
Discount or increase in market value of the increased value share * (Total decreases in market value of decreased value shares owned by other entities that have materially decreased in value / Total decreases in market value of all decreased value shares)
Example: To continue the example in sections 140-55 to 140-65, the controller's class B shares have increased in value by $10,000 (200 shares increasing by $50 per share).
The decreased value shares of the controller are the 800 class A shares. Each share decreases in value by $50, making the total decrease in their market value $40,000.
The only other decreased value shares are the 100 class A shares of the controller's associate. The total decrease in their market value is $5,000.
The first amount is:
$10,000 * ($5,000 / $45,000) = $1,111
(3) The second amount is:
Total of the decreased in the market value of decreased value shares owned by other entities that have materially decreased in value * (Discount or increase in market value of the increased calue share / Total share value increase of the share value shift)
Example: To continue the example, the decreased value shares owned by other entities are the class A shares of the controller's associate. The total decrease in their market value is $5,000.
The controller's class B shares have increased in value by $10,000.
The total share value increase of the share value shift is the total increase in market value of all the shares. The 700 class B shares of the controller's associate have increased in value by $35,000 ($50 each). The 100 class B shares of the third party have increased in value by $5,000. The total increase is:
$10,000 + $35,000 + $5,000 = $50,000
The second amount is:
$5,000 + ($10,000 / $50,000) = $1,000
The smaller of the 2 amounts is $1,000.
140-75 Gain referable to fall in value of shares owned by the entity
(1) The gain referable to the decrease in value of *decreased value shares owned by the entity is the smallest of these 3 amounts.
(2) The first amount is:
Discount or increase in market value of the increased value share * (Total decreases in market value of decreased value shares owned by the entity that have materially decreased in value / Total decreases in market value of all decreased value shares)
Example: To continue the example in sections 140-55 to 140-70, the controller's class B shares have increased in value by $10,000.
The decreased value shares of the controller are the 800 class A shares. The total decrease in their market value is $40,000.
The only other decreased value shares are the 100 class A shares of the controller's associate. The decrease in their market value is $5,000.
The first amount is:
$10,000 * ($40,000 / $45,000) = $8,889
(3) The second amount is:
Total decreases in market value of decreased value shares owned by the entity that have materially decreased in value * (Discount or increase in market value of the increased value share / Total share value increase of the share value shift)
Example: To continue the example, the controller's decreased value shares are the 800 class A shares. The decrease in their market value is $40,000.
The controller's class B shares have increased in value by $10,000. The total share value increase of the share value shift is $50,000.
The second amount is:
$40,000 * ($10,000 / $50,000) = $8,000
$40,000 * ($10,000 / $50,000) = $8,000
(4) The third amount is worked out differently, depending on whether the increase in the *cost base or *reduced cost base of each *increased value share is being worked out.
Increase in cost base
(5) If the increase in the *cost base of each *increased value share is being worked out, work out:
• the total reduction in the *cost bases of the entity's *decreased value shares: see subsection (6);
less:
• the amount worked out under subsection 140-55(5) (which is the part of the cost base of the entity's decreased value shares relevant to the working out of any capital gain).
This amount is then apportioned to each increased value share in proportion to its *cost base. The amount apportioned is the third amount.
(6) The total reduction in the *cost bases of the entity's *decreased value shares is:
The fraction worked out under section 140-60 * The total of the cost bases of the entity's decreased value shares when the share value shift happened
Example: To continue the example, the cost base and reduced cost base of each of the controller's 800 class A shares (the decreased value shares) is $20. The total of their cost bases is $16,000.
The total reduction is:
(9/20) * $16,000 = $7,200
The part of the cost base of those shares relevant to working out any capital gain is $5,600: see section 140-60.
The third amount is:
$7,200 - $5,600 = $1,600
This is the smallest of the 3 amounts.
The smaller of the 2 amounts worked out under section 140-70 is $1,000.
The total of the cost bases of the controller's 200 class B shares is $4,000: see section 140-65.
This is increased by:
$1,000 + $1,600 = $2,600
(or the cost base of each of the controller's 200 class B shares is increased by $13).
Increase in reduced cost base
(7) If the increase in the *reduced cost base of each *increased value share is being worked out, the third amount is:
The amount worked out for the increased value share under subsection (5) * (Total of the reduced cost bases of the entity's decreased value shares when the share value shift happened / Total of the bost bases of those shares at that time)
Value shifted to shares acquired before 20 September 1985
140-90 Making a capital gain
(1) This section sets out what happens if a *share value shift results in *shares that were *acquired before 20 September 1985 becoming *increased value shares.
Example: A controller of a company owns 100 shares in the company that were acquired in 1999. A share value shift causes each one to fall in value from $100 to $60.
The controller's associate owns 50 shares in the company that were acquired in 1984. Each one (the increased value shares) increases in value from $20 to $60.
(2) An entity owning *decreased value shares that have *materially decreased in market value makes a capital gain if the *shift proceeds are more than the part of those shares' *cost base worked out under subsection (4).
Note: The entity cannot make a capital loss.
(3) The shift proceeds are:
Total of the decreases in the market value of those shares * (Total of the increases in the market value of increased value shares acquired before 20 September 1985 / Total share value increase of the share value shift)
Example: To continue the example, suppose someone else (who is not an associate of the controller) owns 50 shares in the company. Each one increases in value from $20 to $60.
The total share value increase is:
$2,000 + @2,000 = $4,000
The controller's shift proceeds are:
$4,000 * ($2,000 / $4,000) = $2,000
Note: This represents the decrease in the market value of the controller's shares which has shifted into other shares owned by the controller or the controller's associate.
(4) The part of those *shares' *cost base is:
Those shares cost base just before they decreased in value * (The shift proceeds / Those shares market value just before they decreased in value)
Example: To continue the example, suppose the cost base of the controller's shares just after they decreased in value is $5,000. Their market value just before they decreased in value is $10,000.
The part of those shares' cost base is:
$5,00 * ($2,000 / $10,000) = $1,000
The controller makes a capital gain of $2,000 - $1,000 = $1,000.
140-95 Adjustments to cost base and reduced cost base
(1) The *cost base and *reduced cost base of each *decreased value share that has *materially decreased in market value are reduced by the lesser of the following:
(a) this fraction:
(The decrease in the market value of that share / The market value of that share just before it decreased in value) * (Total of the increases in the market value of increased value shares acquired before 20 September 1985 / Total share value increse of the share value shift)
(b) the amount of the decrease in the market value of the share.
Example: To continue the example in section 140-90, the cost base and reduced cost base of each of the controller's shares is $50. Each one decreased in value from $100 to $60.
The $50 is reduced by:
$40 / $100) * ($2,000 / $4,000) = 1/5
This is less than $40 (the decrease in the market value of each of the controller's shares). So, the cost base and reduced cost base of each one are reduced from $50 to $40.
(2) The reduction occurs when the *share value shift happens.