Income Tax Assessment Act 1997
A *CGT asset is venture capital equity for a *venture capital entity if it is a *share in a company or an interest in a trust where:
(a) the company or trust is a *resident investment vehicle; and
(b) the share or interest was issued or allotted to the entity by the company or trust; and
(c) the entity was at risk in owning the share or interest in that it had no *arrangement (either before or after the share or interest was issued or allotted) as to:
(i) the maintenance of the value of the share or interest; or
(ii) any earnings or other return that might be made from owning it; or
(iii) protection from commercial loss because of owning it.
A company borrows money to purchase some shares. The terms of the loan include a term that, if the value of the shares falls below the amount of the loan, the company can repay the loan by transferring the shares to the lender.
The company ' s ownership of the shares is not at risk, because there is no possibility that it can lose money under the transaction.
However, *shares or interests in the *resident investment vehicle issued or allotted to a *venture capital entity are not venture capital equity for the entity if:
(a) one or more of these events happens:
(i) a share or interest in the resident investment vehicle that was *acquired by some other entity before that issue or allotment is cancelled or redeemed; or
(ii) there is a return of some of the capital of the resident investment vehicle that was acquired before that issue or allotment; or
(iii) value is shifted out of a share or interest in that vehicle that was acquired before that issue or allotment; and
(b) it is reasonable to conclude that the happening of the event referred to in paragraph (a) is connected to that issue or allotment, or to some *arrangement between the entities concerned.
The capital of an Australian company is 100,000 shares, with a market value of $1 per share. The shares have full voting and dividend rights.
The Australian company issues another 100,000 shares to a foreign company. The new shares are issued at one cent each, but have very limited voting and dividend rights.
The Australian company then changes the rights attaching to its shares so that the new shares have full voting and dividend rights, and the original shares have none.
Value has been shifted out of the original shares, effectively converting " old equity " to " new equity " .
In deciding whether it is reasonable to reach the conclusion referred to in paragraph (2)(b), these matters are relevant:
(a) whether the amount of the decrease in the *net value of the *resident investment vehicle because of the happening of the event referred to in paragraph (2)(a) is the same as, or is calculated by reference to, the value of the issue or allotment of *shares or interests to the *venture capital entity; and
(b) the time lapse between the happening of that event and that issue or allotment.