New Business Tax System (Integrity and Other Measures) Act 1999 (Incorporating amendments up to Act No. 78 of 2001) (169 of 1999)
Schedule 2 Value shifting through debt forgiveness
Income Tax Assessment Act 1997
3 After Division 138
Insert:
Division 139 - Value shifting through debt forgiveness
Guide to Division 139
139-5 What this Division is about
Companies under common ownership can shift value between themselves by forgiving, or substantially and permanently reducing the value of, debts.
This Division requires adjustments to the cost base of direct and indirect interests in those companies where value has been shifted in that way.
Table of sections
Operative provisions
139-10 When this Division may affect you
139-15 Timing of adjustments
139-20 Market value substitution rule not to apply
139-25 Reduction in cost base of shares
139-30 Different calculation in some circumstances
139-35 Reduction in cost base of loans
139-40 Different calculation in some circumstances
139-45 Reduction of cost base of indirect interests in creditor company
139-50 Compensatory increases in interests in debtor company
[This is the end of the Guide.]
Operative provisions
139-10 When this Division may affect you
(1) You may have to make an adjustment under this Division if:
(a) a company (the debtor company ) has an obligation to pay a debt to another company (the creditor company ); and
(b) you have a *share in, a loan to or an indirect interest in the creditor company or a share in or an indirect interest in a share in the debtor company; and
(c) the conditions in subsection (3) or (4) are satisfied.
Exception
(2) No adjustment is required if the debtor company is a *100% subsidiary of the creditor company.
Conditions
(3) The conditions are that:
(a) *CGT event C2 (the trigger event ) happens to the debt or part of it (the surrendered amount ) at a time (the forgiveness time ) on or after 22 February 1999; and
(b) the creditor company and debtor company are *under common ownership at the forgiveness time; and
(c) there is a shift in value from the creditor company to the debtor company as a result of the trigger event because the *capital proceeds the creditor company receives or is entitled to receive from the trigger event are less than the market value of the surrendered amount (at the forgiveness time).
(4) The conditions are that:
(a) there is a substantial and permanent reduction in the value of the debt because of something done (also the trigger event ) by the creditor company or by both companies at a time (also the forgiveness time ) on or after 22 February 1999; and
(b) the creditor company and debtor company are *under common ownership at the forgiveness time; and
(c) there is a shift in value from the creditor company to the debtor company as a result of the trigger event because the money, and market value of other property (if any), that the creditor company receives or is entitled to receive for that reduction is less than the amount of the reduction.
139-15 Timing of adjustments
(1) All reductions to *cost bases and *reduced cost bases of direct interests in the creditor company are to be made as at the forgiveness time.
(2) The adjustments to *cost bases and *reduced cost bases of indirect interests in the creditor company, and direct and indirect interests in the debtor company, are to be made as at the time of the *CGT event referred to in section 139-45 or 139-50.
139-20 Market value substitution rule not to apply
In working out the *capital proceeds from a *CGT event (for this Division), disregard section 116-30 (the market value substitution rule).
139-25 Reduction in cost base of shares
(1) If you owned a *share in the creditor company at the forgiveness time, and you *acquired it on or after 20 September 1985, you must reduce its *cost base and *reduced cost base in accordance with this section.
Note: A different calculation may apply in some circumstances: see section 139-30.
(2) You must work out the factor (the share reduction factor ) obtained by dividing the market value of the *share just before the forgiveness time by the sum of the market values of all the shares in the creditor company (that were acquired on or after 20 September 1985) just before that time.
(3) Reduce the *cost base and *reduced cost base of the *share in this way:
Method statement
Step 1. Reduce the market value of the surrendered amount (just before the forgiveness time) or the amount of the substantial and permanent reduction in the value of the debt by:
(a) the *capital proceeds the creditor company receives or is entitled to receive from the trigger event; or
(b) the money, and market value of other property (if any), that the creditor company receives or is entitled to receive for the substantial and permanent reduction.
Step 2. Multiply the result by the share reduction factor.
Step 3. The result is the maximum reduction amount .
Step 4. Reduce the *cost base and *reduced cost base of the *share to the extent possible by the maximum reduction amount.
139-30 Different calculation in some circumstances
(1) However, you do not make a reduction for a *share under section 139-25 if:
(a) at the forgiveness time:
(i) there were 2 or more classes of shares owned in the creditor company; or
(ii) you or another entity owned a share in the creditor company that you or the other entity *acquired before 20 September 1985; and
(b) it would be unreasonable to reduce the *cost base and *reduced cost base of the share by as much as would be the case under that section.
(2) Instead, you reduce the *cost base and *reduced cost base of the *share by a reasonable amount having regard to:
(a) the circumstances in which you *acquired the share; and
(b) the extent by which its market value was reduced by the trigger event.
139-35 Reduction in cost base of loans
(1) If you owned a loan to the creditor company at the forgiveness time, and:
(a) you *acquired it on or after 20 September 1985; and
(b) either:
(i) the value of the loan was reduced by the trigger event; or
(ii) you did not deal at arm's length with the creditor company in connection with the loan;
you must work out any reduction in its *cost base and *reduced cost base in accordance with this section if:
(c) the cost base or reduced cost base of one or more *shares in the creditor company is reduced to nil under section 139-25; or
(d) no shares in the creditor company were acquired on or after 20 September 1985 and before the forgiveness time; or
(e) the market value of all shares in the creditor company that were acquired on or after that day is nil just before the forgiveness time.
Note: A different calculation may apply in some circumstances: see section 139-40.
(2) You must work out the factor (the loan reduction factor ) obtained by dividing the market value of the loan just before the forgiveness time by the sum of the market values of all the loans to the creditor company (that were acquired on or after 20 September 1985) just before that time.
(3) If:
(a) there were no *shares in the creditor company on which section 139-25 could operate; or
(b) the market value of all shares in the creditor company that were acquired on or after 20 September 1985 is nil just before the forgiveness time;
you reduce the *cost base and *reduced cost base of the loan in the same way as for section 139-25, except that you use the loan reduction factor rather than the share reduction factor.
(4) If section 139-25 has operated to reduce the *cost base of one or more *shares in the creditor company to nil, and the maximum reduction amount exceeded the cost base, multiply the excess by the loan reduction factor. This is done for each share whose cost base is reduced to nil.
(5) The sum of the amounts is the reduction in the *cost base of the loan.
(6) If section 139-25 has operated to reduce the *reduced cost base of one or more *shares in the creditor company to nil, and the maximum reduction amount exceeded the reduced cost base, multiply the excess by the loan reduction factor. This is done for each share whose reduced cost base is reduced to nil.
(7) The sum of the amounts is the reduction in the *reduced cost base of the loan.
139-40 Different calculation in some circumstances
(1) However, you do not reduce the *cost base or *reduced cost base of a loan under section 139-35 if:
(a) at the forgiveness time:
(i) you or another entity owned a *share in the creditor company that you or the entity *acquired before 20 September 1985; or
(ii) you owned another loan to the creditor company; or
(iii) another loan to the creditor company was owned by a company that was a member of the same *wholly-owned group at that time or by an individual referred to in paragraph 138-15(2)(b) (about the ultimate owners); and
(b) it would be unreasonable to reduce it by as much as would be the case under that section.
(2) Instead, you reduce it by a reasonable amount having regard to:
(a) the circumstances in which you *acquired the loan; and
(b) the extent by which its market value was reduced by the trigger event.
139-45 Reduction of cost base of indirect interests in creditor company
(1) You reduce the *cost base and *reduced cost base of a *CGT asset you own if:
(a) because of owning the asset, you have an indirect interest (through one or more interposed companies or trusts) in a *share in or a loan to the creditor company; and
(b) you owned the asset at the forgiveness time; and
(c) a *CGT event happens in relation to the asset; and
(d) you *acquired the CGT asset on or after 20 September 1985; and
(e) an earlier provision of this Division has operated to reduce the cost base or reduced cost base of one or more shares in, or loans to, the creditor company.
(2) The amount of the reduction is such amount as is reasonable having regard to:
(a) the reduction in the value of the *CGT asset as a result of the trigger event; and
(b) for the *cost base - inflation measured by reference to the All Groups Consumer Price Index Number (up to the end of 30 September 1999).
139-50 Compensatory increases in interests in debtor company
(1) You increase the *cost base and *reduced cost base of a *CGT asset under this section if:
(a) the asset is a *share in the debtor company or an asset that gives you an indirect interest in a share in that company (through one or more interposed companies or trusts); and
(b) you owned the asset at the forgiveness time; and
(c) an earlier provision of this Division has operated to reduce the cost base or reduced cost base of one or more shares in, or loans to, the creditor company; and
(d) a *CGT event happens in relation to the asset; and
(e) you *acquired the CGT asset on or after 20 September 1985.
(2) The amount of the increase is such amount as is reasonable having regard to:
(a) the increase in the value of the *CGT asset as a result of the trigger event; and
(b) the amount of any relevant reductions made under this Division; and
(c) for the *cost base - inflation measured by reference to the All Groups Consumer Price Index Number (up to the end of 30 September 1999).