"RCB of interest" means the interest's ^* reduced cost base when the transferor ^* acquired it.

"total of RCBs of direct roll-over replacements" means the total of the ^* reduced cost bases of all ^* direct roll-over replacements for the underlying asset when the transferor ^* acquired them.

(4)

If:

(a)

the interest was an ^* indirect roll-over replacement; or

(b)

the amount worked out under subsection (2) does not appropriately reflect the matters referred to in this subsection;

the interest's ^* reduced cost base is reduced by an amount that is appropriate having regard to these matters:

(c)

the underlying asset loss reduction; and

(d)

the quantum of the interest relative to all ^* direct roll-over replacements and indirect roll-over replacements that the transferor owns or has previously owned.

723-110 Direct and indirect roll-over replacement for underlying asset

(1)

For an entity (the transferor ) that owns a ^* CGT asset, the CGT asset is a direct roll-over replacement for something (the underlying asset ) that another entity owns if, and only if:

(a)

a ^* CGT event happened to the underlying asset while the transferor owned it; and

(b)

the other entity ^* acquired the underlying asset as a result of that CGT event; and

(c)

there was a ^* replacement-asset roll-over for the CGT event; and

(d)

the transferor received the CGT asset (or CGT assets including it) in respect of the CGT event as the replacement asset (or the replacement assets).

(3)

For an entity (the transferor ) that owns a ^* CGT asset, the CGT asset is an indirect roll-over replacement for something (the underlying asset ) that another entity owns if, and only if:

(a)

a ^* CGT event happened to another CGT asset at a time when the transferor owned it and the other entity already owned the underlying asset; and

(b)

for the transferor, the other CGT asset was at that time:

(i)

a ^* direct roll-over replacement for the underlying asset; or

(ii)

an indirect roll-over replacement for the underlying asset because of any other application or applications of this subsection; and

(c)

there was a ^* replacement-asset roll-over for the CGT event; and

(d)

the transferor received the first CGT asset (or CGT assets including it) in respect of the CGT event as the replacement asset (or the replacement assets).

Division 725—Direct value shifting affecting interests in companies and trusts

Table of Subdivisions

Guide to Division 725
725-A Scope of the direct value shifting rules
725-B What is a direct value shift
725-C Consequences of a direct value shift
725-D Consequences for down interest or up interest as CGT asset
725-E Consequences for down interest or up interest as trading stock or a revenue asset
725-F Value adjustments and taxed gains

Guide to Division 725
725-1 What this Division is about

If, under a scheme, value is shifted from equity or loan interests in a company or trust to other equity or loan interests in the same company or trust (including interests issued at a discount), this Division:

(a) adjusts the value of those interests for income tax purposes to take account of material changes in market value that are attributable to the value shift; and
(b) treats the value shift as a partial realisation to the extent that value is shifted between interests held by different owners, and in some other cases.

However, it does so only for interests that are owned by entities involved in the value shift.

Subdivision 725-A—Scope of the direct value shifting rules

Table of sections

725-45 Main object
725-50 When a direct value shift has consequences under this Division
725-55 Controlling entity test
725-65 Cause of the value shift
725-70 Consequences for down interest only if there is a material decrease in its market value
725-80 Who is an affected owner of a down interest?
725-85 Who is an affected owner of an up interest?
725-90 Direct value shift that will be reversed
725-95 Direct value shift resulting from reversal

725-45 Main object

(1)

The main object of this Division is:

(a)

to prevent inappropriate losses from arising on the realisation of ^* equity or loan interests from which value has been shifted to other equity or loan interests in the same entity; and

(b)

to prevent inappropriate gains from arising on the realisation of equity or loan interests in the same entity to which the value has been shifted;

so far as those interests are owned by entities involved in the value shift.

(2)

This is done by:

(a)

adjusting the value of those interests for income tax purposes to take account of changes in market value that are attributable to the value shift; and

(b)

treating the value shift as a partial realisation to the extent that value is shifted:

(i)

between interests held by different owners; or

(ii)

in the case of interests in their character as CGT assets—from post-CGT assets to pre-CGT assets; or

(iii)

between interests of different characters.

725-50 When a direct value shift has consequences under this Division

A ^* direct value shift under a ^* scheme involving ^* equity or loan interests in an entity (the target entity ) has consequences for you under this Division if, and only if:

(a)

the target entity is a company or trust at some time during the ^* scheme period; and

(b)

section 725-55 (Controlling entity test) is satisfied; and

(c)

section 725-65 (Cause of the value shift) is satisfied; and

(d)

you are an ^* affected owner of a ^* down interest, or an ^* affected owner of an ^* up interest, or both; and

(e)

neither of sections 725-90 and 725-95 (about direct value shifts that are reversed) applies.

Note: For a down interest of which you are an affected owner, the direct value shift has consequences under this Division only if section 725-70 (about material decrease in market value) is satisfied.

725-55 Controlling entity test

An entity (the controller ) must ^* control (for value shifting purposes) the target entity at some time during the period starting when the ^* scheme is entered into and ending when it has been carried out. (That period is the scheme period .)

For the concept of control (for value shifting purposes) ,
see sections 727-355 to 727-375.

[The next section is section 725-65.]

725-65 Cause of the value shift

(1)

It must be the case that one or more of the following:

(a)

the target entity;

(b)

the controller;

(c)

an entity that was an ^* associate of the controller at some time during or after the ^* scheme period;

(d)

an ^* active participant in the ^* scheme;

(either alone or together with one or more other entities) did under the scheme the one or more things:

(e)

to which the decrease in the market value of the ^* down interests is reasonably attributable; and

(f)

to which the increase in the market value of the ^* up interests, or the issue of up interests at a ^* discount, is reasonably attributable, or that is or include the issue of up interests at a ^* discount.

Active participants (if target entity is closely held)

(2)

An entity (the first entity ) is an active participant in the ^* scheme if, and only if:

(a)

at some time during the ^* scheme period, the target entity has fewer than 300 members (in the case of a company) or fewer than 300 beneficiaries (in the case of a trust); and

(b)

the first entity has actively participated in, or directly facilitated, the entering into or carrying out of the ^* scheme (whether or not it did so at the direction of some other entity); and

(c)

the first entity:

(i)

owns a ^* down interest at the ^* decrease time; or

(ii)

owns an ^* up interest at the ^* increase time or has an up interest issued to it at a ^* discount because of the ^* direct value shift.

When an entity has 300 or more members or beneficiaries

(3)

Section 124-810 (under which certain companies and trusts are not regarded as having 300 or more members or beneficiaries) also applies for the purposes of this Division.

(4)

In addition, this Division applies to a ^* non-fixed trust as if it did not have 300 or more beneficiaries.

725-70 Consequences for down interest only if there is a material decrease in its market value

(1)

For a ^* down interest of which you are an ^* affected owner, the ^* direct value shift has consequences under this Division only if the sum of the decreases in the market value of all down interests because of direct value shifts under the same ^* scheme as the direct value shift is at least $150,000.

Note: In working out the sum of the decreases in market value of all down interests, it will be necessary to include decreases not only in your down interests, but also in those of other affected owners and of entities that are not affected owners.

(2)

However, if, having regard to all relevant circumstances, it is reasonable to conclude that the sole or main reason why a ^* direct value shift happened under a different scheme from one or more other direct value shifts was so that subsection (1) would not be satisfied for one or more of the direct value shifts mentioned in this subsection, subsection (1) does not apply (and is taken never to have applied) to any of the direct value shifts.

[The next section is section 725-80.]

725-80 Who is an affected owner of a down interest?

An entity is an affected owner of a ^* down interest if, and only if, the entity owns the down interest at the ^* decrease time and at least one of these paragraphs is satisfied:

(a)

the entity is the controller;

(b)

the entity was an ^* associate of the controller at some time during or after the ^* scheme period;

(c)

the entity is an ^* active participant in the ^* scheme.

725-85 Who is an affected owner of an up interest?

An entity is an affected owner of an ^* up interest if, and only if:

(a)

there is at least one ^* affected owner of ^* down interests; and

(b)

the entity owns the up interest at the ^* increase time, or the interest is an up interest because it was issued to the entity at a ^* discount;

and at least one of these paragraphs is satisfied:

(c)

the entity is the controller;

(d)

the entity was an ^* associate of the controller at some time during or after the ^* scheme period;

(e)

at some time during or after the scheme period, the entity was an associate of an entity that is an affected owner of down interests because it was an associate of the controller at some time during or after that period;

(f)

the entity is an ^* active participant in the ^* scheme.

725-90 Direct value shift that will be reversed

(1)

The ^* direct value shift does not have consequences for you under this Division if:

(a)

the one or more things referred to in paragraph 725-145(1)(b) brought about a state of affairs, but for which the direct value shift would not have happened; and

(b)

as at the time referred to in that paragraph, it is more likely than not that, because of the ^* scheme, that state of affairs will cease to exist within 4 years after that time.

Example: Under a scheme, the voting rights attached to a class of shares in a company are changed. As a result, the market value of shares in that class decreases, and the market value of other classes of shares in the company increases. The company's constitution provides that the change is to last for only 3 years.

(2)

However, this section stops applying if the state of affairs referred to in paragraph (1)(a) still exists:

(a)

at the end of those 4 years; or

(b)

when a ^* realisation event happens to ^* down interests or ^* up interests of which you are, or any other entity is, an ^* affected owner;

whichever happens sooner.

(3)

If this section stops applying, it is taken never to have applied to the ^* direct value shift.

Note: This may result in an assessment for an earlier income year having to be amended to give effect to the consequences that the direct value shift would have had for you under this Division if this section hadn't applied.

725-95 Direct value shift resulting from reversal

(1)

A ^* direct value shift does not have consequences for any entity under this Division if:

(a)

section 725-90 applies, and the state of affairs referred to in paragraph 725-90(1)(a) ceases to exist; and

(b)

the direct value shift would not have happened but for that state of affairs ceasing to exist.

(2)

However, if section 725-90 stops applying, this section is taken never to have applied to the later direct value shift.

Subdivision 725-B—What is a direct value shift

Table of sections

725-145 When there is a direct value shift
725-150 Issue of equity or loan interests at a discount
725-155 Meaning of down interests , decrease time , up interests and increase time
725-160 What is the nature of a direct value shift?
725-165 If market value decrease or increase is only partly attributable to the scheme

725-145 When there is a direct value shift

(1)

There is a direct value shift under a ^* scheme involving ^* equity or loan interests in an entity (the target entity ) if:

(a)

there is a decrease in the market value of one or more equity or loan interests in the target entity; and

(b)

the decrease is reasonably attributable to one or more things done under the scheme, and occurs at or after the time when that thing, or the first of those things, is done; and

(c)

either or both of subsections (2) and (3) are satisfied.

Examples of something done under a scheme are issuing new shares at a ^* discount, buying back shares or changing the voting rights attached to shares.

(2)

One or more ^* equity or loan interests in the target entity must be issued at a ^* discount. The issue must be, or must be reasonably attributable to, the thing, or one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph.

Example: A company runs a family business. There are 2 shares originally issued for $2 each. They are owned by 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. The 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.

(3)

Or, there must be an increase in the market value of one or more ^* equity or loan interests in the target entity. The increase must be reasonably attributable to the thing, or to one or more of the things, referred to in paragraph (1)(b). It must also occur at or after the time referred to in that paragraph.

725-150 Issue of equity or loan interests at a discount

(1)

An ^* equity or loan interest is issued at a discount if, and only if, the market value of the interest when issued exceeds the amount of the payment that the issuing entity receives. The excess is the amount of the discount .

(2)

The payment that the issuing entity receives can include property. If it does, use the market value of the property in working out the amount of the payment.

Amounts for which bonus equities are treated as being issued

(3)

If:

(a)

a ^* primary equity interest is issued as mentioned in subsection 130-20(1) (about bonus equities issued in relation to original equities); and

(b)

subsection 130-20(3) does not apply (about bonus equities that are a dividend or otherwise assessable income);

subsection (1) of this section applies to the interest as if the amount of the payment that the issuing entity receives were equal to the ^* cost base of the interest when issued (as worked out under section 130-20).

(4)

If:

(a)

a ^* primary equity interest is issued as mentioned in subsection 6BA(1) of the Income Tax Assessment Act 1936 (about bonus shares issued in relation to original shares); and

(b)

subsection 6BA(2) of that Act applies (about bonus shares that are a dividend);

subsection (1) of this section applies to the interest as if the amount of the payment that the issuing entity receives were equal to the consideration worked out under subsection 6BA(2) of that Act.

(5)

If both of subsections (3) and (4) apply to the issue of the same ^* primary equity interest, subsection (1) of this section applies to the interest as if the amount of the payment that the issuing entity receives were equal to the greater of the amounts worked out under subsections (3) and (4).

Application of subsections (3), (4) and (5)

(6)

Subsection (3) does not apply if, for the income year in which the interest is issued, the issuing entity is:

(a)

a corporate unit trust within the meaning of section 102J of the Income Tax Assessment Act 1936 ; or

(b)

a public trading trust within the meaning of section 102R of that Act.

(7)

Subsections (3), (4) and (5) have effect only for the purposes of working out whether a ^* direct value shift has happened and, if so, its consequences (if any) under this Division.

725-155 Meaning of down interests, decrease time, up interests and increase time

(1)

An ^* equity or loan interest in the target entity is a down interest if a decrease in its market value is reasonably attributable to the one or more things referred to in paragraph 725-145(1)(b), and occurs at or after the time referred to in that paragraph. The time when the decrease happens is called the decrease time for that interest.

(2)

An ^* equity or loan interest in the target entity is an up interest if subsection 725-145(2) or (3) is satisfied for the interest. The time when the interest is issued at a ^* discount, or the increase in market value happens, is called the increase time for that interest.

725-160 What is the nature of a direct value shift?

(1)

The ^* direct value shift has 2 aspects.

(2)

Overall, it consists of:

(a)

the decreases in market value of the down interests; and

(b)

the issue at a ^* discount of the up interests covered by subsection 725-145(2); and

(c)

the increases in market value of the up interests covered by subsection 725-145(3).

(3)

This Division also proceeds on the basis that the ^* direct value shift is from each of the ^* down interests to each of the ^* up interests.

725-165 If market value decrease or increase is only partly attributable to the scheme

If it is reasonable to conclude that an increase or decrease in market value, or the issuing of an ^* equity or loan interest at a ^* discount, is only partly caused by the doing of the one or more things under the ^* scheme, this Division applies to the increase, decrease, or issue at a discount, to that extent only.

Subdivision 725-C—Consequences of a direct value shift

Table of sections

General

725-205 Consequences depend on character of down interests and up interests
725-210 Consequences for down interests depend on pre-shift gains and losses

Special cases

725-220 Neutral direct value shifts
725-225 Issue of bonus shares or units
725-230 Off-market buy-backs

General
725-205 Consequences depend on character of down interests and up interests

(1)

The consequences for you of the ^* direct value shift depend on the character of the ^* down interests and ^* up interests of which you are an ^* affected owner.

(2)

There are consequences for all your ^* down interests and ^* up interests in their character as ^* CGT assets. However, some of them may also be ^* trading stock or ^* revenue assets. There are additional consequences for those interests in their character as trading stock or revenue assets.

Note: For example, you may own a down interest that is a CGT asset and a revenue asset.

Sections 725-240 to 725-255 set out the consequences for you of a shift in value from that interest in its character as a CGT asset. The cost base of the asset will be decreased, which will affect the calculation of a capital gain when a CGT event happens to the interest.

Section 725-320 sets out the consequences for you of a shift in value from that interest in its character as a revenue asset. The adjustment made under that section will affect the calculation of any profit on the sale of the interest.

Any overlap between the capital gain and the profit realised on the sale of the interest is then dealt with under section 118-20.

In some instances, the direct value shift may result in a taxing event generating a gain for you in the income year in which the shift happens. That gain will be both a capital gain (because the down interest can be characterised as a CGT asset) and an increase in your assessable income (because the down interest can be characterised as a revenue asset). Again, any overlap is dealt with under section 118-20.

725-210 Consequences for down interests depend on pre-shift gains and losses

(1)

The consequences for a ^* down interest also depend on whether it has a ^* pre-shift gain or a ^* pre-shift loss.

(2)

It has a pre-shift gain if, immediately before the ^* decrease time, its market value was greater than its ^* adjustable value.

(3)

It has a pre-shift loss if, immediately before the ^* decrease time, its market value was equal to or less than its ^* adjustable value.

[The next section is section 725-220.]

Special cases
725-220 Neutral direct value shifts

(1)

The consequences are different if the total decrease in market value of your ^* down interests is equal to the sum of:

(a)

the total increase in market value of your ^* up interests; and

(b) the total ^* discounts given to you on the issue of your up interests.

(2)

In that case, this Subdivision and Subdivisions 725-D to 725-F apply to you as if the ^* direct value shift:

(a)

consisted only of:

(i)

the decreases in market value of your ^* down interests; and

(ii)

the issue at a ^* discount of your ^* up interests covered by subsection 725-145(2); and

(iii)

the increases in market value of your up interests covered by subsection 725-145(3); and

(b)

were from each of your down interests to each of your up interests.

(3)

This section has effect despite section 725-160.

725-225 Issue of bonus shares or units

(1)

The consequences are different if you are an ^* affected owner of ^* up interests (the bonus interests ) that the target entity issues to you, at a ^* discount, under the ^* scheme, in relation to ^* down interests (the original interests ) of which you are an affected owner.

Effect of treatment under subsection 130-20(3)

(2)

To the extent that the ^* direct value shift is to the bonus interests from original interests in relation to which the target entity issued bonus interests to which:

(a)

subsection 130-20(3) applies (because none of them is a dividend or otherwise assessable income); and

(b)

item 1 of the table in that subsection applies (because the original interests are post-CGT assets);

these paragraphs apply:

(c)

the respective ^* cost bases and ^* reduced cost bases of those original interests are not reduced;

(d)

the bonus interests referred to in subsection (1) do not give rise to a ^* taxing event generating a gain for you under the table in section 725-245 on any of those original interests.

(3)

To the extent that the ^* direct value shift is from the original interests to bonus interests to which subsection 130-20(3) applies (because none of them is a dividend or otherwise assessable income) and:

(a)

item 1 of the table in that subsection applies (because the original interests are post-CGT assets); or

(b)

item 2 of that table applies (because the original interests are pre-CGT assets and an amount has been paid for the bonus interests that you were required to pay);

the respective ^* cost bases and ^* reduced cost bases of those bonus interests are not uplifted.

Effect of treatment under subsection 6BA(3) of the Income Tax Assessment Act 1936

(4)

To the extent that the ^* direct value shift is to the bonus interests from original interests in relation to which the target entity issued bonus interests to which subsection 6BA(3) of the Income Tax Assessment Act 1936 applies (either because they are shares issued for no consideration and none of them is a dividend or because they qualify for the intercorporate dividend rebate):

(a)

the respective ^* adjustable values of those original interests, in their character as ^* trading stock or ^* revenue assets, are not reduced; and

(b)

the bonus interests referred to in subsection (1) do not give rise to a ^* taxing event generating a gain for you under the table in section 725-335 on any of those original interests.

(5)

To the extent that the ^* direct value shift is from the original interests to bonus interests to which subsection 6BA(3) of the Income Tax Assessment Act 1936 applies, the respective ^* adjustable values of those bonus interests of which you are an affected owner, in their character as trading stock or revenue assets, are not uplifted.

725-230 Off-market buy-backs

(1)

The consequences are different if:

(a)

a decrease in the market value of a ^* down interest of which you are an ^* affected owner is reasonably attributable to the target entity proposing to buy back that interest for less than its market value; and

(b)

the target entity does buy back that down interest; and

(c)

subsection 159GZZZQ(2) of the Income Tax Assessment Act 1936 treats you as having received the down interest's market value worked out as if the buy-back had not occurred and was never proposed to occur.

(2)

The ^* adjustable value of the ^* down interest is not reduced, and there is no ^* taxing event generating a gain.

Note: The down interest is not dealt with here because it is already dealt with in Division 16K of Part III of the Income Tax Assessment Act 1936 .

(3)

Also, to the extent that the ^* direct value shift is from the ^* down interest to ^* up interests of which you are an ^* affected owner, uplifts in the ^* adjustable value of the up interests are worked out under either or both of:

(a)

item 8 of the table in subsection 725-250(2); and

(b)

item 9 of the table in subsection 725-335(3);

as if the down interest were one owned by another affected owner.

Subdivision 725-D—Consequences for down interest or up interest as CGT asset

Table of sections

725-240 CGT consequences; meaning of adjustable value
725-245 Table of taxing events generating a gain for interests as CGT assets
725-250 Table of consequences for adjustable values of interests as CGT assets
725-255 Multiple CGT consequences for the same down interest or up interest

725-240 CGT consequences; meaning of adjustable value

(1)

The CGT consequences for you of a ^* direct value shift are of one or more of these 3 kinds:

(a)

there are one or more ^* taxing events generating a gain for ^* down interests of which you are an affected owner (see subsection (2));

(b)

the ^* cost base and ^* reduced cost base of down interests of which you are an ^* affected owner are reduced (see subsection (3));

(c)

the cost base and reduced cost base of ^* up interests of which you are an affected owner are uplifted (see subsection (4)).

Note: If there is a taxing event generating a gain, CGT event K8 happens. See section 104-240.

Taxing event generating a gain

(2)

To work out:

(a)

whether under the table in section 725-245 there is a ^* taxing event generating a gain for you on a ^* down interest; and

(b)

if so, the amount of the gain;

assume that the adjustable value from time to time of that or any other ^* equity or loan interest in the ^* target entity is its ^* cost base.

Note: For example, for that purpose the question whether the interest has a pre-shift gain or a pre-shift loss is determined on the basis that the interest's adjustable value is its cost base.

Reduction or uplift of cost base and reduced cost base

(3)

The ^* cost base and the ^* reduced cost base of a ^* down interest are reduced at the ^* decrease time to the extent that section 725-250 provides for the ^* adjustable value of the interest to be reduced.

(4)

The ^* cost base and the ^* reduced cost base of an ^* up interest are uplifted at the ^* increase time to the extent that section 725-250 provides for the ^* adjustable value of the interest to be uplifted.

(5)

However, the ^* cost base or ^* reduced cost base is uplifted only to the extent that the amount of the uplift is still reflected in the market value of the interest when a later ^* CGT event happens to the interest.

(6)

To work out:

(a)

whether the ^* cost base or ^* reduced cost base of the interest is reduced or uplifted; and

(b)

if so, by how much;

assume that:

(c)

the adjustable value from time to time of that or any other ^* equity or loan interest in the ^* target entity is its cost base or reduced cost base, as appropriate; and

(d)

if the interest is an ^* up interest because it was issued at a ^* discount—the adjustable value of the interest immediately before it was issued was its cost base or reduced cost base, as appropriate, when it was issued.

Note: For example, for that purpose the question whether the interest has a pre-shift gain or a pre-shift loss is determined on the basis that the interest's adjustable value is its cost base or reduced cost base, as appropriate.

Reductions and uplifts also apply to pre-CGT assets

(7)

A reduction or uplift occurs regardless of whether the entity that owns the interest ^* acquired it before, on or after 20 September 1985.

725-245 Table of taxing events generating a gain for interests as CGT assets

To the extent that the ^* direct value shift is from ^* down interests of which you are an ^* affected owner, and that are specified in an item in the table, to ^* up interests specified in that item, those up interests give rise to a taxing event generating a gain for you on each of those down interests. The gain is worked out under section 725-365.

Note: If there is a taxing event generating a gain on a down interest, CGT event K8 happens: see section 104-240. However, a capital gain you make under CGT event K8 is disregarded if the down interest:

* is your trading stock (see section 118-25); or
* is a pre-CGT asset (see subsection 104-240(5)).

725-250 Table of consequences for adjustable values of interests as CGT assets

(1)

The table in subsection (2) sets out consequences of the ^* direct value shift for the ^* adjustable values of ^* down interests and ^* up interests of which you are an ^* affected owner, in their character as ^* CGT assets.

(2)

To the extent that the ^* direct value shift is from ^* down interests specified in an item in the table to ^* up interests specified in that item:

(a)

the ^* adjustable value of each of those down interests is decreased by the amount worked out under the section (if any) specified for the down interests in the last column of that item; and

(b)

the adjustable value of each of those ^* up interests is uplifted by the amount worked out under the section (if any) specified for the up interests in that column.

725-255 Multiple CGT consequences for the same down interest or up interest

(1)

A ^* down interest or ^* up interest of which you are an ^* affected owner may be covered by 2 or more items in the table in subsection 725-250(2).

(2)

If the ^* cost base or ^* reduced cost base of the same ^* down interest or ^* up interest is decreased or uplifted under 2 or more items, it is decreased or uplifted by the total of the amounts worked out under those items.

(3)

If for a particular ^* down interest there is a ^* taxing event generating a gain under an item in the table in section 725-245, that taxing event is in addition to:

(a)

each taxing event generating a gain for that interest under any other item in that table; and

(b)

each decrease in the ^* cost base or ^* reduced cost base of the interest under an item in the table in subsection 725-250(2).

Subdivision 725-E—Consequences for down interest or up interest as trading stock or a revenue asset

Table of sections

725-310 Consequences for down interest or up interest as trading stock
725-315 Adjustable value of trading stock
725-320 Consequences for down interest or up interest as a revenue asset
725-325 Adjustable value of revenue asset
725-335 How to work out those consequences
725-340 Multiple trading stock or revenue asset consequences for the same down interest or up interest

725-310 Consequences for down interest or up interest as trading stock

(1)

The consequences of the ^* direct value shift for your ^* trading stock are of one or more of these 3 kinds:

(a)

the ^* adjustable values of ^* down interests of which you are an ^* affected owner are reduced (see subsection (2));

(b)

the adjustable values of ^* up interests of which you are an affected owner are uplifted (see subsection (3));

(c)

there are one or more ^* taxing events generating a gain for down interests of which you are an affected owner (see subsection (5)).

Effect of reduction or uplift of adjustable value

(2)

If the ^* adjustable value of a ^* down interest that is your trading stock is reduced under section 725-335, you are treated as if:

(a)

^* immediately before the ^* decrease time, you had sold the interest to someone else (at ^* arm's length and in the ordinary course of business) for its ^* adjustable value immediately before the decrease time; and

(b)

immediately after the decrease time, you had bought the interest back for the reduced adjustable value.

(3)

If the ^* adjustable value of an ^* up interest that is your ^* trading stock is uplifted under section 725-335, you are treated as if:

(a)

^* immediately before the ^* increase time, you had sold the interest to someone else (at ^* arm's length and in the ordinary course of business) for its ^* adjustable value immediately before the increase time; and

(b)

immediately after the increase time, you had bought the interest back for the uplifted adjustable value.

(4)

However, the increase in the cost of an ^* up interest because of paragraph (3)(b) is taken into account from time to time only to the extent that the amount of the increase is still reflected in the market value of the interest.

Note: The situations where the increase in cost would be taken into account include:

* in working out your deductions for the cost of trading stock acquired during the income year in which the increase time happens; and
* the end of an income year if the interest's closing value as trading stock is worked out on the basis of its cost; and
* the start of the income year in which the interest is disposed of, if that happens in a later income year and the interest's closing value as trading stock at the end of the previous income year was worked out on the basis of its cost.

If the interest stops being trading stock, section 70-110 treats you as having disposed of it.

Taxing event generating a gain

(5)

For each ^* taxing event generating a gain under an item in the table in subsection 725-335(3), the gain is included in your assessable income for the income year in which the ^* decrease time happens.

725-315 Adjustable value of trading stock

If a ^* down interest or ^* up interest is your trading stock, its adjustable value at a particular time is:

(a)

if the interest has been ^* trading stock of yours ever since the start of the income year in which that time occurs—its ^* value as trading stock at the start of the income year; or

(b)

otherwise—its cost.

Note 1: If an interest has been affected by an earlier direct value shift during the same income year, it will be treated as having already been sold and repurchased (because of an earlier application of section 725-310). As a result, the cost on repurchase becomes its adjustable value immediately before the decrease time or increase time for the later direct value shift.

Note 2: The adjustable value of an interest that is an up interest because it was issued at a discount is worked out under paragraph (b).

725-320 Consequences for down interest or up interest as a revenue asset

(1)

The consequences of the ^* direct value shift for your ^* revenue assets are of one or more of these 3 kinds:

(a)

the ^* adjustable values of ^* down interests of which you are an ^* affected owner are reduced (see subsection (2));

(b)

the adjustable values of ^* up interests of which you are an affected owner are uplifted (see subsection (3));

(c)

one or more ^* taxing events generating a gain for down interests of which you are an affected owner (see subsection (5)).

Effect of reduction or uplift of adjustable value

(2)

If the ^* adjustable value of a ^* down interest that is your ^* revenue asset is decreased under section 725-335, you are treated as if:

(a)

^* immediately before the ^* decrease time, you had sold the interest to someone else for its ^* adjustable value immediately before the decrease time; and

(b)

immediately afterwards, you had bought the interest back for the reduced adjustable value; and

(c)

from the time when you bought it back, the interest continued to be a revenue asset, for the same reasons as it was a revenue asset before you sold it.

(3)

If the ^* adjustable value of an ^* up interest that is your ^* revenue asset is uplifted under section 725-335, you are treated as if:

(a)

^* immediately before the ^* increase time, you had sold the interest to someone else for its ^* adjustable value immediately before the increase time; and

(b)

immediately afterwards, you had bought the interest back for the uplifted adjustable value; and

(c)

from the time when you bought it back, the interest continued to be a revenue asset, for the same reasons as it was a revenue asset before you sold it.

(4)

However, the uplift in ^* adjustable value is taken into account only to the extent that the amount of the uplift is still reflected in the market value of the interest when it is disposed of or otherwise realised.

Taxing event generating a gain

(5)

For each ^* taxing event generating a gain under an item in the table in subsection 725-335(3), the gain is included in your assessable income for the income year in which the ^* decrease time happens.

725-325 Adjustable value of revenue asset

(1)

If a ^* down interest is your ^* revenue asset, its adjustable value immediately before the ^* decrease time is the total of the amounts that would be subtracted from the gross disposal proceeds in calculating any profit or loss on disposal of the interest if you disposed of it immediately before the decrease time.

(2)

If an ^* up interest is your ^* revenue asset and it increases in market value because of the ^* direct value shift, its adjustable value immediately before the ^* increase time is the total of the amounts that would be subtracted from the gross disposal proceeds in calculating any profit or loss on disposal of the interest if you disposed of it immediately before the increase time.

(3)

If an ^* up interest is your ^* revenue asset and it is issued at a ^* discount, it is taken to have an adjustable value immediately before it is issued equal to the consideration paid or given by you for the interest.

Note: If an interest has been affected by an earlier direct value shift during the same income year, it will be treated as having already been sold and repurchased (because of an earlier application of section 725-320). As a result, the cost on repurchase becomes its adjustable value immediately before the decrease time or increase time for the later direct value shift.

[The next section is section 725-335.]

725-335 How to work out those consequences

(1)

This section sets out the consequences of the ^* direct value shift for a ^* down interest or ^* up interest as ^* trading stock or a ^* revenue asset.

(2)

If you have both trading stock and revenue assets, items 1 and 2 of the table in subsection (3) can apply once to the trading stock and again to the revenue assets. The other items apply (if at all) to the trading stock and revenue assets together.

Decreases and uplifts in adjustable value

(3)

To the extent that the ^* direct value shift is from ^* down interests specified in an item in the table to ^* up interests specified in that item:

(a)

the ^* adjustable value of each of those down interests is decreased by the amount worked out under the section (if any) specified for the down interests in the last column of that item; and

(b)

the adjustable value of each of those ^* up interests is uplifted by the amount worked out under the section (if any) specified for the up interests in that column.

Taxing events generating a gain

(4)

To the extent that the ^* direct value shift is from ^* down interests:

(a)

of which you are an ^* affected owner; and

(b)

that are specified in item 2, 4 or 7 in the table in subsection (3);

to ^* up interests specified in that item, those up interests give rise to a taxing event generating a gain for you under that item on each of those down interests. The gain is worked out under section 725-365.

725-340 Multiple trading stock or revenue asset consequences for the same down interest or up interest

(1)

A ^* down interest or ^* up interest of which you are an ^* affected owner may be covered by 2 or more items in the table in subsection 725-335(3).

(2)

If the ^* adjustable value of the same ^* down interest or ^* up interest is decreased or uplifted under 2 or more items, it is decreased or uplifted by the total of the amounts worked out under those items.

(3)

If for a particular ^* down interest there is a ^* taxing event generating a gain under an item, that taxing event is in addition to:

(a)

each taxing event generating a gain for that interest under any other item in the table; and

(b)

each decrease in the ^* adjustable value of the interest under that or any other item in the table.

Subdivision 725-F—Value adjustments and taxed gains

Table of sections

725-365 Decreases in adjustable values of down interests (with pre-shift gains), and taxing events generating a gain
725-370 Uplifts in adjustable values of up interests under certain table items
725-375 Uplifts in adjustable values of up interests under other table items
725-380 Decreases in adjustable value of down interests (with pre-shift losses)

725-365 Decreases in adjustable values of down interests (with pre-shift gains), and taxing events generating a gain

Use the following method statement:

(a)

to work out the amount of the gain for a ^* taxing event generating a gain under:

(i)

section 725-245; or

(ii)

item 2, 4 or 7 of the table in subsection 725-335(3); and

(b)

to work out the decrease in ^* adjustable value of a ^* down interest under:

(i)

item 1, 2, 3, 4 or 6 of the table in subsection 725-250(2); or

(ii)

item 1, 2, 4 or 7 of the table in subsection 725-335(3).

Method statement

Step 1. Group together all ^* down interests that:

(a) are of the kind referred to in the relevant item; and
(b) immediately before the ^* decrease time, had the same ^* adjustable value as the down interest; and
(c) immediately before that time had the same market value as the down interest; and
(d) sustained the same decrease in market value as the down interest because of the ^* direct value shift.

Step 2 . Work out the value shifted from that group of ^* down interests to the ^* up interests referred to in the relevant item using the following formula:
_{Step 3. Work out the notional adjustable value of the value shifted from that group of ^* down interests to those ^* up interests using the formula:
Step 4 . The decrease in the ^* adjustable value of the ^* down interest under the relevant item is equal to:
Step 5 . For a ^* taxing event generating a gain under the relevant item, the amount of the gain is equal to:}

725-370 Uplifts in adjustable values of up interests under certain table items

Use the following method statement to work out the uplift in ^* adjustable value of an ^* up interest under:

(a)

item 1 or 2 of the table in subsection 725-250(2); or

(b)

item 1 of the table in subsection 725-335(3).

Method statement

Step 1 . If the market value of the ^* up interest increases because of the ^* direct value shift, group together all up interests of the kind referred to in the relevant item that:

(a) immediately before the ^* increase time, had the same ^* adjustable value as the up interest; and
(b) sustained the same increase in market value as the up interest because of the ^* direct value shift.

If the ^* up interest is issued at a ^* discount, group together all ^* up interests of the kind referred to in the relevant item that:

(c) immediately before the ^* increase time, had the same ^* adjustable value as the up interest; and
(d) because of the direct value shift, are issued at the same discount as the up interest.

Step 2. The notional adjustable value of the value shifted from the ^* down interests referred to in the relevant item to all the ^* up interests referred to in that item has already been worked out under one or more applications of step 3 of the method statement in section 725-365.
Step 3. Use the following formula to work out how much of that notional adjustable value is attributable to the value shifted to the group of ^* up interests referred to in step 1 of this method statement:
_{Step 4. The uplift in the ^* adjustable value of the ^* up interest under the relevant item is equal to:}

725-375 Uplifts in adjustable values of up interests under other table items

Use the following method statement to work out the uplift in ^* adjustable value of an ^* up interest under:

(a)

item 3, 4, 5 or 8 of the table in subsection 725-250(2); or

(b)

item 2, 3, 6 or 9 of the table in subsection 725-335(3).

Method statement

Step 1 . If the market value of the ^* up interest increases because of the direct value shift, group together all ^* up interests of the kind referred to in the relevant item that sustained the same increase in market value as the up interest because of the direct value shift.
If the up interest is issued at a discount, group together all up interests of the kind referred to in the relevant item that are issued at a discount of the same amount as the up interest because of the direct value shift.
Step 2. The value shifted to that group of ^* up interests from the ^* down interests referred to in the relevant item is the amount worked out using the formula:
_{where:
sum of the group increases or discounts means (as appropriate):}

(a) the sum of the increases in market value of all ^* up interests in the group because of the ^* direct value shift; or
(b) the sum of the ^* discounts at which all ^* up interests in the group were issued because of the ^* direct value shift.

total value of the direct value shift means:

(a) if the sum of the decreases in market value of all ^* down interests because of the ^* direct value shift is equal to or greater than the sum of the increases in market value of all ^* up interests and all ^* discounts given because of the shift—the sum of the decreases; or
(b) if the sum of the decreases in market value of all down interests because of the direct value shift is less than the sum of the increases in market value of all up interests and all discounts given because of the shift—the sum of the increases and discounts.

Step 3 . The uplift in the ^* adjustable value of the ^* up interest under the relevant item is equal to:

725-380 Decreases in adjustable value of down interests (with pre-shift losses)

Use the following method statement to work out the decrease in ^* adjustable value of a ^* down interest under:

(a)

item 5 or 7 of the table in subsection 725-250(2); or

(b)

item 3, 5 or 8 of the table in subsection 725-335(3).

Method statement

Step 1 . Group together all ^* down interests of the kind referred to in the relevant item that:

(a) immediately before the ^* decrease time, had the same ^* adjustable value as the down interest; and
(b) immediately before that time had the same market value as the down interest; and
(c) sustained the same decrease in market value as the down interest because of the ^* direct value shift.

Step 2. Work out the value shifted from that group of ^* down interests to the ^* up interests referred to in the relevant item using the formula:
_{Step 3 . The decrease in ^* adjustable value of the ^* down interest under the relevant item is equal to:}

Division 727—Indirect value shifting affecting interests in companies and trusts, and arising from non-arm's length dealings

Table of Subdivisions

Guide to Division 727
727-A Scope of the indirect value shifting rules
727-B What is an indirect value shift
727-C Exclusions
727-D Working out the market value of economic benefits
727-E Key concepts
727-F Consequences of an indirect value shift
727-G The realisation time method
727-H The adjustable value method
727-K Reduction of loss on equity or loan interests realised before the IVS time
727-L Indirect value shift resulting from a direct value shift

Guide to Division 727
727-1 What this Division is about

If there is a net shift of value between 2 related entities because of a non-arm's length dealing, this Division:

(a) prevents losses from arising, because of the value shift, on realisation of direct or indirect equity or loan interests in the losing entity; and
(b) within limits, prevents gains from arising, because of the value shift, on realisation of direct or indirect equity or loan interests in the gaining entity.

However, it does so only for interests that are owned by entities involved in the value shift.

Table of sections

727-5 What is an indirect value shift?
727-10 How does this Division deal with indirect value shifts?
727-15 When does an indirect value shift have consequences under this Division?
727-25 Effect of this Division on realisations at a loss that occur before the nature or extent of an indirect value shift can be fully determined

727-5 What is an indirect value shift?

(1)

An indirect value shift arises when there is a net shift of value from one entity to another.

Example: Company A transfers property to company B in return for a cash payment. If the market value of the property is $180 million but the cash payment is only $50 million, there is a net shift of value from company A to company B of $130 million.

(2)

It is called indirect because the transaction will have the indirect effect of shifting value from equity or loan interests in the losing entity to equity or loan interests in the gaining entity.

This is because the net shift in value between the entities will usually decrease the market value of interests in the losing entity and increase the market value of interests in the gaining entity.

Example: Assume that company C owns all the shares in company A and company D owns all the shares in company B. The net shift of value from company A to company B will reduce the value of company C's shares in company A and increase the value of company D's shares in company B.

(3)

It will also produce corresponding effects further up a chain of entities.

Example: Assume that company E owns all the shares in company C and company D. The net shift of value from company A to company B will also reduce the value of company E's shares in company C and increase the value of its shares in company D.

(4)

This Division is not concerned with the tax treatment of the net shift in value between the entities at the bottom of the chains. Instead, it deals with the effects on the market value of interests (both direct and indirect) in those entities.

(5)

An indirect value shift distorts the relationship between the market value of an equity or loan interest and its value for income tax purposes. When the interest is realised, this can produce an inappropriate loss for income tax purposes, or an inappropriate gain.

Example: If company E sold its shares in company C, the indirect value shift could (apart from this Division) result in a loss for income tax purposes. Company E could defer the corresponding gain on its shares in company D by not selling these.

727-10 How does this Division deal with indirect value shifts?

(1)

To prevent an inappropriate loss or gain from arising on realisation of an interest, this Division reduces the amount of the loss or gain (realisation time method). However, a choice can be made to adjust the interest's value for income tax purposes in a way that takes account of the indirect value shift (adjustable value method).

(2)

This Division does not create taxing events giving rise to gains or losses.

727-15 When does an indirect value shift have consequences under this Division?

(1)

Indirect value shift is defined very broadly, but the application of this Division is limited in various ways.

(2)

The losing entity must be a company or trust (except a superannuation entity). However, the gaining entity can be any kind of entity, including an individual.

(3)

This Division does not apply if entities deal with each other at arm's length, or provide economic benefits in return for full market value.

(4)

The losing entity and the gaining entity must be connected by having had the same ultimate controller . In the case of closely held entities, they may instead be connected by having had a high level of common ownership .

(5)

The only interests affected are those owned by entities involved in the indirect value shift or by their associates.

(6)

There are a range of exclusions, such as:

(a)

exclusions for minor indirect value shifts; and

(b)

a series of rules designed to provide safe harbour treatment for common transactions relating to services; and

(c)

anti-overlap provisions to prevent double-counting.

(7)

Rules of thumb are included to make it easier to determine the market value of some kinds of economic benefits.

(8)

To reduce compliance costs for:

(a)

entities in the Simplified Tax System; and

(b)

entities that meet the CGT small business net asset threshold ($5 million);

interests owned by those entities are not affected by this Division.

[The next section is section 727-25.]

727-25 Effect of this Division on realisations at a loss that occur before the nature or extent of an indirect value shift can be fully determined

(1)

To determine whether a scheme gives rise to an indirect value shift, it must be possible to identify all the economic benefits under the scheme, and the providers and recipients of those benefits.

(2)

Before then, interests that might be affected by the scheme may be realised at a loss. Subdivision 727-K contains special rules that apply if that happens.

Subdivision 727-A—Scope of the indirect value shifting rules

Table of sections

727-95 Main object
727-100 When an indirect value shift has consequences under this Division
727-105 Ultimate controller test
727-110 Common-ownership nexus test (if both losing and gaining entities are closely held)
727-125 No consequences if losing entity is a superannuation entity

727-95 Main object

The main object of this Division is:

(a)

to prevent inappropriate losses from arising on the realisation of direct or indirect equity or loan interests in an entity from which there has been a net shift of value because of a non-arm's length dealing; and

(b)

to prevent inappropriate gains from arising on the realisation of direct or indirect equity interests in the entity to which that value has been shifted;

in cases where the 2 entities are related as set out in this Division.

727-100 When an indirect value shift has consequences under this Division

An ^* indirect value shift (see Subdivision 727-B) has consequences under this Division if, and only if:

(a)

the ^* losing entity is at the time of the indirect value shift a company or trust (except one listed in section 727-125 (about superannuation entities)); and

(b)

in relation to either or both of the following:

(i)

the losing entity ^* providing one or more economic benefits to the gaining entity ^* in connection with the ^* scheme from which the indirect value shift results;

(ii)

the gaining entity providing one or more economic benefits to the losing entity in connection with the scheme;

the 2 entities are not dealing with each other at ^* arm's length; and

(c)

either or both of sections 727-105 and 727-110 are satisfied; and

(d)

no exclusion in Subdivision 727-C applies.

Note 1: The consequences for direct and indirect interests in the losing entity or in the gaining entity are set out in Subdivision 727-F. If those consequences are to be worked out using the realisation time method (under Subdivision 727-G), there are further exclusions for certain 95% services indirect value shifts: see section 727-700.

Note 2: An indirect value shift does not have consequences for interests in the losing entity or gaining entity owned immediately before the IVS time by an entity that:

* is eligible to be an STS taxpayer for each income year that includes any of the IVS period; or
* would satisfy the maximum net asset value test in section 152-15 throughout the IVS period.

See subsection 727-470(2).

727-105 Ultimate controller test

It must be the case that, at some time during the ^* IVS period:

(a)

the ^* losing entity and the ^* gaining entity have the same ^* ultimate controller; or

(b)

the ultimate controller of the losing entity is the same entity that was the ultimate controller of the gaining entity at a different time during that period; or

(c)

the gaining entity is the ultimate controller of the losing entity; or

(d)

the losing entity is the ultimate controller of the gaining entity.

For the concept of IVS period , see section 727-150.
For the concept of ultimate controller , see section 727-350.

727-110 Common-ownership nexus test (if both losing and gaining entities are closely held)

(1)

Or, it must be the case that:

(a)

at some time during the ^* IVS period, neither the ^* losing entity nor the ^* gaining entity has 300 or more members (in the case of a company) or 300 or more beneficiaries (in the case of a trust); and

(b)

the losing entity and the gaining entity have a ^* common-ownership nexus within the IVS period.

For the concept of IVS period , see section 727-150.
For the concept of common-ownership nexus , see section 727-400.

(2)

Section 124-810 (under which certain companies and trusts are not regarded as having 300 or more members or beneficiaries) also applies for the purposes of this Division.

(3)

In addition, this Division applies to a ^* non-fixed trust as if it did not have 300 or more beneficiaries.

727-125 No consequences if losing entity is a superannuation entity

An ^* indirect value shift has no consequences under this Division if the ^* losing entity is one of these in relation to the income year in which the indirect value shift happens:

(a)

a ^* complying superannuation fund; or

(b)

a ^* non-complying superannuation fund; or

(c)

a ^* complying approved deposit fund; or

(d)

a ^* non-complying approved deposit fund; or

(e)

a ^* pooled superannuation trust.

Subdivision 727-B—What is an indirect value shift

Table of sections

727-150 How to determine whether a scheme results in an indirect value shift
727-155 Providing economic benefits
727-160 When an economic benefit is provided in connection with a scheme
727-165 Preventing double-counting of economic benefits

727-150 How to determine whether a scheme results in an indirect value shift

(1)

A ^* scheme can result in one or more ^* indirect value shifts only if one or more economic benefits have been, are being, or are to be, ^* provided ^* in connection with the scheme.

(2)

The question whether the ^* scheme has that result must be determined by reference to the facts and circumstances that exist at the earliest time (either when the scheme is entered into or later) when it is reasonable to conclude that:

(a)

all the economic benefits that have been, are being, or are to be, ^* provided ^* in connection with the scheme can be identified; and

(b)

for each of those economic benefits:

(i)

the entity that has provided, is providing, or is to provide, the economic benefit can be identified; and

(ii)

the entity to which the economic benefit has been, is being, or is to be, provided can be identified; and

(iii)

if the economic benefit is to be provided—those entities are in existence, and the providing of the economic benefit is not contingent; and

(c)

there are no other economic benefits that are to be provided in connection with the scheme if some contingency is met.

That time is called the IVS time for the scheme.

Note: In most cases, the IVS time will be at or soon after the scheme is entered into. However, if:

* direct or indirect interests in a company or trust are realised at a loss when the IVS time for the scheme has not yet happened (even if it never happens); and
* the company or trust has provided, is providing, is to provide, or might provide, economic benefits in connection with the scheme;

there may be consequences for those interests similar to those of an indirect value shift resulting from the scheme. See Subdivision 727-K.

(3)

The ^* scheme results in an indirect value shift from one entity (the losing entity ) to another entity (the gaining entity ) if the total market value of the one or more economic benefits (the greater benefits ) that the losing entity has ^* provided, is providing, or is to provide, to the gaining entity ^* in connection with the scheme exceeds:

(a)

the total market value of the one or more economic benefits ( lesser benefits ) that the gaining entity has provided, is providing, or is to provide, to the losing entity in connection with the scheme; or

(b)

if there are no economic benefits covered by paragraph (a)—nil.

That excess is the amount of the indirect value shift.

(4)

The market value of an economic benefit is to be determined as at the earliest time when it is reasonable to conclude that:

(a)

the economic benefit can be identified; and

(b)

paragraph (2)(b) is satisfied for that benefit.

For more rules affecting how the market value of an economic benefit is determined, see Subdivision 727-D.

(5)

Neither the ^* losing entity nor the ^* gaining entity needs to be a party to the ^* scheme. A benefit can be provided by act or omission.

(6)

The indirect value shift happens at the ^* IVS time.

(7)

The IVS period for a ^* scheme starts immediately before the scheme is entered into and ends at the ^* IVS time.

(8)

A contingency that is artificial, or is virtually certain to be met, is treated under this Division as if it had been met.

727-155 Providing economic benefits

Examples

(1)

These are some examples of an entity providing an economic benefit to another entity:

(a)

the first entity pays an amount to the other entity (in this case the market value of the benefit is the amount of the payment);

(b)

the first entity provides an asset or services to the other entity;

(c)

the first entity does something that creates an asset in the hands of the other entity (for example, a company issues shares to its members);

(d)

the first entity incurs a liability to the other entity, or increases a liability it already owes to the other entity;

(e)

the first entity terminates all or part of a liability owed by the other entity;

(f)

the first entity does something that increases the market value of an asset that the other entity holds.

(2)

These examples are not intended to limit the meaning of providing an economic benefit.

Things treated as economic benefits

(3)

This Division applies as if the ending of:

(a)

a ^* primary equity interest or ^* secondary equity interest in an entity; or

(b)

a right that the owner of a ^* primary equity interest or ^* secondary equity interest in an entity has because of owning the interest;

were an economic benefit that the owner of the interest provides to that entity.

727-160 When an economic benefit is provided in connection with a scheme

(1)

An economic benefit has been, is being, is to be, or might be, ^* provided by an entity to another entity in connection with a ^* scheme if, and only if:

(a)

the benefit has been, is being, is to be, or might be, provided under the scheme; or

(b)

the providing of the benefit is reasonably attributable to:

(i)

something that has been, is being, is to be, or might be, done or omitted under the scheme (whether before, at the time of, or after, the providing of the benefit) by an entity that is either of those entities or a third entity; or

(ii)

2 or more such things.

(2)

An entity referred to in paragraph (1)(b) need not be a party to the ^* scheme. A benefit can be provided by act or omission.

727-165 Preventing double-counting of economic benefits

Rights to have economic benefits provided

(1)

If an economic benefit that has been, is being, is to be, or might be, ^* provided as mentioned in subsection 727-150(3) or 727-855(1) consists of a right to have economic benefits provided, that subsection applies to the right but does not also apply to those economic benefits.

Example: Acme Ltd enters into an agreement with Paragon Pty Ltd under which Acme is to provide services to Paragon over a 5 year period in return for payments.

Paragon's rights under the agreement are economic benefits that Acme provides to Paragon when the agreement is made. The services are economic benefits that Acme is to provide to Paragon.

Because of this subsection, the market value of the rights is taken into account in working out whether there has been an indirect value shift, but the market value of the services is not.

Effect of an economic benefit on interests in the entity to which it is provided

(2)

If an economic benefit has been, is being, or is to be, ^* provided to an entity, then, for the purposes of subsection 727-150(3) or 727-855(1), disregard an economic benefit to the extent that:

(a)

it consists of an increase in the market value of:

(i)

an ^* equity or loan interest in the entity; or

(ii)

an ^* indirect equity or loan interest in the entity; and

(b)

the increase is reasonably attributable to the first-mentioned benefit.

Subdivision 727-C—Exclusions
Guide to Subdivision 727-C
727-200 What this Subdivision is about

Some indirect value shifts do not have consequences under this Division.

Note 1: If the consequences of an indirect value shift are to be worked out using the realisation time method (under Subdivision 727-G), there are further exclusions for certain 95% services indirect value shifts: see section 727-700.

Note 2: For cases where there may be both a direct value shift and an indirect value shift, see Subdivision 727-L.

Table of sections

General

727-215 Amount does not exceed $50,000
727-220 Disposal of asset at cost, or at undervalue if full value is not reflected in adjustable values of equity or loan interests in the losing entity

Indirect value shifts involving services

727-230 Services provided by losing entity to gaining entity for at least their direct cost
727-235 Services provided by gaining entity to losing entity for no more than a commercially realistic price
727-240 What services certain provisions apply to
727-245 How to work out certain amounts for the purposes of sections 727-230 and 727-235

Anti-overlap provisions

727-250 Distribution by an entity to a member or beneficiary

Miscellaneous

727-260 Shift down a wholly-owned chain of entities

[This is the end of the Guide.]

General
727-215 Amount does not exceed $50,000

(1)

An ^* indirect value shift does not have consequences under this Division if the amount of it does not exceed $50,000.

(2)

However, subsection (1) does not apply to an ^* indirect value shift (and is taken never to have applied to it) if:

(a)

before, at the same time as, or after it, another indirect value shift happens for which the same entity is the losing entity as for the first indirect value shift; and

(b)

having regard to all relevant circumstances, it is reasonable to conclude that the sole or main reason why one of the indirect value shifts happened under a different ^* scheme from the other was so that its amount would not exceed $50,000.

727-220 Disposal of asset at cost, or at undervalue if full value is not reflected in adjustable values of equity or loan interests in the losing entity

(1)

An ^* indirect value shift does not have consequences under this Division if the conditions in this section are met.

(2)

The ^* greater benefits must consist entirely of:

(a)

the ^* losing entity transferring a ^* CGT asset to the ^* gaining entity; or

(b)

a right to have the losing entity transfer an asset to the gaining entity.

(3)

There must be ^* lesser benefits and, as at the ^* IVS time, the total market value of the lesser benefits must not be less than the greatest of these amounts:

(a)

the asset's ^* cost base at that time;

(b)

the asset's cost;

(c)

the asset's market value immediately before the most recent time (if any), since the ^* losing entity ^* acquired the asset, when an ^* affected owner has acquired:

(i)

a ^* primary equity interest in the losing entity; or

(ii)

an ^* indirect primary equity interest in the losing entity.

(4)

A ^* primary equity interest in an entity is an indirect primary equity interest in another entity if, and only if:

(a)

the first entity owns a primary equity interest in the other entity; or

(b)

the first entity owns a primary equity interest that is an indirect primary equity interest in the other entity because of one or more other applications of this subsection.

[The next section is section 727-230.]

Indirect value shifts involving services
727-230 Services provided by losing entity to gaining entity for at least their direct cost

An ^* indirect value shift does not have consequences under this Division if:

(a)

to the extent of at least 95% of their total market value, the ^* greater benefits consist entirely of:

(i)

a right to have services that are covered by section 727-240 provided directly by the losing entity to the gaining entity; or

(ii)

services that are covered by section 727-240 and have been, are being, or are to be, so provided;

or both; and

(b)

there are ^* lesser benefits and, as at the ^* IVS time, the total market value of the lesser benefits is not less than the total of:

(i)

the present value of the direct cost to the losing entity of providing the services; and

(ii)

the present value of a reasonable allocation of the total direct cost to the losing entity of providing services that include the first-mentioned services (so far as it is not already covered by subparagraph (i)).

To work out the costs and present values referred to in paragraph (b),
see section 727-245.

727-235 Services provided by gaining entity to losing entity for no more than a commercially realistic price

(1)

An ^* indirect value shift does not have consequences under this Division if:

(a)

there are ^* lesser benefits and, to the extent of at least 95% of their total market value, the lesser benefits consist entirely of:

(i)

a right to have services that are covered by section 727-240 provided directly by the gaining entity to the losing entity; or

(ii)

services that are covered by section 727-240 and have been, are being, or are to be, so provided;

or both; and

(b)

as at the ^* IVS time, the total market value of the greater benefits is not more than the total of:

(i)

the present value of the direct cost to the gaining entity of providing the services; and

(ii)

the present value of a reasonable allocation of the total direct cost to the gaining entity of providing services that include the first-mentioned services (so far as it is not already covered by subparagraph (i)); and

(iii)

the present value of a reasonable allocation of the indirect cost to the gaining entity of providing the first-mentioned services; and

(iv)

the mark-up worked out under subsection (2) or (3) of this section.

To work out the costs and present values referred to in paragraph (1)(b),
see section 727-245.

(2)

If it is reasonable to estimate that an entity providing the same quantity of services of the same kind in the same market would charge for them on the basis of a particular percentage mark-up, or on the basis of a percentage mark-up within a particular range, the mark-up for the purposes of subparagraph (1)(b)(iv) is:

* the total of the respective present values of the costs mentioned in subparagraphs (1)(b)(i), (ii) and (iii);

multiplied by:

* that percentage mark-up, or the highest percentage in that range.

(3)

Otherwise, the mark-up for the purposes of subparagraph (1)(b)(iv) is 10% of the total of the respective present values of the costs mentioned in subparagraphs (1)(b)(i), (ii) and (iii).

727-240 What services certain provisions apply to

(1)

Sections 727-230, 727-235, 727-700 and 727-725 apply only to services consisting of:

(a)

doing work (including professional work and giving professional advice or any other kind of advice); or

Note: Examples include accounting or legal services; advertising services and financial management services.

(b)

providing (including allowing use of) facilities for entertainment, recreation or instruction; or

(c)

leasing, renting, hiring, or allowing the use of, any asset; or

(d)

packaging, transporting or storing any property; or

(e)

providing insurance; or

(f)

services provided, by a banker to a customer, in the course of the banker carrying on the business of banking; or

(g)

lending money or providing any other form of financial accommodation.

(2)

It does not matter whether services covered by paragraph (1)(a) also involve supplying property.

727-245 How to work out certain amounts for the purposes of sections 727-230 and 727-235

(1)

The costs mentioned in paragraph 727-230(b) or 727-235(1)(b) are to be worked out:

(a)

in accordance with generally accepted accounting practices; and

(b)

to the extent that the services are to be provided in the future, on the basis of a reasonable estimate of those costs.

(2)

To avoid doubt, the direct cost or indirect cost mentioned in paragraph 727-230(b) or 727-235(1)(b) does not include:

(a)

to the extent that the services consist of or include lending money or providing any other form of financial accommodation—the amount of the loan or other accommodation; or

(b)

to the extent that the services consist of or include leasing, renting, hiring, or allowing the use of, any asset:

(i)

the cost of acquiring the asset; or

(ii)

the cost of acquiring an interest in, or right in respect of, the asset in order to provide the services.

Example: Acme Ltd is the holding company of Group Financier Pty Ltd. Group Financier Pty Ltd borrows $20 million at 7% per annum, and on lends it to other subsidiaries of Acme Ltd at 8% per annum.

The $20 million does not form part of Group Financier Pty Ltd's direct cost of the services it provides to the other subsidiaries in the form of the on lending. However, the 7% interest that Group Financier Pty Ltd pays on the $20 million does form part of that direct cost.

(3)

The present values mentioned in paragraph 727-230(b) or 727-235(1)(b) are to be worked out using a discount rate equal to the rate that, for the purposes of section 109N of Income Tax Assessment Act 1936 , is the benchmark interest rate for the income year in which the ^* IVS time occurs.

Note: That section is about distributions to entities connected with a private company.

Anti-overlap provisions
727-250 Distribution by an entity to a member or beneficiary

(1)

An ^* indirect value shift does not have consequences under this Division if:

(a)

the ^* greater benefits consist entirely of:

(i)

a distribution of income or capital that the ^* losing entity makes to the ^* gaining entity; or

(ii)

a right to a distribution of income or capital that the losing entity is to make to the gaining entity;

because the gaining entity holds ^* primary equity interests in the losing entity; and

(b)

either:

(i)

an amount covered by one or more of subsections (2), (3) and (4); or

(ii)

the total of 2 or more such amounts;

equals or exceeds the amount of the distribution.

Conditions

(2)

This subsection covers an amount that the assessable income or exempt income of the gaining entity for any income year includes because of the distribution or right.

(3)

This subsection covers an amount by which the ^* cost base or ^* reduced cost base (or both) of some or all of the ^* primary equity interests referred to in subsection (1) changes because of the distribution or right.

(4)

This subsection covers an amount that, because of the distribution or right, is taken into account:

(a)

under section 116-20 in working out the ^* capital proceeds of a ^* CGT event that happens during any income year to some or all of the ^* primary equity interests referred to in subsection (1); or

(b)

in working out a ^* capital gain that an entity makes from CGT event E4 or G1 happening during any income year to some or all of those primary equity interests; or

(c)

in working out whether a loss or gain is ^* realised for income tax purposes by a ^* realisation event that happens to some or all of those primary equity interests (in their character as ^* trading stock or ^* revenue assets).

Application of section to deemed dividend

(5)

If a ^* corporate tax entity makes a ^* distribution that is not otherwise a distribution of income or capital, this section applies as if the distribution were a distribution of income or capital the entity made.

Note: Subsection (5) extends this section to cover something that is taken to be a dividend paid by a company. Compare item 1 of the table in subsection 960-120(1).

[The next section is section 727-260.]

Miscellaneous
727-260 Shift down a wholly-owned chain of entities

(1)

An ^* indirect value shift does not have consequences under this Division if the ^* gaining entity is a ^* wholly-owned subsidiary of the ^* losing entity throughout the ^* IVS period.

Exception: impact on market value of primary loan interest

(2)

However, subsection (1) does not apply if the ^* indirect value shift has produced a ^* disaggregated attributable decrease, in the market value of an ^* affected interest in the ^* losing entity that is also a ^* primary loan interest in an entity covered by subsection (3), for the owner of the interest.

(3)

This subsection covers:

(a)

the ^* losing entity; and

(b)

an entity that owns ^* primary equity interests in an entity that this subsection covers because of one or more previous applications of it.

Subdivision 727-D—Working out the market value of economic benefits

Table of sections

727-300 What the rules in this Subdivision are for
727-315 Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000

727-300 What the rules in this Subdivision are for

This Subdivision is used in determining whether there has been an ^* indirect value shift and, if so:

(a)

whether it has consequences under this Division; and

(b)

if it does, the amount of it.

[The next section is section 727-315.]

727-315 Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000

(1)

This Division applies to an economic benefit consisting of:

(a)

an entity transferring to another entity a ^* depreciating asset (except a building or structure) for which the transferring entity has deducted or can deduct an amount under Division 40; or

(b)

a right to have an entity transfer such a depreciating asset to another entity;

as if the economic benefit's market value were equal to the greater (the residual value ) of:

(c)

the asset's ^* adjustable value at the time when the economic benefit was or is ^* provided; and

(d)

the value assigned to the asset at that time in the transferring entity's books;

but only if:

(e)

as at that time, the ^* cost of the unit to the transferring entity is less than $1,500,000; and

(f)

it is reasonable for the transferring entity to conclude that the unit's actual market value at that time was, is, or will be, not less than 80%, and not more than 120%, of the residual value; and

(g)

both the transferring entity and the other entity choose to have the market value of that economic benefit treated as being equal to the residual value.

(2)

If:

(a)

each of 2 or more economic benefits of the kind mentioned in subsection (1) has been, is being, is to be, or might be, provided by the same transferring entity, to the same other entity, ^* in connection with the same ^* scheme; and

(b)

it is reasonable for the transferring entity to conclude that the total of the ^* depreciating assets' actual market values at the respective times when the economic benefits were or are ^* provided was, is, or will be, not less than 80%, and not more than 120%, of the total of their respective residual values under subsection (1);

paragraph (1)(f) is taken to be satisfied for each of the economic benefits.

Subdivision 727-E—Key concepts

Table of sections

Ultimate controller

727-350 Ultimate controller
727-355 Control (for value shifting purposes) of a company
727-360 Control (for value shifting purposes) of a fixed trust
727-365 Control (for value shifting purposes) of a non-fixed trust
727-370 Preventing double counting for percentage stake tests
727-375 Tests in this Subdivision are exhaustive

Common-ownership nexus and ultimate stake of a particular percentage

727-400 When 2 entities have a common-ownership nexus within a period
727-405 Ultimate stake of a particular percentage in a company
727-410 Ultimate stake of a particular percentage in a fixed trust
727-415 Rules for tracing

Ultimate controller
727-350 Ultimate controller

An entity is an ultimate controller of another entity if, and only if:

(a)

the first entity ^* controls (for value shifting purposes) the other entity; and

(b)

there is no entity that controls (for value shifting purposes) both the first entity and the other entity.

727-355 Control (for value shifting purposes) of a company

50% stake test

(1)

An entity controls (for value shifting purposes) a company if the entity, or the entity and its ^* associates between them:

(a)

can exercise, or can control the exercise of, at least 50% of the voting power in the company (either directly, or indirectly through one or more interposed entities); or

(b)

have the right to receive (either directly, or indirectly through one or more interposed entities) at least 50% of any dividends that the company may pay; or

(c)

have the right to receive for (either directly, or indirectly through one or more interposed entities) at least 50% of any distribution of capital of the company.

40% stake test

(2)

An entity also controls (for value shifting purposes) a company if the entity, or the entity and its ^* associates between them:

(a)

can exercise, or can control the exercise of, at least 40% of the voting power in the company (either directly, or indirectly through one or more interposed entities); or

(b)

have the right to receive (either directly, or indirectly through one or more interposed entities) at least 40% of any dividends that the company may pay; or

(c)

have the right to receive (either directly, or indirectly through one or more interposed entities) at least 40% of any distribution of capital of the company;

unless an entity (other than the first entity and its associates) either alone or together with its associates in fact controls the company.

Actual control test

(3)

An entity also controls (for value shifting purposes) a company if the entity, either alone or together with its ^* associates, in fact controls the company.

727-360 Control (for value shifting purposes) of a fixed trust

40% stake test

(1)

An entity controls (for value shifting purposes) a ^* fixed trust if the entity, or the entity and its ^* associates between them, have the right to receive (either directly, or indirectly through one or more interposed entities) at least 40% of any distribution of trust income, or trust capital, to beneficiaries of the trust.

Other tests

(2)

An entity also controls (for value shifting purposes) a ^* fixed trust if:

(a)

the entity, or an ^* associate of the entity, whether alone or with other associates (the relevant entity ), has the power to obtain the beneficial enjoyment of the trust's capital or income (whether or not by exercising its power of appointment or revocation, and whether with or without another entity's consent); or

(b)

the relevant entity is able to control the application of the trust's capital or income in any manner (whether directly or indirectly); or

(c)

the relevant entity is able to do a thing mentioned in paragraph (a) or (b) under a ^* scheme; or

(d)

a trustee of the trust is accustomed or is under an obligation (whether formally or informally), or might reasonably be expected, to act in accordance with the relevant entity's directions, instructions or wishes; or

(e)

the relevant entity is able to remove or appoint a trustee of the trust.

727-365 Control (for value shifting purposes) of a non-fixed trust

Trustee tests

(1)

An entity controls (for value shifting purposes) a ^* non-fixed trust if:

(a)

the entity or an ^* associate of the entity is a trustee of the trust; or

(b)

the entity, or the entity and its ^* associates between them, can remove or appoint the trustee, or one or more of the trustees, of the trust; or

(c)

a trustee of the trust is accustomed to act, is under an obligation (whether formally or informally) to act, or might reasonably be expected to act, in accordance with the directions, instructions or wishes of:

(i)

the entity or an ^* associate of the entity; or

(ii)

2 or more entities, at least one of which is the entity or an associate of the entity.

Tests based on control of the trust income or capital

(2)

An entity also controls (for value shifting purposes) a ^* non-fixed trust if the entity, or the entity and its ^* associates between them:

(a)

have the power to obtain the beneficial enjoyment of trust income or capital; or

(b)

can control in any way at all, whether directly or indirectly, the application of trust income or capital; or

(c)

can, under a ^* scheme, gain the enjoyment or control referred to in paragraph (a) or (b).

(3)

An entity also controls (for value shifting purposes) a ^* non-fixed trust if:

(a)

the entity, or any of its ^* associates, can benefit under the trust otherwise than because of a ^* fixed entitlement to a share of the income or capital of the trust; or

(b)

if the entity, or the entity and its ^* associates between them, have the right to receive (either directly, or indirectly through one or more interposed entities) at least 40% of any distribution of trust income, or trust capital.

727-370 Preventing double counting for percentage stake tests

If an interest giving an entity, or an entity and its ^* associates:

(a)

the ability to exercise, or control the exercise of, any of the voting power in a company; or

(b)

the right to receive dividends that a company may pay; or

(c)

the right to receive a distribution of capital of a company; or

(d)

the right to receive a distribution of trust income or trust capital;

is both direct and indirect, and (apart from this section) would be counted more than once in applying subsection 727-355(1) or (2) or section 727-360, only the direct interest is to be counted.

727-375 Tests in this Subdivision are exhaustive

An entity does not control (for value shifting purposes) a company or trust except as provided in this Subdivision.

Common-ownership nexus and ultimate stake of a particular percentage
727-400 When 2 entities have a common-ownership nexus within a period

(1)

2 entities have a common-ownership nexus within a period if, and only if, they satisfy the test in any of the one or more items in the table applicable to them.

Additional condition about profile of percentage ultimate stakes held by 2 or more ultimate owners

(2)

In order to satisfy the test in item 1, 2 or 3 in the table in subsection (1), at least one of subsections (3), (4) and (5) must be satisfied.

(3)

For at least one of the ^* ultimate owners referred to in that item, the percentage of the ^* ultimate stake that owner has as mentioned in paragraph (a) in the last column of that item must be at least 40%, and so must the percentage of the ultimate stake that owner has as mentioned in paragraph (b) in the last column of that item.

(4)

Alternatively, for each of those ^* ultimate owners, the percentage of the ^* ultimate stake that owner has as mentioned in that paragraph (a) must be the same as the percentage of the ultimate stake that owner has as mentioned in that paragraph (b).

(5)

Alternatively, the number of those ^* ultimate owners must not exceed 16.

727-405 Ultimate stake of a particular percentage in a company

(1)

This section sets out 3 tests of whether an entity has an ultimate stake of a particular percentage (the test percentage ) in a company.

Note: In applying the tests, follow the rules in section 727-415.

Voting power

(2)

The first test is that, after tracing, to the ^* ultimate owners who ultimately hold it, the direct and indirect ownership of all ^* shares in the company that carry the right to exercise voting power in the company, that ownership is held by the entity to the extent of the test percentage of that voting power.

Dividends

(3)

The second test is that, after tracing, to the ^* ultimate owners who ultimately hold it, the direct and indirect ownership of all ^* shares in the company that carry the right to receive any dividends that the company may pay, that ownership is held by the entity to the extent of the test percentage of those dividends.

Capital distributions

(4)

The third test is that, after tracing, to the ^* ultimate owners who ultimately hold it, the direct and indirect ownership of all ^* shares in the company that carry the right to receive any distribution of capital of the company, that ownership is held by the entity to the extent of the test percentage of the distribution.

Certain shares ignored

(5)

In tracing the ownership of ^* shares in a company, ignore ^* shares whose ^* dividends can reasonably be regarded as being equivalent to the payment of interest on a loan having regard to:

(a)

how the dividends are calculated; and

(b)

the conditions applying to the payment of the dividends; and

(c)

any other relevant matters.

727-410 Ultimate stake of a particular percentage in a fixed trust

(1)

This section sets out 2 tests of whether an entity has an ultimate stake of a particular percentage (the test percentage ) in a ^* fixed trust.

Note: In applying the tests, follow the rules in section 727-415.

Income distributions

(2)

The first test is that, after tracing, to the ^* ultimate owners who ultimately hold them, the direct and indirect rights to receive distributions of trust income, those rights are held by the entity to the extent of the test percentage of each such distribution.

Capital distributions

(3)

The second test is that, after tracing, to the ^* ultimate owners who ultimately hold them, the direct and indirect rights to receive distributions of trust capital, those rights are held by the entity to the extent of the test percentage of each such distribution.

727-415 Rules for tracing

(1)

In applying sections 727-400, 727-405 and 727-410, follow the rules in this section.

Interposed entities

(2)

Tracing is to be done through any interposed entities.

Ownership or rights held jointly

(3)

If some of the ownership or rights of a particular kind in relation to a company or trust are held by 2 or more entities jointly or in common, each of the entities is treated as holding a proportion of the ownership or rights so held. The proportion is to be worked out on a reasonable basis, so that the total of the proportions equals the total of the ownership or rights so held.

Ownership or rights held by associate

(4)

If, at a particular time:

(a)

an ^* ultimate owner is an ^* associate of another ultimate owner; and

(b)

the associate ultimately holds some of the ownership or rights of a particular kind in relation to a company or trust;

then, in determining whether the other ultimate owner is one of 2 or more ultimate owners because of whom the conditions in an item in the table in section 727-400 are satisfied, the ownership or rights of that kind in relation to the company or trust held by the associate at that time:

(c)

to the extent of a particular percentage, may be treated as being instead held by the other ultimate owner; and

(d)

to the extent so treated, cannot be treated as being instead held by any other ultimate owner of whom the first ultimate owner is an associate.

(5)

If one or more applications of subsection (4) are necessary to establish that an ^* ultimate owner is one of 2 or more ultimate owners because of whom the conditions in an item in the table in section 727-400 are satisfied, that subsection must be applied accordingly.

Subdivision 727-F—Consequences of an indirect value shift
Guide to Subdivision 727-F
727-450 What this Subdivision is about

This Subdivision tells you:

* which method to use to work out the consequences of an indirect value shift for equity or loan interests, and indirect equity or loan interests, in the losing entity and in the gaining entity; and

* which interests, and which owners, are affected.

Table of sections

Operative provisions

727-455 Consequences of the indirect value shift

Affected interests

727-460 Affected interests in the losing entity
727-465 Affected interests in the gaining entity
727-470 Exceptions
727-520 Equity or loan interest and related terms
727-525 Indirect equity or loan interest

Affected owners

727-530 Who are the affected owners

Choices about method to be used

727-550 Choosing the adjustable value method
727-555 Giving other affected owners information about the choice

[This is the end of the Guide.]

Operative provisions
727-455 Consequences of the indirect value shift

The consequences (if any) of an ^* indirect value shift must be worked out using the ^* realisation time method unless the ^* adjustable value method is chosen in accordance with section 727-550.

Note: Later provisions of this Subdivision set out the interests to which those consequences apply (see sections 727-460 to 727-525), which are in turn determined by who are the affected owners (see section 727-530).

Affected interests
727-460 Affected interests in the losing entity

These are the affected interests in the ^* losing entity:

(a)

each ^* equity or loan interest that an ^* affected owner owns in the losing entity immediately before the ^* IVS time; and

(b)

each equity or loan interest that:

(i)

an affected owner owns in another affected owner immediately before the IVS time; and

(ii)

is an ^* indirect equity or loan interest in the losing entity;

(except one covered by an exception in section 727-470).

727-465 Affected interests in the gaining entity

If immediately before the ^* IVS time the ^* gaining entity is a company or trust (except one listed in section 727-125 (about superannuation entities)), these are the affected interests in the gaining entity:

(a)

each ^* equity or loan interest that an ^* affected owner owns in the gaining entity immediately before the ^* IVS time; and

(b)

each equity or loan interest that:

(i)

an affected owner owns in another affected owner immediately before the IVS time; and

(ii)

is an ^* indirect equity or loan interest in the gaining entity.

(except one covered by an exception in section 727-470).

727-470 Exceptions

Mere active participants

(1)

An ^* equity or loan interest that an ^* active participant in the ^* scheme owns in another active participant immediately before the ^* IVS time is not an ^* affected interest in the ^* losing entity or in the ^* gaining entity unless one of the active participants is also covered by 1, 2, 3 or 4 in the table in subsection 727-530(1) (about who is an affected owner).

Entity that is eligible to be an STS taxpayer, or satisfies the maximum net asset value test for small business relief

(2)

An ^* equity or loan interest that an entity (the owner ) owns immediately before the ^* IVS time is not an ^* affected interest in the ^* losing entity or in the ^* gaining entity if the owner:

(a)

is eligible to be an ^* STS taxpayer for each income year that includes any of the ^* IVS period; or

(b)

would satisfy the maximum net asset value test in section 152-15 throughout the ^* IVS period.

(3)

If the owner is not in existence for part of the ^* IVS period, disregard that part in applying subsection (2).

Interests in superannuation entities not covered

(4)

An ^* equity or loan interest in an ^* affected owner is not an ^* affected interest in the ^* losing entity or in the ^* gaining entity if the affected owner is an entity listed in section 727-125 (about superannuation entities) in relation to the income year in which the ^* IVS time happens.

[The next section is section 727-520.]

727-520 Equity or loan interest and related terms

(1)

An equity or loan interest in an entity is a ^* primary interest, or a ^* secondary interest, in the entity.

(2)

A primary interest in an entity is a ^* primary equity interest, or a ^* primary loan interest, in the entity.

(3)

The meaning of primary equity interest in an entity is set out in the table.

(4)

A primary loan interest in an entity is:

(a)

a ^* loan to the entity; or

(b)

an interest as joint owner (including as tenant in common) of a loan to the entity.

(5)

A secondary interest in an entity is a ^* secondary equity interest, or a ^* secondary loan interest, in the entity.

(6)

A secondary equity interest in an entity is a right or option:

(a)

to ^* acquire an existing ^* primary equity interest in the entity; or

(b)

to have the entity issue a new primary equity interest.

(7)

A secondary loan interest in an entity is a right or option:

(a)

to ^* acquire an existing ^* primary loan interest in the entity; or

(b)

to have the entity issue a new primary loan interest.

727-525 Indirect equity or loan interest

An ^* equity or loan interest in an entity is an indirect equity or loan interest in another entity if, and only if:

(a)

the first entity owns an equity or loan interest in the other entity; or

(b)

the first entity owns an equity or loan interest that is an indirect equity or loan interest in the other entity because of one or more other applications of this section.

[The next section is section 727-530.]

Affected owners
727-530 Who are the affected owners

(1)

The table sets out the affected owners for the ^* indirect value shift.

(2)

An entity is an intermediate controller of another entity if, and only if:

(a)

the first entity ^* controls (for value shifting purposes) the other entity; and

(b)

the first entity is ^* controlled (for value shifting purposes) by an ^* ultimate controller of the other entity.

Active participants (if both losing and gaining entities are closely held)

(3)

An entity (the first entity ) is an active participant in the ^* scheme if:

(a)

at some time during the ^* IVS period, neither the losing entity nor the gaining entity has 300 or more members (in the case of a company) or 300 or more beneficiaries (in the case of a trust); and

(b)

the first entity:

(i)

actively participated in, or directly facilitated, the entering into of the ^* scheme; or

(ii)

at some time during the ^* IVS period actively participated in, or directly facilitated, the carrying out of the scheme;

(whether or not it did so at the direction of some other entity); and

(c)

at some time during the ^* IVS period, the first entity owned:

(i)

an ^* equity or loan interest in the losing entity or in the gaining entity; or

(ii)

an ^* indirect equity or loan interest in the losing entity or in the gaining entity; and

(d)

the first entity is neither the losing entity nor the gaining entity.

Note: Subsections 727-110(2) and (3) contain rules about when an entity is treated as having or not having 300 or more members or beneficiaries.

Choices about method to be used
727-550 Choosing the adjustable value method

(1)

This section sets out rules for:

(a)

choosing to use the ^* adjustable value method to work out the consequences of an ^* indirect value shift; or

(b)

choosing (when using the adjustable value method) not to work out on a ^* loss-focussed basis the reductions in the ^* adjustable values of ^* affected interests.

Who makes the choice

(2)

The choice must be made in accordance with the table.

When choice must be made

(3)

The choice must be made within 2 years after the first ^* realisation event that happens to an ^* affected interest at or after the IVS time.

Choice binds all affected owners

(4)

The choice binds all ^* affected owners for the ^* indirect value shift.

727-555 Giving other affected owners information about the choice

(1)

An entity that makes a choice under section 727-550 (including a choice made jointly with one or more other entities) must inform all entities that it knows to be ^* affected owners for the ^* indirect value shift about the content of the choice. The entity must do so in writing within one month after making the choice.

Penalty: 30 penalty units.

(2)

If:

(a)

a choice under section 727-550 is made jointly by 2 or more entities; and

(b)

one of the entities complies with subsection (1);

no other entity need comply with that subsection in relation to that choice.

(3)

If an ^* affected owner for an ^* indirect value shift has reason to believe that an entity may have made a choice under section 727-550 (including a choice made jointly with one or more other entities), the affected owner may give the entity a written notice asking whether the entity has made such a choice.

(4)

Within one month after receiving a notice under subsection (3), an entity must inform the ^* affected owner in writing whether the entity has made a choice under section 727-550 and, if so, about the content of the choice.

Penalty: 30 penalty units.

(5)

The Commissioner may extend the period for complying with a provision of this section.

Subdivision 727-G—The realisation time method
727-600 What this Subdivision is about

Under the realisation time method:

* losses on realisation of affected interests in the losing entity are reduced; and

* gains on realisation of affected interests in the gaining entity are reduced, within limits worked out by reference to the reductions in losses on affected interests in the losing entity; and

* certain 95% services indirect value shifts are disregarded.

This Subdivision also explains how its reduction of a loss or gain affects CGT assets, trading stock and revenue assets.

Table of sections

Operative provisions

727-610 Consequences of indirect value shift
727-615 Reduction of loss on realisation event for affected interest in losing entity
727-620 Reduction of gain on realisation event for affected interest in gaining entity
727-625 Total gain reductions not to exceed total loss reductions
727-630 How cap in section 727-625 applies if affected interest is also trading stock or a revenue asset
727-635 Splitting an equity or loan interest
727-640 Merging equity or loan interests
727-645 Effect of CGT roll-over

Further exclusion for certain 95% services indirect value shifts if realisation time method must be used

727-700 When 95% services indirect value shift is excluded
95% services indirect value shifts that are not excluded
727-705 Another provision of the income tax law affects amount related to services by at least $100,000
727-710 Ongoing or recent service arrangement reduces value of losing entity by at least $100,000
727-715 Service arrangements reduce value of losing entity that is a group service provider by at least $500,000
727-720 Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000
727-725 Meaning of predominantly-services indirect value shift

[This is the end of the Guide.]

Operative provisions
727-610 Consequences of indirect value shift

(1)

This Subdivision sets out the realisation time method of working out the consequences (if any) of an ^* indirect value shift.

(2)

If those consequences are to be worked out using that method, this Subdivision applies to each ^* realisation event:

(a)

by which a loss would, apart from this Division, be ^* realised for income tax purposes; and

(b)

that happens to an ^* affected interest in the ^* losing entity; and

(c)

that is the first realisation event that happens to that interest at or after the ^* IVS time; and

(d)

that happens:

(i)

if the amount of the indirect value shift is $500,000 or more—at any time after the IVS time; or

(ii)

otherwise—within 4 years after the IVS time.

(3)

If:

(a)

those consequences are to be worked out using that method; and

(b)

the ^* gaining entity is a company or trust (except one listed in section 727-125 (about superannuation entities)) immediately before the ^* IVS time;

this Subdivision applies to each ^* realisation event:

(c)

by which a gain would, apart from this Division, be ^* realised for income tax purposes; and

(d)

that happens to an ^* affected interest in the ^* gaining entity; and

(e)

that is the first realisation event that happens to that interest at or after the IVS time.

(4)

The consequences for the ^* affected interest depend on its character. There are consequences for the interest in its character as a ^* CGT asset. However, if the interest is also ^* trading stock or a ^* revenue asset, there are additional consequences for it in that character.

(5)

In working out the consequences for an ^* affected interest in the ^* losing entity or ^* gaining entity, in the interest's character as ^* trading stock, a ^* realisation event is disregarded for the purposes of identifying under paragraph (2)(c) or (3)(e) the first realisation event that happens to that interest at or after the ^* IVS time, if:

(a)

the realisation event consists of the ending of an income year; and

(b)

the ^* value of the interest as trading stock on hand of an entity at the end of the income year is the interest's ^* cost; and

(c)

the interest became part of the entity's trading stock on hand during that income year, or the value of the interest as trading stock of the entity on hand at the start of the income year was also the interest's cost.

727-615 Reduction of loss on realisation event for affected interest in losing entity

If this Subdivision applies to a ^* realisation event that happens to an ^* affected interest in the ^* losing entity, a loss that would, apart from this Division, be ^* realised for income tax purposes by the event is reduced by an amount that is reasonable having regard to:

(a)

a reasonable estimate of the amount (if any) by which the ^* indirect value shift has reduced the interest's market value; and

(b)

if the interest is also an affected interest in the ^* gaining entity—a reasonable estimate of the extent (if any) to which the interest's market value at the time of the realisation event still reflects the effect of the indirect value shift on the market value of ^* equity or loan interests in the gaining entity.

727-620 Reduction of gain on realisation event for affected interest in gaining entity

If this Subdivision applies to a ^* realisation event that happens to an ^* affected interest in the ^* gaining entity, a gain that would, apart from this Division, be ^* realised for income tax purposes by the event is reduced by an amount that is reasonable having regard to:

(a)

a reasonable estimate of the amount (if any) by which the ^* indirect value shift has increased the interest's market value; and

(b)

a reasonable estimate of the extent (if any) to which the interest's market value at the time of the realisation event still reflects the effect of the indirect value shift on the market value of ^* equity or loan interests in the gaining entity.

727-625 Total gain reductions not to exceed total loss reductions

(1)

This section ensures that the total ( total gain reductions ) of the amounts by which section 727-620 reduces gains ^* realised for income tax purposes by ^* realisation events happening at the same time does not exceed the total ( total loss reductions ) of:

(a)

the amounts by which section 727-615 reduces losses that:

(i)

would, apart from this Division, be ^* realised for income tax purposes by ^* realisation events happening before or at that time; and

(ii)

have not already been taken into account in a previous application of this section; and

(b)

the amounts by which section 727-850 (as applying to the ^* scheme from which the ^* indirect value shift results) reduces losses that:

(i)

would, apart from this Division, be realised for income tax purposes by realisation events happening before the ^* IVS time to ^* equity or loan interests, or ^* indirect equity or loan interests, in the ^* losing entity; and

(ii)

have not already been taken into account in a previous application of this section.

(2)

If, apart from this section, the total gain reductions would exceed the total loss reductions, the amount by which section 727-620 reduces each of the gains is itself reduced by the amount worked out using this formula:

(3)

For the purposes of the formula: