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Edited version of private ruling
Authorisation Number: 1011667144357
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Ruling
Subject: Market value
In determining whether you satisfy the principal asset test under section 855-30 of the Income Tax Assessment Act 1997 (ITAA 1997), can you use fair value as obtained from the financial statements of a company?
No.
This ruling applies for the following period
Year ending 30 June 2011
The scheme commenced on
1 June 2010
Relevant facts
You are a non resident. You, together with associates (the holding entity) acquired about X% shares in a listed Australian company (the test entity) without setting up any permanent establishment or any involvement of option or right. The holding entity has remained as a non resident and is contemplating selling part of the shares in the test entity.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 855-30(2)
Does Part IVA apply to this ruling?
Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.
We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.
If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.
For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.
Reasons for Decision
Legislative references referred to herein are from the ITAA 1997 unless stated otherwise stated.
Principal asset test (PAT)
Subsection 855-30(2) states that a membership interest held by an entity (the holding entity) in another entity (the test entity) passes the PAT if the sum of the market values of the test entity's assets that are taxable Australian real property exceeds the sum of the market values of its assets that are not taxable Australian real property.
The ATO document titled Market valuation for tax purposes covers fair value. Fair value is an accounting concept specifically used for financial reporting purposes. It is not always an identical concept to market value, although it is generally defined in a similar way to market value.
Subsection 855-30(2) specifically states market value must be used.
In your case, market value must be used as fair value may not necessarily represent market value.