Contents
Chapter 3—Specialist liability rules
Part 3‑95—Value shifting
Division 723—Direct value shifting by creating right over non‑depreciating asset
Subdivision 723‑A—Reduction in loss from realising non‑depreciating asset
723‑1 Object
723‑10 Reduction in loss from realising non‑depreciating asset over which right has been created
723‑15 Reduction in loss from realising non‑depreciating asset at the same time as right is created over it
723‑20 Exceptions
723‑25 Realisation event that is only a partial realisation
723‑35 Multiple rights created to take advantage of the $50,000 threshold
723‑40 Application to CGT asset that is also trading stock or revenue asset
723‑50 Effects if right created over underlying asset is also trading stock or a revenue asset
Subdivision 723‑B—Reducing reduced cost base of interests in entity that acquires non‑depreciating asset under roll‑over
723‑105 Reduced cost base of interest reduced when interest realised at a loss
723‑110 Direct and indirect roll‑over replacement for underlying asset
Division 725—Direct value shifting affecting interests in companies and trusts
Guide to Division 725 11
725‑1 What this Division is about
Subdivision 725‑A—Scope of the direct value shifting rules
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
Subdivision 725‑B—What is a direct value shift
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
Subdivision 725‑C—Consequences of a direct value shift
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
Subdivision 725‑D—Consequences for down interest or up interest as CGT asset
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
Subdivision 725‑E—Consequences for down interest or up interest as trading stock or a revenue asset
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
Subdivision 725‑F—Value adjustments and taxed gains
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)
Division 727—Indirect value shifting affecting interests in companies and trusts, and arising from non‑arm’s length dealings
Guide to Division 727 47
727‑1 What this Division is about
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
Subdivision 727‑A—Scope of the indirect value shifting rules
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
Subdivision 727‑B—What is an indirect value shift
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
Subdivision 727‑C—Exclusions
Guide to Subdivision 727‑C
727‑200 What this Subdivision is about
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
Subdivision 727‑D—Working out the market value of economic benefits
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
Subdivision 727‑E—Key concepts
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
Subdivision 727‑F—Consequences of an indirect value shift
Guide to Subdivision 727‑F
727‑450 What this Subdivision is about
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
Subdivision 727‑G—The realisation time method
727‑600 What this Subdivision is about
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
Subdivision 727‑H—The adjustable value method
Guide to Subdivision 727‑H
727‑750 What this Subdivision is about
727‑755 Consequences of indirect value shift
Reductions of adjustable value
727‑770 Reduction under the adjustable value method
727‑775 Has there been a disaggregated attributable decrease?
727‑780 Working out the reduction on a loss‑focussed basis
Uplifts of adjustable value
727‑800 Uplift under the attributable increase method
727‑805 Has there been a disaggregated attributable increase?
727‑810 Scaling‑down formula
Consequences of the method for various kinds of assets
727‑830 CGT assets
727‑835 Trading stock
727‑840 Revenue assets
Subdivision 727‑K—Reduction of loss on equity or loan interests realised before the IVS time
727‑850 Consequences of scheme under this Subdivision
727‑855 Presumed indirect value shift
727‑860 Conditions about the prospective gaining entity
727‑865 How other provisions of this Division apply to support this Subdivision
727‑870 Effect of CGT roll‑over
727‑875 Application to CGT asset that is also trading stock or revenue asset
Subdivision 727‑L—Indirect value shift resulting from a direct value shift
727‑905 How this Subdivision affects the rest of this Division
727‑910 Treatment of value shifted under the direct value shift
Chapter 4—International aspects of income tax
Part 4‑5—General
Division 768—Foreign non‑assessable income and gains
Subdivision 768‑A—Returns on foreign investment
Guide to Subdivision 768‑A
768‑1 What this Subdivision is about
Foreign equity distributions on participation interests
768‑5 Foreign equity distributions on participation interests
768‑7 Foreign equity distributions entitled to a foreign income tax deduction
768‑10 Meaning of foreign equity distribution
768‑15 Participation test—minimum 10% participation
Subdivision 768‑B—Some items of income that are exempt from income tax
768‑100 Foreign government officials in Australia
768‑105 Compensation arising out of Second World War
768‑110 Foreign residents deriving income from certain activities in Australia’s exclusive economic zone or on or above Australia’s continental shelf
Subdivision 768‑G—Reduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies
Guide to Subdivision 768‑G
768‑500 What this Subdivision is about
Operative provisions
768‑505 Reducing a capital gain or loss from certain CGT events in relation to certain voting interests
Active foreign business asset percentage
768‑510 Active foreign business asset percentage
768‑515 Choices to apply market value method or book value method
768‑520 Market value method—choice made under subsection 768‑515(1)
768‑525 Book value method—choice made under subsection 768‑515(2)
768‑530 Active foreign business asset percentage—modifications for foreign life insurance companies and foreign general insurance companies
768‑533 Foreign company that is a FIF using CFC calculation method—treatment as AFI subsidiary under this Subdivision
768‑535 Modified rules for foreign wholly‑owned groups
Types of assets of a foreign company
768‑540 Active foreign business assets of a foreign company
768‑545 Assets included in the total assets of a foreign company
Voting percentages in a company
768‑550 Direct voting percentage in a company
768‑555 Indirect voting percentage in a company
768‑560 Total voting percentage in a company
Subdivision 768‑R—Temporary residents
Guide to Subdivision 768‑R
768‑900 What this Subdivision is about
Operative provisions
768‑905 Objects
768‑910 Income derived by temporary resident
768‑915 Certain capital gains and capital losses of temporary resident to be disregarded
768‑950 Individual becoming an Australian resident
768‑955 Temporary resident who ceases to be temporary resident but remains an Australian resident
768‑960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules
768‑970 Modification of rules for accruals system of taxation of certain non‑resident trust estates
768‑980 Interest paid by temporary resident
Division 770—Foreign income tax offsets
Guide to Division 770 160
770‑1 What this Division is about
770‑5 Object
Subdivision 770‑A—Entitlement rules for foreign income tax offsets
Basic entitlement rule for foreign income tax offset
770‑10 Entitlement to foreign income tax offset
770‑15 Meaning of foreign income tax, credit absorption tax and unitary tax
Subdivision 770‑B—Amount of foreign income tax offset
Guide to Subdivision 770‑B
770‑65 What this Subdivision is about
Operative provisions
770‑70 Amount of foreign income tax offset
770‑75 Foreign income tax offset limit
770‑80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply
Subdivision 770‑C—Rules about payment of foreign income tax
Rules about when foreign tax is paid
770‑130 When foreign income tax is considered paid—taxes paid by someone else
770‑135 Foreign income tax paid by CFCs on attributed amounts
Rules about when foreign tax is considered not paid
770‑140 When foreign income tax is considered not paid—anti‑avoidance rule
Subdivision 770‑D—Administration
770‑190 Amendment of assessments
Division 775—Foreign currency gains and losses
Guide to Division 775 172
775‑5 What this Division is about
Subdivision 775‑A—Objects of this Division
775‑10 Objects of this Division
Subdivision 775‑B—Realisation of forex gains or losses
775‑15 Forex realisation gains are assessable
775‑20 Certain forex realisation gains are exempt income
775‑25 Certain forex realisation gains are non‑assessable non‑exempt income
775‑27 Certain forex realisation gains are non‑assessable non‑exempt income
775‑30 Forex realisation losses are deductible
775‑35 Certain forex realisation losses are disregarded
775‑40 Disposal of foreign currency or right to receive foreign currency—forex realisation event 1
775‑45 Ceasing to have a right to receive foreign currency—forex realisation event 2
775‑50 Ceasing to have an obligation to receive foreign currency—forex realisation event 3
775‑55 Ceasing to have an obligation to pay foreign currency—forex realisation event 4
775‑60 Ceasing to have a right to pay foreign currency—forex realisation event 5
775‑65 Only one forex realisation event to be counted
775‑70 Tax consequences of certain short‑term forex realisation gains
775‑75 Tax consequences of certain short‑term forex realisation losses
775‑80 You may choose not to have sections 775‑70 and 775‑75 apply to you
775‑85 Forex cost base of a right to receive foreign currency
775‑90 Forex entitlement base of a right to pay foreign currency
775‑95 Proceeds of assuming an obligation to pay foreign currency
775‑100 Net costs of assuming an obligation to receive foreign currency
775‑105 Currency exchange rate effect
775‑110 Constructive receipts and payments
775‑115 Economic set‑off to be treated as legal set‑off
775‑120 Non‑arm’s length transactions
775‑125 CGT consequences of the acquisition of foreign currency as a result of forex realisation event 2 or 3
775‑130 Certain deductions not allowable
775‑135 Right to receive or pay foreign currency
775‑140 Obligation to pay or receive foreign currency
775‑145 Application of forex realisation events to currency and fungible rights and obligations
775‑150 Transitional election
775‑155 Applicable commencement date
775‑160 Exception—event happens before the applicable commencement date
775‑165 Exception—currency or right acquired, or obligation incurred, before the applicable commencement date
775‑168 Exception—disposal or redemption of traditional securities
775‑175 Application to things happening before commencement
Subdivision 775‑C—Roll‑over relief for facility agreements
Guide to Subdivision 775‑C
775‑180 What this Subdivision is about
Operative provisions
775‑185 What is a facility agreement?
775‑190 What is an eligible security?
775‑195 You may choose roll‑over relief for a facility agreement
775‑200 Forex realisation event 4 does not apply
775‑205 What is a roll‑over?
775‑210 Notional loan
775‑215 Discharge of obligation to pay the principal amount of a notional loan under a facility agreement—forex realisation event 6
775‑220 Material variation of a facility agreement—forex realisation event 7
Subdivision 775‑D—Qualifying forex accounts that pass the limited balance test
Guide to Subdivision 775‑D
775‑225 What this Subdivision is about
Operative provisions
775‑230 Election to have this Subdivision apply to one or more qualifying forex accounts
775‑235 Variation of election
775‑240 Withdrawal of election
775‑245 When does a qualifying forex account pass the limited balance test?
775‑250 Tax consequences of passing the limited balance test
775‑255 Notional realisation when qualifying forex account starts to pass the limited balance test
775‑260 Modification of tax recognition time
Subdivision 775‑E—Retranslation for qualifying forex accounts
Guide to Subdivision 775‑E
775‑265 What this Subdivision is about
Operative provisions
775‑270 You may choose retranslation for a qualifying forex account
775‑275 Withdrawal of choice
775‑280 Tax consequences of choosing retranslation for an account
775‑285 Retranslation of gains and losses relating to a qualifying forex account—forex realisation event 8
Subdivision 775‑F—Retranslation under foreign exchange retranslation election under Subdivision 230‑D
Guide to Subdivision 775‑F
775‑290 What this Subdivision is about
775‑295 When this Subdivision applies
775‑300 Tax consequences of choosing retranslation for arrangement
775‑305 Retranslation of gains and losses relating to arrangement to which foreign exchange retranslation election applies—forex realisation event 9
775‑310 When election ceases to apply to arrangement
775‑315 Balancing adjustment when election ceases to apply to arrangement
Division 802—Foreign residents’ income with an underlying foreign source
Subdivision 802‑A—Conduit foreign income
Guide to Subdivision 802‑A
802‑5 What this Subdivision is about
Operative provisions
802‑10 Objects
802‑15 Foreign residents—exempting CFI from Australian tax
802‑17 Trust estates and foreign resident beneficiaries—exempting CFI from Australian tax
802‑20 Distributions between Australian corporate tax entities—non‑assessable non‑exempt income
802‑25 Conduit foreign income of an Australian corporate tax entity
802‑30 Foreign source income amounts
802‑35 Capital gains and losses
802‑40 Effect of foreign income tax offset on conduit foreign income
802‑45 Previous declarations of conduit foreign income
802‑50 Receipt of an unfranked distribution from another Australian corporate tax entity
802‑55 No double benefits
802‑60 No streaming of distributions
Division 815—Cross‑border transfer pricing
Subdivision 815‑A—Treaty‑equivalent cross‑border transfer pricing rules
Guide to Subdivision 815‑A
815‑1 What this Subdivision is about
Operative provisions
815‑5 Object
815‑10 Transfer pricing benefit may be negated
815‑15 When an entity gets a transfer pricing benefit
815‑20 Cross‑border transfer pricing guidance
815‑25 Modified transfer pricing benefit for thin capitalisation
815‑30 Determinations negating transfer pricing benefit
815‑35 Consequential adjustments
815‑40 No double taxation
Subdivision 815‑B—Arm’s length principle for cross‑border conditions between entities
Guide to Subdivision 815‑B
815‑101 What this Subdivision is about
Operative provisions
815‑105 Object
815‑110 Operation of Subdivision
815‑115 Substitution of arm’s length conditions
815‑120 When an entity gets a transfer pricing benefit
815‑125 Meaning of arm’s length conditions
815‑130 Relevance of actual commercial or financial relations
815‑135 Guidance
815‑140 Modification for thin capitalisation
815‑145 Consequential adjustments
815‑150 Amendment of assessments
Subdivision 815‑C—Arm’s length principle for permanent establishments
Guide to Subdivision 815‑C
815‑201 What this Subdivision is about
Operative provisions
815‑205 Object
815‑210 Operation of Subdivision
815‑215 Substitution of arm’s length profits
815‑220 When an entity gets a transfer pricing benefit
815‑225 Meaning of arm’s length profits
815‑230 Source rules for certain arm’s length profits
815‑235 Guidance
815‑240 Amendment of assessments
Subdivision 815‑D—Special rules for trusts and partnerships
Guide to Subdivision 815‑D
815‑301 What this Subdivision is about
Operative provisions
815‑305 Special rule for trusts
815‑310 Special rules for partnerships
Subdivision 815‑E—Reporting obligations for significant global entities
Guide to Subdivision 815‑E
815‑350 What this Subdivision is about
Operative provisions
815‑355 Requirement to give statements
815‑360 Replacement reporting periods
815‑365 Exemptions
Division 820—Thin capitalisation rules
Guide to Division 820 292
820‑1 What this Division is about
820‑5 Does this Division apply to an entity?
820‑10 Map of Division
Subdivision 820‑A—Preliminary
820‑30 Object of Division
820‑32 Exemption for private or domestic assets and non‑debt liabilities
820‑35 Application—$2 million threshold
820‑37 Application—assets threshold
820‑39 Exemption of certain special purpose entities
820‑40 Meaning of debt deduction
Subdivision 820‑B—Thin capitalisation rules for outward investing entities (non‑ADI)
Guide to Subdivision 820‑B
820‑65 What this Subdivision is about
Operative provisions
820‑85 Thin capitalisation rule for outward investing entities (non‑ADI)
820‑90 Maximum allowable debt
820‑95 Safe harbour debt amount—outward investor (general)
820‑100 Safe harbour debt amount—outward investor (financial)
820‑105 Arm’s length debt amount
820‑110 Worldwide gearing debt amount—outward investor that is not also an inward investment vehicle
820‑111 Worldwide gearing debt amount—outward investor that is also an inward investment vehicle
820‑115 Amount of debt deduction disallowed
820‑120 Application to part year periods
Subdivision 820‑C—Thin capitalisation rules for inward investing entities (non‑ADI)
Guide to Subdivision 820‑C
820‑180 What this Subdivision is about
Operative provisions
820‑185 Thin capitalisation rule for inward investing entities (non‑ADI)
820‑190 Maximum allowable debt
820‑195 Safe harbour debt amount—inward investment vehicle (general)
820‑200 Safe harbour debt amount—inward investment vehicle (financial)
820‑205 Safe harbour debt amount—inward investor (general)
820‑210 Safe harbour debt amount—inward investor (financial)
820‑215 Arm’s length debt amount
820‑216 Worldwide gearing debt amount—inward investment vehicle (general)
820‑217 Worldwide gearing debt amount—inward investment vehicle (financial)
820‑218 Worldwide gearing debt amount—inward investor (general)
820‑219 Worldwide gearing debt amount—inward investor (financial)
820‑220 Amount of debt deduction disallowed
820‑225 Application to part year periods
Subdivision 820‑D—Thin capitalisation rules for outward investing entities (ADI)
Guide to Subdivision 820‑D
820‑295 What this Subdivision is about
Operative provisions
820‑300 Thin capitalisation rule for outward investing entities (ADI)
820‑305 Minimum capital amount
820‑310 Safe harbour capital amount
820‑315 Arm’s length capital amount
820‑320 Worldwide capital amount
820‑325 Amount of debt deduction disallowed
820‑330 Application to part year periods
Subdivision 820‑E—Thin capitalisation rules for inward investing entities (ADI)
Guide to Subdivision 820‑E
820‑390 What this Subdivision is about
Operative provisions
820‑395 Thin capitalisation rule for inward investing entities (ADI)
820‑400 Minimum capital amount
820‑405 Safe harbour capital amount
820‑410 Arm’s length capital amount
820‑415 Amount of debt deduction disallowed
820‑420 Application to part year periods
Subdivision 820‑EA—Some financial entities may choose to be treated as ADIs
820‑430 When choice can be made, and what effect it has
820‑435 Conditions
820‑440 Revocation of choice
820‑445 How this Subdivision interacts with Subdivision 820‑FA
Subdivision 820‑FA—How the thin capitalisation rules apply to consolidated groups and MEC groups
Guide to Subdivision 820‑FA
820‑579 What this Subdivision is about
Operative provisions
820‑581 How this Division applies to head company for income year in which group comes into existence or ceases to exist
820‑583 Classification of head company
820‑584 Exempt special purpose entities treated as not being member of group
820‑585 Exemption for consolidated group headed by foreign‑controlled Australian ADI or its holding company
820‑587 Additional application of Subdivision 820‑D to MEC group that includes foreign‑controlled Australian ADI
820‑588 Choice to treat specialist credit card institutions as being financial entities and not ADIs
820‑589 How Subdivision 820‑D applies to a MEC group
Subdivision 820‑FB—Grouping branches of foreign banks and foreign financial entities with a consolidated group, MEC group or single Australian resident company
Guide to Subdivision 820‑FB
820‑595 What this Subdivision is about
Choice to group with branches of foreign banks and foreign financial entities
820‑597 Choice by head company of consolidated group or MEC group
820‑599 Choice by Australian resident company outside consolidatable group and MEC group
Effect of choice
820‑601 Application
820‑603 General
820‑605 Effect on establishment entity if certain debt deductions disallowed
820‑607 Effect on test periods under this Division
820‑609 Effect on classification of head company or single company
820‑610 Choice not to be outward investing entity (ADI) or inward investing entity (ADI)
820‑611 Values to be based on what would be in consolidated accounts for group
820‑613 How Subdivision 820‑D applies
820‑615 How Subdivision 820‑E applies
Subdivision 820‑G—Calculating the average values
Guide to Subdivision 820‑G
820‑625 What this Subdivision is about
How to calculate the average values
820‑630 Methods of calculating average values
820‑635 The opening and closing balances method
820‑640 The 3 measurement days method
820‑645 The frequent measurement method
Special rules about values and valuation
820‑675 Amount to be expressed in Australian currency
820‑680 Valuation of assets, liabilities and equity capital
820‑682 Recognition of assets and liabilities—modifying application of accounting standards
820‑683 Recognition of internally generated intangible items—modifying application of accounting standards
820‑684 Valuation of intangible assets if no active market—modifying application of accounting standards
820‑685 Valuation of debt capital
820‑690 Commissioner’s power
Subdivision 820‑H—Control of entities
Guide to Subdivision 820‑H
820‑740 What this Subdivision is about
Australian controller of a foreign entity
820‑745 What is an Australian controlled foreign entity?
820‑750 What is an Australian controller of a controlled foreign company?
820‑755 What is an Australian controller of a controlled foreign trust?
820‑760 What is an Australian controller of a controlled foreign corporate limited partnership?
Foreign controlled Australian entity
820‑780 What is a foreign controlled Australian entity?
820‑785 What is a foreign controlled Australian company?
820‑790 What is a foreign controlled Australian trust?
820‑795 What is a foreign controlled Australian partnership?
Thin capitalisation control interest
820‑815 General rule about thin capitalisation control interest in a company, trust or partnership
820‑820 Special rules about calculating TC control interest held by an entity
820‑825 Special rules about calculating TC control interests held by a group of entities
820‑830 Special rules about determining percentage of TC control interest
820‑835 Commissioner’s power
TC direct control interest, TC indirect control interest and TC control tracing interest
820‑855 TC direct control interest in a company
820‑860 TC direct control interest in a trust
820‑865 TC direct control interest in a partnership
820‑870 TC indirect control interest in a company, trust or partnership
820‑875 TC control tracing interest in a company, trust or partnership
Subdivision 820‑HA—Controlled foreign entity debt and controlled foreign entity equity
Guide to Subdivision 820‑HA
820‑880 What this Subdivision is about
820‑881 Application
820‑885 What is controlled foreign entity debt?
820‑890 What is controlled foreign entity equity?
Subdivision 820‑I—Associate entities
Guide to Subdivision 820‑I
820‑900 What this Subdivision is about
820‑905 Associate entity
820‑910 Associate entity debt
820‑915 Associate entity equity
820‑920 Associate entity excess amount
Subdivision 820‑J—Equity interest in a trust or partnership
Guide to Subdivision 820‑J
820‑925 What this Subdivision is about
820‑930 Equity interest in a trust or partnership
Subdivision 820‑JA—Worldwide debt and equity concepts
Guide to Subdivision 820‑JA
820‑931 What this Subdivision is about
Operative provisions
820‑932 Worldwide debt and worldwide equity
820‑933 Statement worldwide debt, statement worldwide equity and statement worldwide assets
820‑935 Meaning of audited consolidated financial statements
Subdivision 820‑K—Zero‑capital amount
Guide to Subdivision 820‑K
820‑940 What this Subdivision is about
820‑942 How to work out the zero‑capital amount
Subdivision 820‑KA—Cost‑free debt capital and excluded equity interests
Guide to Subdivision 820‑KA
820‑945 What this Subdivision is about
820‑946 Cost‑free debt capital and excluded equity interest
Subdivision 820‑L—Record keeping requirements
Guide to Subdivision 820‑L
820‑950 What this Subdivision is about
Records about Australian permanent establishments
820‑960 Records about Australian permanent establishments
820‑965 Review of Commissioner’s decision
Records about arm’s length amounts
820‑980 Records about arm’s length debt amount and arm’s length capital amount
Records about asset revaluations
820‑985 Methodology of revaluation and independence of valuer
Offences committed by certain entities
820‑990 Offences—treatment of partnerships
820‑995 Offences—treatment of unincorporated companies
Division 830—Foreign hybrids
Guide to Division 830 469
830‑1 What this Division is about
Subdivision 830‑A—Meaning of “foreign hybrid”
830‑5 Foreign hybrid
830‑10 Foreign hybrid limited partnership
830‑15 Foreign hybrid company
Subdivision 830‑B—Extension of normal partnership provisions to foreign hybrid companies
830‑20 Treatment of company as a partnership
830‑25 Partners are the shareholders in the company
830‑30 Individual interest of a partner in net income etc. equals percentage of notional distribution of company’s profits
830‑35 Partner’s interest in assets
830‑40 Control and disposal of share in partnership income
Subdivision 830‑C—Special rules applicable while an entity is a foreign hybrid
830‑45 Partner’s revenue and net capital losses from foreign hybrid not to exceed partner’s loss exposure amount
830‑50 Deduction etc. where partner’s foreign hybrid revenue loss amount and foreign hybrid net capital loss amount are less than partner’s loss exposure amount
830‑55 Meaning of foreign hybrid net capital loss amount
830‑60 Meaning of loss exposure amount
830‑65 Meaning of outstanding foreign hybrid revenue loss amount
830‑70 Meaning of outstanding foreign hybrid net capital loss amount
830‑75 Extended meaning of subject to foreign tax
Subdivision 830‑D—Special rules applicable when an entity becomes or ceases to be a foreign hybrid
830‑80 Setting the tax cost of partners’ interests in the assets of an entity that becomes a foreign hybrid
830‑85 Setting the tax cost of assets of an entity when it ceases to be a foreign hybrid
830‑90 What the expression tax cost is set means
830‑95 What the expression tax cost setting amount means
830‑100 What the expression tax cost means
830‑105 What the expression asset‑based income tax regime means
830‑110 No disposal of assets etc. on entity becoming or ceasing to be a foreign hybrid
830‑115 Tax losses cannot be transferred to a foreign hybrid
830‑120 End of CFC’s last statutory accounting period
830‑125 How long interest in asset, or asset, held
Division 832—Hybrid mismatch rules
Guide to Division 832 495
832‑1 What this Division is about
Subdivision 832‑A—Preliminary
Guide to Subdivision 832‑A
832‑5 What this Subdivision is about
Operative provisions
832‑10 Entitlement to receive payment
832‑15 Entitlement to receive non‑cash benefits
832‑20 Losses that arise from payments or parts of payments
832‑25 Recipients and payers of a payment
832‑30 Tax provisions to be disregarded in identifying payments and income or profits
832‑35 Single entity rule otherwise not disregarded
832‑40 Schemes outside Australia
832‑45 Relationship between this Division and other charging provisions in this Act
832‑50 Relationship between this Division and Division 820
832‑55 Division does not affect foreign residence rules
832‑60 Valuation of trading stock affected by hybrid mismatch rules
Subdivision 832‑B—Concepts relating to mismatches
Guide to Subdivision 832‑B
832‑100 What this Subdivision is about
Operative provisions
832‑105 When a payment gives rise to a deduction/non‑inclusion mismatch
832‑110 When a payment gives rise to a deduction/deduction mismatch
832‑115 Disregard effect of Division in determining deductions
832‑120 Meaning of foreign income tax deduction
832‑125 Meaning of subject to Australian income tax
832‑130 Meaning of subject to foreign income tax
832‑135 Safe harbour for translation rates
Subdivision 832‑C—Hybrid financial instrument mismatch
Guide to Subdivision 832‑C
832‑175 What this Subdivision is about
Operative provisions
832‑180 Deduction not allowable—Australian primary response
832‑185 Inclusion in assessable income—Australian secondary response
832‑190 Exception where entity not a party to the structured arrangement
832‑195 When a hybrid financial instrument mismatch is an offshore hybrid mismatch
832‑200 When a payment gives rise to a hybrid financial instrument mismatch
832‑205 Meaning of Division 832 control group
832‑210 Meaning of structured arrangement
832‑215 Hybrid mismatch
832‑220 Hybrid requirement—payments under financial instruments
832‑225 Hybrid requirement—payments under transfers of certain financial instruments
832‑230 Hybrid mismatch—integrity rule for substitute payments
832‑235 Extended operation of this Subdivision in relation to concessional foreign taxes
832‑240 Adjustment if hybrid financial instrument payment is income in a later year
Subdivision 832‑D—Hybrid payer mismatch
Guide to Subdivision 832‑D
832‑280 What this Subdivision is about
Operative provisions
832‑285 Deduction not allowable—Australian primary response
832‑290 Inclusion in assessable income—Australian secondary response
832‑295 Exception where entity not a party to the structured arrangement
832‑300 When a hybrid payer mismatch is an offshore hybrid mismatch
832‑305 When a payment gives rise to a hybrid payer mismatch
832‑310 Hybrid mismatch
832‑315 Hybrid requirement—assume payment was made to same recipient but by an ungrouped payer
832‑320 Hybrid payer
832‑325 Meaning of liable entity
832‑330 Neutralising amount
832‑335 Adjustment if hybrid payer has dual inclusion income in a later year
Subdivision 832‑E—Reverse hybrid mismatch
Guide to Subdivision 832‑E
832‑375 What this Subdivision is about
Operative provisions
832‑380 Deduction not allowable—Australian primary response
832‑385 Exception where entity not a party to the structured arrangement
832‑390 When a reverse hybrid mismatch is an offshore hybrid mismatch
832‑395 When a payment gives rise to a reverse hybrid mismatch
832‑400 Hybrid mismatch
832‑405 Hybrid requirement—assume payment was made to an investor
832‑410 Reverse hybrid
Subdivision 832‑F—Branch hybrid mismatch
Guide to Subdivision 832‑F
832‑450 What this Subdivision is about
Operative provisions
832‑455 Deduction not allowable
832‑460 Exception where entity not a party to the structured arrangement
832‑465 When a branch hybrid mismatch is an offshore hybrid mismatch
832‑470 Branch hybrid mismatch
832‑475 Hybrid mismatch
832‑480 Hybrid requirement—payment made directly or indirectly to a branch hybrid
832‑485 Branch hybrid
Subdivision 832‑G—Deducting hybrid mismatch
Guide to Subdivision 832‑G
832‑525 What this Subdivision is about
Operative provisions
832‑530 Deduction not allowable
832‑535 Additional requirements for secondary response
832‑540 When a deducting hybrid mismatch is an offshore hybrid mismatch
832‑545 When an amount gives rise to a deducting hybrid mismatch
832‑550 Deducting hybrid
832‑555 Identifying a secondary response country
832‑560 Neutralising amount
832‑565 Adjustment if deducting hybrid has dual inclusion income in a later year
Subdivision 832‑H—Imported hybrid mismatch
Guide to Subdivision 832‑H
832‑605 What this Subdivision is about
Operative provisions
832‑610 Deduction not allowable
832‑615 When a payment gives rise to an imported hybrid mismatch
832‑620 Hybrid mismatch
832‑625 Meaning of importing payment
832‑630 Working out the amount of the imported hybrid mismatch
832‑635 Carry forward of residual offshore hybrid mismatches
Subdivision 832‑I—Dual inclusion income
Guide to Subdivision 832‑I
832‑675 What this Subdivision is about
Operative provisions
832‑680 Dual inclusion income, and when an entity is eligible to apply it
Subdivision 832‑J—Integrity rule
832‑720 What this Subdivision is about
Operative provisions
832‑725 Payments made to interposed foreign entity (integrity measure)—denial of deduction
832‑730 Back to back arrangements, etc.
832‑735 Determination may specify kinds of scheme and circumstances where no denial of deduction
Subdivision 832‑K—Modifications for Division 230 (about taxation of financial arrangements)
Guide to Subdivision 832‑K
832‑775 What this Subdivision is about
Operative provisions
832‑780 Section 832‑20 applies to Division 230 losses
832‑785 Adjusting Division 230 loss
832‑790 Modifications relating to Division 230 gains and losses
Division 840—Withholding taxes
Guide to Division 840 571
840‑1 What this Division is about
Subdivision 840‑M—Managed investment trust withholding tax
Guide to Subdivision 840‑M
840‑800 What this Subdivision is about
Operative provisions
840‑805 Liability for managed investment trust withholding tax
840‑810 When managed investment trust withholding tax is payable
840‑815 Certain income is non‑assessable non‑exempt income
840‑820 Agency rules
Subdivision 840‑S—Seasonal Labour Mobility Program withholding tax
Guide to Subdivision 840‑S
840‑900 What this Subdivision is about
Operative provisions
840‑905 Liability for Seasonal Labour Mobility Program withholding tax
840‑910 When Seasonal Labour Mobility Program withholding tax is payable
840‑915 Certain income is non‑assessable non‑exempt income
840‑920 Overpayment of Seasonal Labour Mobility Program withholding tax
Division 842—Exempt Australian source income and gains of foreign residents
Subdivision 842‑B—Some items of Australian source income of foreign residents that are exempt from income tax
Guide to Subdivision 842‑B
842‑100 What this Subdivision is about
842‑105 Amounts of Australian source ordinary income and statutory income that are exempt
Subdivision 842‑I—Investment manager regime
Guide to Subdivision 842‑I
842‑200 What this Subdivision is about
Object of this Subdivision
842‑205 Object of this Subdivision
IMR concessions
842‑210 IMR concessions apply only to foreign residents etc.
842‑215 IMR concessions
842‑220 Meaning of IMR entity
842‑225 Meaning of IMR financial arrangement
IMR widely held entities
842‑230 Meaning of IMR widely held entity
842‑235 Rules for determining total participation interests for the purposes of the widely held test
842‑240 Extended meaning of IMR widely held entity—temporary circumstances outside entity’s control
Independent Australian fund managers
842‑245 Meaning of independent Australian fund manager
842‑250 Reductions in IMR concessions if independent Australian fund manager entitled to substantial share of IMR entity’s income
Division 855—Capital gains and foreign residents
Guide to Division 855 601
855‑1 What this Division is about
Subdivision 855‑A—Disregarding a capital gain or loss by foreign residents
855‑5 Objects of this Subdivision
855‑10 Disregarding a capital gain or loss from CGT events
855‑15 When an asset is taxable Australian property
855‑16 Meaning of permanent establishment article
855‑20 Taxable Australian real property
855‑25 Indirect Australian real property interests
855‑30 Principal asset test
855‑32 Disregard market value of duplicated non‑TARP assets
855‑35 Reducing a capital gain or loss from a business asset—Australian permanent establishments
855‑40 Capital gains and losses of foreign residents through fixed trusts
Subdivision 855‑B—Becoming an Australian resident
855‑45 Individual or company becomes an Australian resident
855‑50 Trust becomes a resident trust
855‑55 CFC becomes an Australian resident
Division 880—Sovereign entities and activities
Subdivision 880‑A—Basic concepts
Guide to Subdivision 880‑A
880‑10 What this Subdivision is about
Operative provisions
880‑15 Meaning of sovereign entity
880‑20 Meaning of sovereign entity group
Subdivision 880‑B—Basic tax treatment of sovereign entities
Guide to Subdivision 880‑B
880‑50 What this Subdivision is about
Operative provisions
880‑55 Sovereign entity liable to pay tax
880‑60 Bodies politic of foreign countries and foreign government agencies treated as foreign residents
Subdivision 880‑C—Sovereign immunity
Guide to Subdivision 880‑C
880‑100 What this Subdivision is about
Operative provisions
880‑105 Sovereign entity’s income from membership interest etc. in trust or company—non‑assessable non‑exempt income
880‑110 Sovereign entity’s deduction from membership interest etc.—loss not deductible
880‑115 Sovereign entity’s capital gain from membership interest etc.—gain disregarded
880‑120 Sovereign entity’s capital loss from membership interest etc. in trust or company—loss disregarded
880‑125 Covered sovereign entities
880‑130 Meaning of public non‑financial entity and public financial entity
Subdivision 880‑D—Consular activities
Guide to Subdivision 880‑D
880‑200 What this Subdivision is about
Operative provisions
880‑205 Income from consular functions—non‑assessable non‑exempt income
Chapter 3—Specialist liability rules
Part 3‑95—Value shifting
Division 723—Direct value shifting by creating right over non‑depreciating asset
Table of Subdivisions
723‑A Reduction in loss from realising non‑depreciating asset
723‑B Reducing reduced cost base of interests in entity that acquires non‑depreciating asset under roll‑over
Subdivision 723‑A—Reduction in loss from realising non‑depreciating asset
Table of sections
723‑1 Object
723‑10 Reduction in loss from realising non‑depreciating asset over which right has been created
723‑15 Reduction in loss from realising non‑depreciating asset at the same time as right is created over it
723‑20 Exceptions
723‑25 Realisation event that is only a partial realisation
723‑35 Multiple rights created to take advantage of the $50,000 threshold
723‑40 Application to CGT asset that is also trading stock or revenue asset
723‑50 Effects if right created over underlying asset is also trading stock or a revenue asset
723‑1 Object
The purpose of this Division is to reduce a loss that would otherwise be *realised for income tax purposes by a *realisation event happening to an asset (except a *depreciating asset), to the extent that:
(a) value has been shifted out of the asset by the owner creating in an associate a right over the asset; and
(b) the value shifted was not brought to tax when the right was created and has not since been brought to tax on a realisation of the right.
723‑10 Reduction in loss from realising non‑depreciating asset over which right has been created
(1) A loss that would, apart from this Division, be *realised for income tax purposes by a *realisation event is reduced by the amount worked out under subsections (3) and (4) if:
(a) the event happens to a *CGT asset (the underlying asset) you own that, at the time of the event (the realisation time):
(i) is not a *depreciating asset; or
(ii) is an item of your *trading stock; or
(iii) is a *revenue asset of yours; and
(b) before the realisation time:
(i) you created in an *associate of yours; or
(ii) an entity covered by subsection (2) (about previous owners of the underlying asset) created in an associate of the entity;
a right in respect of the underlying asset; and
(c) immediately before the realisation time, the right is still in existence and is owned by an associate of yours; and
(d) a decrease in the underlying asset’s *market value is reasonably attributable to the creating of the right; and
(e) creating the right involved a *CGT event:
(i) whose *capital proceeds are less than the market value of the right when created (the difference between those capital proceeds and that market value is called the shortfall on creating the right); and
(ii) that is not a CGT event that happens to some part of the underlying asset but not to the remainder of it; and
(f) the shortfall on creating the right is more than $50,000; and
(g) the market value of the underlying asset at the realisation time is less than it would have been if the right no longer existed at that time (the difference is called the deficit on realisation).
Note: If subparagraph (1)(e)(ii) applies, the cost base and reduced cost base of the underlying asset is apportioned under section 112‑30, so there is no need for this section to apply to the right.
(2) This subsection covers an entity if:
(a) the entity *acquired the underlying asset before you did; and
(b) there has been a roll‑over for each *CGT event (if any) as a result of which an entity (including you) acquired the asset after the first entity acquired it, and before the realisation time; and
(c) for each such CGT event (if any), the entity (including you) that acquired the underlying asset as a result of the event was, immediately after the event, an *associate of the entity that last acquired the asset before the event.
(3) The amount by which this section reduces the loss is the lesser of:
(a) the shortfall on creating the right; and
(b) the deficit on realisation.
However, that amount is reduced by each gain that:
(c) is *realised for income tax purposes by a *realisation event that happens to the right:
(i) before or at the realisation time for the underlying asset; and
(ii) at a time when the right is owned by an entity that is your *associate immediately before the realisation time for the underlying asset; and
(d) is not disregarded.
Note: To work out a gain realised for income tax purposes by a realisation event that happens to the right, see sections 977‑15, 977‑35, 977‑40 and 977‑55. If more than one of those sections applies to the right, see section 723‑50.
(4) For each gain that:
(a) is *realised for income tax purposes by a *realisation event that happens to the right:
(i) within 4 years after the realisation time for the underlying asset; and
(ii) at a time when the right is owned by an entity that is your *associate immediately before the realisation time for the underlying asset; and
(b) is not disregarded;
the amount worked out under subsection (3) is taken to have been reduced by the amount of that gain.
Note: This subsection may result in amendment of an assessment for the income year in which the realisation time happens.
723‑15 Reduction in loss from realising non‑depreciating asset at the same time as right is created over it
(1) A loss that would, apart from this Division, be *realised for income tax purposes by a *realisation event is reduced by the amount worked out under subsections (2) and (3) if:
(a) the event happens to a *CGT asset (the underlying asset) you own that, at the time of the event (the realisation time):
(i) is not a *depreciating asset; or
(ii) is an item of your *trading stock;
(iii) is a *revenue asset of yours; and
(b) at the realisation time, you create in an *associate of yours a right in respect of the underlying asset; and
(c) creating the right involves a *CGT event:
(i) whose *capital proceeds are less than the *market value of the right when created (the difference between those capital proceeds and that market value is called the shortfall on creating the right); and
(ii) that is not a CGT event that happens to some part of the underlying asset but not to the remainder of it; and
(d) the shortfall on creating the right is more than $50,000; and
(e) the market value of the underlying asset at the realisation time is less than it would have been if the right had not been created (the difference is called the deficit on realisation).
Note: If subparagraph (1)(c)(ii) applies, the cost base and reduced cost base of the underlying asset is apportioned under section 112‑30, so there is no need for this section to apply to the right.
(2) The amount by which this section reduces the loss is the lesser of:
(a) the shortfall on creating the right; and
(b) the deficit on realisation.
(3) For each gain that:
(a) is *realised for income tax purposes by a *realisation event that happens to the right:
(i) within 4 years after the realisation time for the underlying asset; and
(ii) at a time when the right is owned by an entity that is your *associate immediately before the realisation time for the underlying asset; and
(b) is not disregarded;
the amount worked out under subsection (2) is taken to have been reduced by the amount of that gain.
Note 1: To work out a gain realised for income tax purposes by a realisation event that happens to the right, see sections 977‑15, 977‑35, 977‑40 and 977‑55. If more than one of those sections applies to the right, see section 723‑50.
Note 2: This subsection may require amendment of an assessment for the income year in which the realisation time happens.
723‑20 Exceptions
Conservation covenant over land
(1) Section 723‑10 or 723‑15 does not reduce a loss if:
(a) the underlying asset is land; and
(b) the right referred to in paragraph 723‑10(1)(b) or 723‑15(1)(b) is a *conservation covenant over the land.
Right created on death of owner
(2) Section 723‑10 or 723‑15 does not reduce a loss if the right referred to in paragraph 723‑10(1)(b) or 723‑15(1)(b) is created by:
(a) a will or codicil; or
(b) an order of a court varying or modifying a will or codicil; or
(c) a total or partial intestacy; or
(d) an order of a court varying or modifying the application of the law about distributing the estate of someone who dies intestate.
723‑25 Realisation event that is only a partial realisation
(1) Section 723‑10 or 723‑15 applies differently if:
(a) a *realisation event happens to some part of a *CGT asset (the underlying asset) you own that, at the time of the event:
(i) is not a *depreciating asset; or
(ii) is an item of your *trading stock; or
(iii) is a *revenue asset of yours;
but not to the remainder of the underlying asset; or
(b) a realisation event consists of creating an interest in a CGT asset (also the underlying asset) you own that, at the time of the event, is covered by subparagraph (a)(i), (ii) or (iii).
(2) The section applies on the basis that:
(a) the *realisation event happens to the underlying asset; and
(b) the shortfall on creating the right referred to in paragraph 723‑10(1)(e) or 723‑15(1)(c); and
(c) the deficit on realisation referred to in paragraph 723‑10(1)(g) or 723‑15(1)(e);
are each reduced by multiplying its amount by this fraction:
(3) For the purposes of the formula in subsection (2):
market value of part means the *market value, at the time of the *realisation event, of the part referred to in paragraph (1)(a) or the interest referred to in paragraph (1)(b), as appropriate.
market value of underlying asset means the *market value, immediately before the *realisation event, of the underlying asset.
723‑35 Multiple rights created to take advantage of the $50,000 threshold
(1) Sections 723‑10 and 723‑15 apply differently if, having regard to all relevant circumstances, it is reasonable to conclude that the sole or main reason why a right was created as a different right from one or more other rights created in respect of the same thing was so that paragraph 723‑10(1)(f) or 723‑15(1)(d) would not be satisfied for one or more of the rights mentioned in this subsection.
(2) Those sections:
(a) apply to that thing, in relation to each of the rights mentioned in subsection (1) of this section, as if paragraphs 723‑10(1)(f) and 723‑15(1)(d) were omitted; and
(b) are taken always to have so applied.
723‑40 Application to CGT asset that is also trading stock or revenue asset
If a *CGT asset you own is also an item of your *trading stock or a *revenue asset, this Division applies to the asset once in its character as a CGT asset and again in its character as trading stock or a revenue asset.
723‑50 Effects if right created over underlying asset is also trading stock or a revenue asset
(1) Subsection 723‑10(3) or (4) or 723‑15(3) applies differently if the right created in respect of the underlying asset is also *trading stock or a *revenue asset at the time of a *realisation event that happens to the right.
(2) The gain that is taken into account for the purposes of that subsection is:
(a) if the right is also *trading stock—worked out under section 977‑35 or 977‑40 (about realisation events for trading stock); or
(b) if the right is also a *revenue asset—the greater of:
(i) the gain worked out under section 977‑15 (about realisation events for CGT assets); and
(ii) the gain worked out under section 977‑55 (about realisation events for revenue assets).
Subdivision 723‑B—Reducing reduced cost base of interests in entity that acquires non‑depreciating asset under roll‑over
Table of sections
723‑105 Reduced cost base of interest reduced when interest realised at a loss
723‑110 Direct and indirect roll‑over replacement for underlying asset
723‑105 Reduced cost base of interest reduced when interest realised at a loss
(1) The *reduced cost base of a *primary equity interest, *secondary equity interest, or *indirect primary equity interest, in a company or trust is reduced just before a *realisation event that is a *CGT event happens to the interest if:
(a) apart from this Division, a loss would be *realised for income tax purposes by the CGT event; and
(b) apart from this Division, a loss would have been *realised for income tax purposes by a realisation event if the event had happened, just before the CGT event, to a *CGT asset (the underlying asset) that the company or trust then owned and that:
(i) was not then a *depreciating asset; or
(ii) was then an item of *trading stock of the company or trust; or
(iii) was then a *revenue asset of the company or trust; and
(c) the loss referred to in paragraph (b) would have been reduced under Subdivision 723‑A by an amount (the underlying asset loss reduction); and
(d) for the entity (the transferor) that owned the interest just before the CGT event, the interest was a *direct roll‑over replacement or *indirect roll‑over replacement for the underlying asset.
(2) If the interest was a *direct roll‑over replacement, its *reduced cost base is reduced by the amount worked out using this formula, unless that amount does not appropriately reflect the matters referred to in subsection (4):
(3) For the purposes of the formula in subsection (2):
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).
(2) 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.
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.
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 public trading trust within the meaning of section 102R of the Income Tax Assessment Act 1936.
(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.
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 104‑250.
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.
Taxing events generating a gain for down interests as CGT assets |
Item | Down interests: | Up interests: |
1 | *down interests that: (a) are owned by you; and (b) are neither your *revenue assets nor your *trading stock; and (c) have *pre‑shift gains; and (d) are *post‑CGT assets | *up interests owned by you that: (a) are neither your revenue assets nor your trading stock; and (b) are *pre‑CGT assets |
2 | *down interests that: (a) are owned by you; and (b) are neither your *revenue assets nor your *trading stock; and (c) have *pre‑shift gains | *up interests owned by you that are your trading stock or revenue assets |
3 | *down interests owned by you that: (a) are of the one kind (either your *trading stock or your *revenue assets); and (b) have *pre‑shift gains | *up interests owned by you that: (a) are of the other kind (either your revenue assets or your trading stock); or (b) are neither your *revenue assets nor your *trading stock |
4 | *down interests owned by you that have *pre‑shift gains | up interests owned by other *affected owners |
Note: If there is a taxing event generating a gain on a down interest, CGT event K8 happens: see section 104‑250. 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 104‑250(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.
Consequences of the direct value shift for adjustable values of CGT assets |
Item | To the extent that the direct value shift is from: | To: | The decrease or uplift is worked out under: |
1 | *down interests that: (a) are owned by you; and (b) have *pre‑shift gains; and (c) are *post‑CGT assets | *up interests owned by you that do not give rise to a *taxing event generating a gain for you on those down interests under section 725‑245 | for the down interests: section 725‑365; and for the up interests: section 725‑370 |
2 | *down interests that: (a) are owned by you; and (b) have *pre‑shift gains; and (c) are *pre‑CGT assets | *up interests owned by you that are *pre‑CGT assets | for the down interests: section 725‑365; and for the up interests: section 725‑370 |
3 | *down interests that: (a) are owned by you; and (b) have *pre‑shift gains; and (c) are *pre‑CGT assets | *up interests owned by you that are *post‑CGT assets | for the down interests: section 725‑365; and for the up interests: section 725‑375 |
4 | *down interests owned by you that have *pre‑shift gains | *up interests owned by you that give rise to a *taxing event generating a gain on those down interests under section 725‑245 | for the down interests: section 725‑365; and for the up interests: section 725‑375 |
5 | *down interests owned by you that have *pre‑shift losses | *up interests owned by you | for the down interests: section 725‑380; and for the up interests: section 725‑375 |
6 | *down interests owned by you that have *pre‑shift gains | *up interests owned by other *affected owners | for the down interests: section 725‑365 |
7 | *down interests owned by you that have *pre‑shift losses | *up interests owned by other *affected owners | for the down interests: section 725‑380 |
8 | *down interests owned by other *affected owners | *up interests owned by you | for the up interests: section 725‑375 |
9 | *down interests owned by you | *up interests owned by entities that are not *affected owners | (there are no decreases or uplifts) |
10 | *down interests owned by entities that are not *affected owners | *up interests owned by you | (there are no decreases or uplifts) |
Reducing uplift to prevent double increase in cost base etc.
(3) However, if, apart from paragraph (2)(b), an amount is included in the *cost base or *reduced cost base of an *up interest as a result of the *scheme under which the *direct value shift happens, the uplift in the *adjustable value of the interest under that paragraph is reduced by that amount.
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.
Note: If subsection 725‑250(3) is relevant, it will affect all the uplifts worked out under all 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.
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.
Consequences for down interest or up interest as trading stock or revenue asset |
Item | To the extent that the direct value shift is from: | To: | The decrease or uplift is worked out under: |
1 | *down interests owned by you that: (a) are of the one kind (either your *trading stock or your *revenue assets); and (b) have *pre‑shift gains | *up interests owned by you that are of that same kind | for the down interests: section 725‑365; and for the up interests: section 725‑370 |
2 | *down interests owned by you that: (a) are of the one kind (either your *trading stock or your *revenue assets); and (b) have *pre‑shift gains | *up interests owned by you that are of the other kind (either your revenue assets or your trading stock) | for the down interests: section 725‑365; and for the up interests: section 725‑375 |
3 | *down interests owned by you that: (a) are your *trading stock or *revenue assets; and (b) have *pre‑shift losses | *up interests owned by you that are of that same kind or of the other kind | for the down interests: section 725‑380; and for the up interests: section 725‑375 |
4 | *down interests owned by you that: (a) are your *trading stock or *revenue assets; and (b) have *pre‑shift gains | *up interests owned by you that are neither your revenue assets nor your trading stock | for the down interests: section 725‑365 |
5 | *down interests owned by you that: (a) are your *trading stock or *revenue assets; and (b) have *pre‑shift losses | *up interests owned by you that are neither your revenue assets nor your trading stock | for the down interests: section 725‑380 |
6 | *down interests owned by you that are neither your *revenue assets nor your *trading stock | *up interests owned by you that are your trading stock or revenue assets | for the up interests: section 725‑375 |
7 | *down interests owned by you that: (a) are your *trading stock or *revenue assets; and (b) have *pre‑shift gains | up interests owned by other *affected owners | for the down interests: section 725‑365 |
8 | *down interests owned by you that: (a) are your *trading stock or *revenue assets; and (b) have *pre‑shift losses | *up interests owned by other *affected owners | for the down interests: section 725‑380 |
9 | *down interests owned by other *affected owners | *up interests owned by you that are your *trading stock or *revenue assets | for the up interests: section 725‑375 |
10 | *down interests owned by you that are your *trading stock or *revenue assets | *up interests owned by entities that are not *affected owners | (there are no decreases or uplifts) |
11 | *down interests owned by entities that are not *affected owners | *up interests owned by you that are your *trading stock or *revenue assets | (there are no decreases or uplifts) |
Reducing uplift to prevent double increase in adjustable value
(3A) However, if, apart from paragraph (3)(b), an amount is included, as a result of the *scheme under which the *direct value shift happens, in the *adjustable value of an *up interest that is your *trading stock or *revenue asset, the uplift in the adjustable value of the interest under that paragraph is reduced by that amount.
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.
Note: If subsection 725‑335(3A) is relevant, it will affect all the uplifts worked out under all 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) *small business entities; and
(b) entities that meet the CGT small business net asset threshold ($6 million);
interests owned by those entities are not affected by 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
(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 dealing that is not at *arm’s length; and
(b) to prevent inappropriate gains from arising on the realisation of *direct equity interests 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 a small business entity 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
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.
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).
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.
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 (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.
Common‑ownership nexus within a period |
Item | If the entities are: | This is the test: |
1 | both companies | There must be 2 or more *ultimate owners who: (a) at some time during that period, because of the same test in section 727‑405, have *ultimate stakes, of percentages totalling at least 80%, in one of the companies; and (b) at that or a different time during that period, because of that same test, have * ultimate stakes, of percentages totalling at least 80%, in the other company Also, subsection (2) of this section must be satisfied |
2 | both *fixed trusts | There must be 2 or more *ultimate owners who: (a) at some time during that period, because of the same test in section 727‑410, have *ultimate stakes, of percentages totalling at least 80%, in one of the trusts; and (b) at that or a different time during that period, because of that same test, have * ultimate stakes, of percentages totalling at least 80%, in the other trust Also, subsection (2) of this section must be satisfied |
3 | a company and a *fixed trust | There must be 2 or more *ultimate owners who: (a) at some time during that period, because of the same test in section 727‑405, have *ultimate stakes, of percentages totalling at least 80%, in the company; and (b) at that or a different time during that period, because of the same test in section 727‑410, have * ultimate stakes, of percentages totalling at least 80%, in the trust Also, subsection (2) of this section must be satisfied |
4 | a company and a *non‑fixed trust | There must be 2 or more *ultimate owners: (a) each of whom *controls (for value shifting purposes) the non‑fixed trust because of section 727‑365 at the same time during that period; and (b) who, at that or a different time during that period, have *ultimate stakes, of percentages totalling at least 80%, in the company because of the same test in section 727‑405 |
5 | a *fixed trust and a *non‑fixed trust | There must be 2 or more *ultimate owners: (a) each of whom *controls (for value shifting purposes) the non‑fixed trust because of section 727‑365 at the same time during that period; and (b) who, at that or a different time during that period, have *ultimate stakes, of percentages totalling at least 80%, in the fixed trust because of the same test in section 727‑410 |
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
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 a small business entity, 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 a *small business entity 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.
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.
Primary equity interests |
Item | In the case of this kind of entity: | Primary equity interest means: |
1 | a company | a *share in the company; or an interest as joint owner (including as tenant in common) of a *share in the company |
2 | a trust | any of these: (a) an interest in the trust income or trust capital; or (b) any other interest in the trust; or (c) an interest as joint owner (including as tenant in common) of an interest covered by paragraph (a) or (b) |
(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.
Affected owners
727‑530 Who are the affected owners
(1) The table sets out the affected owners for the *indirect value shift.
Affected owners |
Item | In this case: | The affected owners include: |
1 | At least one condition in section 727‑105 (ultimate controller test) is satisfied | each *ultimate controller because of which a condition in that section is satisfied; and each entity that, at a time during the *IVS period when such an ultimate controller *controlled (for value shifting purposes) the losing entity, was an *intermediate controller of the losing entity; and each entity that, at a time during the IVS period when such an ultimate controller controlled (for value shifting purposes) the gaining entity, was an intermediate controller of the gaining entity |
2 | The conditions in section 727‑110 (common‑ownership nexus test) are satisfied in respect of: (a) one or more times; or (b) one or more sets of 2 times | each *ultimate owner who is one of 2 or more ultimate owners because of whom the condition in the applicable item of that table is satisfied in respect of any of those times; and each entity through which ownership or rights are traced to such an ultimate owner in applying the applicable item of that table in respect of any of those times |
3 | Any case | the *losing entity and the *gaining entity |
4 | Any case | each entity that, at any time after the *scheme was entered into, is an *associate of an entity that is an affected owner because of item 1, 2 or 3 of this table |
5 | Any case | each *active participant in the *scheme |
(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.
Who makes the choice |
Item | In this case: | The choice must be made by: |
1 | If the conditions in section 727‑110 (common‑ownership nexus test) are satisfied | jointly by the *ultimate owners because of whom the condition in the applicable item of the table in section 727‑400 is satisfied |
2 | Item 1 does not apply, and there is an entity: (a) who is the sole *ultimate controller because of whom the conditions in section 727‑105 (ultimate controller test) are satisfied; or (b) who would be that sole ultimate controller if sections 727‑355 to 727‑375 were applied ignoring that entity’s *associates | that entity |
3 | Neither of items 1 and 2 applies | jointly by the 2 or more *ultimate controllers because of whom the conditions in section 727‑105 (ultimate controller test) are satisfied |
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
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:
number of interests means the number of *affected interests in the *gaining entity to which *realisation events happened at that time.
727‑630 How cap in section 727‑625 applies if affected interest is also trading stock or a revenue asset
(1) This section affects how to work out the total gain reductions and the total loss reductions for the purposes of section 727‑625 if:
(a) a *realisation event covered by that section happens to an *equity or loan interest, or to an *indirect equity or loan interest, in the *losing entity or in the *gaining entity; and
(b) the interest is also *trading stock or a *revenue asset at the time of the event.
Trading stock
(2) In the case of an *equity or loan interest, or an *indirect equity or loan interest, in the *losing entity that is *trading stock at that time:
(a) the amount (if any) by which section 727‑615 or 727‑850 reduces a loss worked out under section 977‑25 or 977‑30 (about realisation events for trading stock) that would, apart from this Division, be *realised for income tax purposes by the event is taken into account; and
(b) the amount (if any) by which section 727‑615 or 727‑850 reduces a loss worked out under section 977‑10 (about realisation events for CGT assets) that would, apart from this Division, be *realised for income tax purposes by the event is not taken into account;
in working out the total loss reductions.
(3) In the case of an *affected interest in the *gaining entity that is *trading stock at that time:
(a) the amount (if any) by which section 727‑620 reduces a gain worked out under section 977‑35 or 977‑40 (about realisation events for trading stock) that would, apart from this Division, be *realised for income tax purposes by the event is taken into account; and
(b) the amount (if any) by which section 727‑620 reduces a gain worked out under section 977‑15 (about realisation events for CGT assets) that would, apart from this Division, be *realised for income tax purposes by the event is not taken into account;
in working out the total gain reductions.
Revenue asset
(4) In the case of an *equity or loan interest, or an *indirect equity or loan interest, in the *losing entity that is a *revenue asset at that time, the greater of the following is taken into account in working out the total loss reductions:
(a) the amount (if any) by which section 727‑615 or 727‑850 reduces a loss worked out under section 977‑55 (about realisation events for revenue assets) that would, apart from this Division, be *realised for income tax purposes by the event;
(b) the amount (if any) by which section 727‑615 or 727‑850 reduces a loss worked out under section 977‑10 (about realisation events for CGT assets) that would, apart from this Division, be *realised for income tax purposes by the event.
(5) In the case of an *affected interest in the *gaining entity that is a *revenue asset at that time, the greater of the following amounts is taken into account in working out the total gain reductions:
(a) the amount (if any) by which section 727‑620 reduces a gain worked out under section 977‑55 (about realisation events for revenue assets) that would, apart from this Division, be *realised for income tax purposes by the event;
(b) the amount (if any) by which section 727‑620 reduces a gain worked out under section 977‑15 (about realisation events for CGT assets) that would, apart from this Division, be *realised for income tax purposes by the event.
727‑635 Splitting an equity or loan interest
If an *equity or loan interest in the *losing entity or in the *gaining entity is split into 2 or more equity or loan interests at or after the *IVS time:
(a) each of the 2 or more interests inherits whatever characteristics would have been relevant to applying this Subdivision to the first interest if the split had not happened; and
(b) those characteristics include characteristics the first interest has inherited because of any other application or applications of this section or section 727‑640; and
(c) if a characteristic of the first interest involves an amount or quantity, the amount or quantity for that characteristic as inherited by each of the 2 or more interests is a reasonable proportion of the amount or quantity for that characteristic of the first interest.
727‑640 Merging equity or loan interests
If 2 or more *equity or loan interests (the original interests) in the *losing entity or in the *gaining entity are merged into 1 or more *equity or loan interests (the new interests) at or after the *IVS time:
(a) each of the new interests inherits whatever characteristics would have been relevant to applying this Subdivision to the original interests if the merging had not happened; and
(b) those characteristics include characteristics inherited by any of the original interests because of any other application or applications of this section or section 727‑635; and
(c) if a characteristic of any of the original interests involves an amount or quantity, the amount or quantity for that characteristic as inherited by any of the new interests is a reasonable proportion of the amount or quantity for that characteristic of the original interest.
727‑645 Effect of CGT roll‑over
(1) If:
(a) this Subdivision applies to a *realisation event that is a *CGT event that happens to an *affected interest in the *losing entity; and
(b) section 727‑615 reduces a loss that would, apart from this Division, be *realised for income tax purposes by the CGT event; and
(c) there is a roll‑over for the CGT event;
the interest’s *reduced cost base at the time of the CGT event is taken to have been reduced by the amount by which section 727‑615 reduces that loss, but is so taken only for the purposes of working out:
(d) the interest’s reduced cost base, from time to time after the roll‑over, for the entity that *acquired the interest because of the CGT event; and
(e) in the case of a *replacement‑asset roll‑over—the reduced cost base of the replacement CGT asset, from time to time after the roll‑over, for the entity that *disposed of the interest.
Note: Because of the roll‑over, the loss reduction under section 727‑615 will have no tax effect. This subsection ensures that the loss reduction is passed on, through the reduction in reduced cost base, to prevent or reduce a loss arising on a later CGT event.
(2) If:
(a) this Subdivision applies to a *realisation event that is a *CGT event that happens to an *affected interest in the *gaining entity; and
(b) section 727‑620 reduces a gain that would, apart from this Division, be *realised for income tax purposes by the CGT event; and
(c) there is a roll‑over for the CGT event;
the interest’s *cost base at the time of the CGT event is taken to have been uplifted by the amount by which section 727‑620 reduces that gain, but is so taken only for the purposes of working out:
(d) the interest’s cost base, from time to time after the roll‑over, for the entity that *acquired the interest because of the CGT event; and
(e) in the case of a *replacement‑asset roll‑over—the cost base of the replacement CGT asset, from time to time after the roll‑over, for the entity that *disposed of the interest.
Note: Because of the roll‑over, the gain reduction under section 727‑620 will have no tax effect. This subsection ensures that the gain reduction is passed on, through the uplift in cost base, to prevent or reduce a gain arising on a later CGT event.
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
(1) If the *indirect value shift is a *95% services indirect value shift, this Subdivision does not apply to a *realisation event that:
(a) happens to an *affected interest in the *losing entity that is owned by an entity (the owner); and
(b) is covered by subsection 727‑610(2);
unless:
(c) the conditions in section 727‑705 are met for the indirect value shift; or
(d) the conditions in section 727‑710, 727‑715 or 727‑720 are met for the indirect value shift and for that realisation event.
(2) An *indirect value shift is a 95% services indirect value shift if, and only if, to the extent of at least 95% of their total *market value, the *greater benefits consist entirely of:
(a) a right to have services that are covered by section 727‑240 provided directly by the *losing entity to the *gaining entity; or
(b) services that are covered by section 727‑240 and have been, are being, or are to be, so provided;
or both.
(3) This section does not limit any other exclusion in this Subdivision or in Subdivision 727‑C.
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
The conditions in this section are met if:
(a) the *losing entity or the *gaining entity lodges an *income tax return for an income year during some or all of which the owner owned the interest; and
(b) a provision of this Act:
(i) reduces or excludes an amount that is included in the return; or
(ii) increases an amount that is so included; or
(iii) includes an amount not included in the return;
for the purposes of working out the taxable income, a *tax loss, or a *net capital loss, of that entity for that income year; and
(c) the amount is related to the right mentioned in paragraph 727‑700(2)(a), or to some or all of the services mentioned in paragraph 727‑700(2)(a) or (b), from the point of view of the losing entity providing the services or of the gaining entity receiving them; and
(d) if the amount is so reduced or increased—the reduction or increase is at least $100,000; and
(e) if the amount is so excluded or included—the amount is at least $100,000; and
(f) at some time after the return is lodged, the entity that lodged it is aware, or ought reasonably to be aware, of the reduction, exclusion, increase or inclusion.
Example: If the Commissioner has notified an entity affected by a determination under Part IVA of the Income Tax Assessment Act 1936, the entity ought reasonably to be aware of the effect of the determination.
727‑710 Ongoing or recent service arrangement reduces value of losing entity by at least $100,000
(1) Either or both of these must be true:
(a) when the *realisation event mentioned in subsection 727‑700(1) happens, some or all of the services mentioned in paragraph 727‑700(2)(a) or (b) have not yet been provided; or
(b) some or all of those services have been provided in the income year (of the *losing entity) in which the realisation event happens, or in the previous income year.
(2) It must be reasonable to conclude that the total (the total market value) of the *market values, immediately before the *realisation event, of *primary interests in the *losing entity then owned by *affected owners is less than it would have been if none of the following had happened:
(a) the *95% services indirect value shift; and
(b) all other *predominantly‑services indirect value shifts that satisfy subsection (1) (or that would satisfy it if they were *95% services indirect value shifts).
(3) It must also be reasonable to conclude that the total *market value is less than it would have been by at least:
(a) $100,000, if the total of the *adjustable values, immediately before the *realisation event, of the *primary interests referred to in subsection (2) is less than or equal to $2,000,000; or
(b) 5% of the total of those *adjustable values, if that total is greater than $2,000,000 and less than or equal to $10,000,000; or
(c) $500,000, if that total is greater than $10,000,000.
(4) For the purposes of subsections (2) and (3), disregard an *indirect value shift referred to in paragraph (2)(a) or (b) if services are provided directly by the *losing entity to the *gaining entity under the *scheme before the income year (of the losing entity) before the one in which the *realisation event happened.
727‑715 Service arrangements reduce value of losing entity that is a group service provider by at least $500,000
(1) At some time during the period (the ownership period) when the owner owned the interest, the sole or dominant activity of the *losing entity must consist of providing services directly to one or more entities (the group entities) each of which is covered by one or more of the following paragraphs:
(a) the *gaining entity;
(b) an *affected owner;
(c) an entity that has at that time the same *ultimate controller as the losing entity or the gaining entity;
(d) if the conditions in section 727‑110 (common‑ownership nexus test) are satisfied for the *indirect value shift—an entity that has with the losing entity or with the gaining entity a *common‑ownership nexus within that period.
(2) It must be reasonable to conclude that the total (the total market value) of the *market values, immediately before the *realisation event, of *primary interests in the *losing entity then owned by *affected owners is less than it would have been if none of the following had happened:
(a) the *95% services indirect value shift; and
(b) each *predominantly‑services indirect value shift for which the same entity is the losing entity as for the 95% services indirect value shift, and that happened:
(i) if the amount of the *indirect value shift is $500,000 or more—at any time during the ownership period; or
(ii) otherwise—during the ownership period but within 4 years before the realisation event, or at the same time as the realisation event.
Thresholds for reduction of the total market value
(3) It must also be reasonable to conclude that the total *market value is less than it would have been by at least $500,000, and by at least the lesser of:
(a) 5% of the total of the *adjustable values of *primary interests in the *losing entity owned by *affected owners at:
(i) if subsection (4) applies—the time determined under that subsection; or
(ii) otherwise—the start of the income year in which the *realisation event happens; and
(b) the amount worked out under the table.
Alternative threshold for reduction of the total market value |
Item | In this case: | The amount is: |
1 | The ownership period is 4 years or less | worked out using this formula: 
|
2 | The ownership period is more than 4 years | $25,000,000 |
(3A) If at the time referred to in subsection (3) a *primary interest covered by that subsection was *trading stock or a *revenue asset, its *adjustable value taken into account under that subsection is the greater of its adjustable value as a *CGT asset and its adjustable value as trading stock or a revenue asset.
(4) If the owner of the interest is an *affected owner because of item 1, 2, 3 or 4 in the table in subsection 727‑530(1) (about who is an affected owner), the time for the purposes of subparagraph (3)(a)(i) of this section is the latest of:
(a) the start of the income year in which the *realisation event happens; and
(b) the start of the most recent period (if any):
(i) that ended before or at the time of the *realisation event; and
(ii) throughout which at least one of the group entities had the same *ultimate controller as the losing entity or the gaining entity; and
(c) the start of the most recent period (if any):
(i) that ended before or at the time of the realisation event; and
(ii) within which at least one of the group entities has with the losing entity or with the gaining entity a *common‑ownership nexus.
727‑720 Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000
(1) It must be the case that at no time during the period when the owner owned the interest did the sole or dominant activity of the *losing entity consist of providing services as mentioned in subsection 727‑715(1).
(2) It must be reasonable to conclude that the total (the total market value) of the *market values, immediately before the *realisation event, of *primary interests in the *losing entity then owned by *affected owners is less than it would have been if none of the following had happened:
(a) the *95% services indirect value shift;
(b) each *predominantly‑services indirect value shift that meets either of these conditions:
(i) its amount was less than $500,000 and it happened within 4 years before the realisation event, or at the same time as the realisation event;
(ii) its amount was $500,000 or more and it happened at any time before the realisation event, or at the same time as the realisation event;
and that meets all of these conditions:
(iii) the same entity is the losing entity for it as for the 95% services indirect value shift;
(iv) it happened under a different *scheme from the 95% services indirect value shift; and
(v) having regard to all relevant circumstances, it is reasonable to conclude that the sole or main reason why it happened under a different scheme was to prevent the conditions in section 727‑705, 727‑710, 727‑715 or this section from being met.
(3) It must also be reasonable to conclude that the total *market value is less than it would have been by at least:
(a) $500,000, if the total of the *adjustable values, immediately before the *realisation event, of the *primary interests referred to in subsection (2) is less than or equal to $10,000,000; or
(b) 5% of the total of those *adjustable values, if that total is greater than $10,000,000 and less than or equal to $100,000,000; or
(c) $5,000,000, if that total is greater than $100,000,000.
(4) The providing of the services mentioned in paragraph 727‑700(2)(a) or (b) by the losing entity must not be in the ordinary course of its business.
727‑725 Meaning of predominantly‑services indirect value shift
An *indirect value shift is a predominantly‑services indirect value shift if, and only if, the *greater benefits consist entirely or predominantly of:
(a) a right to have services that are covered by section 727‑240 provided directly by the *losing entity to the *gaining entity; or
(b) services that are covered by section 727‑240 and have been, are being, or are to be, so provided;
or both.
Subdivision 727‑H—The adjustable value method
Guide to Subdivision 727‑H
727‑750 What this Subdivision is about
Under the adjustable value method:
• the adjustable values of affected interests in the losing entity are reduced; and
• the adjustable values of affected interests in the gaining entity are uplifted, within limits worked out by references to the reductions in the adjustable values of affected interests in the losing entity.
The consequences of that are:
• the cost base and reduced cost base of the interests are reduced or uplifted (or both); and
• if the interests are also trading stock or revenue assets, there are further consequences for them in their character as such.
Table of sections
727‑755 Consequences of indirect value shift
Reductions of adjustable value
727‑770 Reduction under the adjustable value method
727‑775 Has there been a disaggregated attributable decrease?
727‑780 Working out the reduction on a loss‑focussed basis
Uplifts of adjustable value
727‑800 Uplift under the attributable increase method
727‑805 Has there been a disaggregated attributable increase?
727‑810 Scaling‑down formula
Consequences of the method for various kinds of assets
727‑830 CGT assets
727‑835 Trading stock
727‑840 Revenue assets
727‑755 Consequences of indirect value shift
(1) This Subdivision sets out the adjustable value 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:
(a) the *adjustable value of each *affected interest in the *losing entity is reduced as provided in this Subdivision; and
(b) if the *gaining entity is a company or trust (except one listed in section 727‑125 (about superannuation entities)) immediately before the *IVS time, the *adjustable value of each *affected interest in the *gaining entity is uplifted as provided in this Subdivision.
(3) 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.
Reductions of adjustable value
727‑770 Reduction under the adjustable value method
(1) This section sets out how to work out the amount (if any) by which the *adjustable value of an *affected interest in the *losing entity is reduced.
(2) First, work out under section 727‑775 whether the *indirect value shift has produced for the owner of the interest a *disaggregated attributable decrease in the *market value of the interest.
(3) If it has not, the interest’s *adjustable value is not reduced because of the *indirect value shift.
(4) If it has, the amount (if any) by which the interest’s *adjustable value is reduced is worked out on a *loss‑focussed basis under section 727‑780.
(5) However, if a choice is made in accordance with section 727‑550 for the reduction not to be worked out on a *loss‑focussed basis, the reduction is equal to the *disaggregated attributable decrease.
Reduction not to exceed reasonable amount
(6) If the reduction worked out as provided in subsection (4) or (5) is not reasonable in the circumstances, having regard to the objects of this Division, the interest’s *adjustable value is instead reduced by so much of that reduction as is reasonable in the circumstances, having regard to those objects.
Note: The main object of this Division is set out in section 727‑95.
727‑775 Has there been a disaggregated attributable decrease?
(1) This section sets out how to determine whether an *indirect value shift has produced, for the owner of an *equity or loan interest, a disaggregated attributable decrease in the *market value of the interest and, if so, the amount of it.
(2) Work out the *market value of the interest at the *IVS time, but disregarding:
(a) all effects on the market value of the interest during the *IVS period, except effects that are reasonably attributable to the *indirect value shift; and
(b) the effects (if any) of the indirect value shift on the market value of *equity or loan interests, or *indirect equity or loan interests, in the gaining entity.
(This result is called the notional resulting market value.)
Note: Paragraph (2)(b) is necessary because the market value of the interest may also have been affected by the increase in the market value of interests in the gaining entity, because the entity in which the interest is held had direct or indirect interests in both the losing entity and the gaining entity.
In such a case, the reduction in adjustable value under this Division will usually be offset by an uplift under this Division.
(3) If the notional resulting *market value is less than the market value (the old market value) of the interest:
(a) at the start of the *IVS period; or
(b) if the owner last began to own the interest during that period—when the owner last began to own the interest;
the difference is the disaggregated attributable decrease.
(4) The *indirect value shift has not produced a disaggregated attributable decrease for the owner of the interest if the notional resulting *market value is greater than or equal to the old market value.
(5) The *market value of the interest at a particular time may be worked out under subsection (2) or (3) by making a reasonable estimate of that market value.
727‑780 Working out the reduction on a loss‑focussed basis
(1) Use the table in subsection (2) of this section to work out on a loss‑focussed basis the amount (if any) by which the interest’s *adjustable value is reduced.
(2) This involves comparing the old *market value, and the notional resulting market value, with the interest’s *adjustable value (the old adjustable value) immediately before the *IVS time.
Reduction under the attributable decrease method |
Item | If the old market value: | And the notional resulting market value: | This is the result: |
1 | is greater than or equal to the old adjustable value | is less than the old adjustable value | the *adjustable value is reduced to the notional resulting market value |
2 | is greater than or equal to the old adjustable value | is greater than or equal to the old adjustable value | the *adjustable value is not reduced because of the *indirect value shift |
3 | is less than the old adjustable value | is less than the old adjustable value | the *adjustable value is reduced by the amount of the *disaggregated attributable decrease |
Note 1: Because of item 1, the indirect value shift cannot cause a loss to arise on disposal of the interest.
Note 2: Because of item 3 the loss already embedded in the interest is preserved, but the indirect value shift does not increase it.
Uplifts of adjustable value
727‑800 Uplift under the attributable increase method
(1) This section sets out how to work out the amount (if any) by which the *adjustable value of an *affected interest in the *gaining entity is uplifted.
(2) First, work out under section 727‑805 whether the *indirect value shift has produced for the owner of the interest a *disaggregated attributable increase in the *market value of the interest.
(3) If it has not, the interest’s *adjustable value is not uplifted because of the *indirect value shift.
(4) If it has, the *adjustable value is uplifted by the amount worked out using the scaling‑down formula in section 727‑810, subject to the rest of this section.
Note: The uplift will be less than or equal to the disaggregated attributable increase.
Cap if interest has both a disaggregated attributable increase and a disaggregated attributable decrease
(5) If the *indirect value shift has also produced for the owner of the interest a *disaggregated attributable decrease in the *market value of the interest, the interest’s *adjustable value:
(a) is not uplifted if it is not also reduced under this Division because of the indirect value shift; and
(b) if it is also reduced under this Division because of the indirect value shift—is not uplifted by more than the reduction.
Cap based on notional distribution by gaining entity of dividends or capital equal to total reductions in adjustable value of affected interests in losing entity
(6) However, the interest’s *adjustable value is not uplifted by more than the greater of these amounts:
(a) the amount (if any) that the *affected owner of the interest would receive (directly, or indirectly through one or more interposed entities) in respect of the interest if:
(i) the *gaining entity were to pay as *dividends, at the time (the payment time) immediately before the *IVS time, an amount (the total reduction amount) equal to the total of the amounts by which the *adjustable values of *equity or loan interests in the *losing entity are reduced under this Subdivision because of the *indirect value shift; and
(ii) those dividends were successively paid or distributed at the payment time by each entity interposed between the gaining entity and that affected owner; and
(b) the amount (if any) that the *affected owner of the interest would receive (directly, or indirectly through one or more interposed entities) in respect of the interest if:
(i) the gaining entity were to pay the total reduction amount at the payment time as a distribution of capital; and
(ii) that capital was successively paid or distributed at the payment time by each entity interposed between the gaining entity and that affected owner.
(6A) The reduction of *adjustable value that is to be taken into account under subparagraph (6)(a)(i) for an *equity or loan interest in the *losing entity is:
(a) if the interest is *trading stock immediately before the *IVS time—the one worked out on the basis of the interest’s adjustable value under subsection 727‑835(2); or
(b) otherwise—the greater or greatest of these:
(i) the reduction of the interest’s *cost base;
(ii) the reduction of the interest’s *reduced cost base;
(iii) the reduction (if any) worked out on the basis of the interest’s adjustable value under subsection 727‑840(2) (about revenue assets).
Uplift not to exceed reasonable amount
(7) If the uplift worked out as provided in subsections (4), (5) and (6) is not reasonable in the circumstances, having regard to the objects of this Division, the interest’s *adjustable value is instead uplifted by an amount that is reasonable in the circumstances, having regard to those objects.
Note: The main object of this Division is set out in section 727‑95.
727‑805 Has there been a disaggregated attributable increase?
(1) This section sets out how to determine whether an *indirect value shift has produced, for the owner of an *equity or loan interest, a disaggregated attributable increase in the *market value of the interest and, if so, the amount of it.
(2) Make a reasonable estimate of the *market value of the interest at the *IVS time, but disregarding:
(a) all effects on the market value of the interest during the *IVS period, except effects that are reasonably attributable to the *indirect value shift; and
(b) the effects (if any) of the indirect value shift on the market value of *equity or loan interests, or *indirect equity or loan interests, in the losing entity.
(This result is called the notional resulting market value.)
Note: Paragraph (2)(b) is necessary because the market value of the interest may also have been affected by the decrease in the market value of interests in the losing entity, because the entity in which the interest is held had direct or indirect interests in both the losing entity and the gaining entity.
In such a case, the increase in adjustable value under this Division will usually be offset by a reduction under this Division.
(3) If the notional resulting market value is greater than a reasonable estimate of the *market value (the old market value) of the interest:
(a) at the start of the *IVS period; or
(b) if the owner last began to own the interest during that period—when the owner last began to own the interest;
the difference is the disaggregated attributable increase.
(4) The *indirect value shift has not produced a disaggregated attributable increase for the owner of the interest if the notional resulting market value is less than or equal to the old market value.
727‑810 Scaling‑down formula
(1) The scaling‑down formula for the purposes of section 727‑800 is:
Note: The numerator in the fraction can never exceed the denominator. This means that the fraction can never exceed 1, so the uplift will never exceed the disaggregated attributable increase.
(2) For the purposes of the formula:
total disaggregated attributable decreases means the total of:
(a) all *disaggregated attributable decreases that the *indirect value shift has produced, in the *market values of *affected interests in the *losing entity, for the entities that owned those interests immediately before the *IVS time; and
(b) if:
(i) section 727‑850 (as applying to the *scheme from which the indirect value shift results) reduces losses that are *realised for income tax purposes by *realisation events happening before the *IVS time to *equity or loan interests, or to *indirect equity or loan interests, in the losing entity; and
(ii) the indirect value shift is the only indirect value shift, or is the greater or greatest of 2 or more indirect value shifts, that results from the scheme and for which the losing entity is the losing entity;
for each of those realisation events, the amounts that would, if:
(iii) the *presumed indirect value shift were an indirect value shift; and
(iv) the IVS time for the presumed indirect value shift were the time of that realisation event;
be the disaggregated attributable decreases that the presumed indirect value shift has produced, in the market value of the equity or loan interests to which that realisation event happened, for the entities that owned those interests immediately before the time of that realisation event.
total reductions for affected interests means the total of:
(a) all reductions under this Division, because of the indirect value shift, of *adjustable values of affected interests in the losing entity; and
(b) if paragraph (b) of the definition of total disaggregated attributable decreases applies—the amounts by which section 727‑850 reduces the losses (if any) referred to in that paragraph.
Consequences of the method for various kinds of assets
727‑830 CGT assets
(1) The *cost base of an *equity or loan interest is reduced or uplifted immediately before the *IVS time to the extent that this Division provides for the *adjustable value of the interest to be reduced or uplifted.
(2) The *reduced cost base of an *equity or loan interest is reduced or uplifted immediately before the *IVS time to the extent that this Division provides for the *adjustable value of the interest to be reduced or uplifted.
(3) 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.
(4) 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 the adjustable value from time to time of that or any other *equity or loan interest is its cost base or reduced cost base, as appropriate.
(5) If this Division provides for the *adjustable value of an *equity or loan interest to be both reduced and uplifted:
(a) the reduction and uplift for which subsection (1) or (2) of this section provides offset each other to the extent of whichever of them is the lesser; but
(b) if subsection (3) of this section cancels or reduces the uplift, this subsection is taken always to have applied on that basis.
Reductions and uplifts also apply to pre‑CGT assets
(6) A reduction or uplift occurs regardless of whether the entity that owns the interest *acquired it before, on or after 20 September 1985.
727‑835 Trading stock
(1) This section deals with:
(a) how this Division applies to an *equity or loan interest that is *trading stock of an entity at the time (the adjustment time) immediately before the *IVS time; and
(b) the income tax consequences of this Division reducing or uplifting the *adjustable value of the interest.
(2) The interest’s adjustable value at a particular time is:
(a) if the interest has been *trading stock of the entity ever since the start of the income year of the entity in which that time occurs—its *value as trading stock at the start of the income year; or
(b) otherwise—its cost.
(3) If this Division reduces or uplifts the interest’s *adjustable value, the entity is treated as if:
(a) immediately before the adjustment time, the entity had sold the interest to someone else (at *arm’s length and in the ordinary course of business) for its *adjustable value immediately before that time; and
(b) immediately after the adjustment time, the entity had bought the interest back for the reduced or uplifted adjustable value.
Note: The notional sale and repurchase are separated in time. As a result, if this section is applied to another indirect value shift that happens later in the same income year, the interest’s adjustable value will be the cost on the notional repurchase: see paragraph (2)(b).
(4) However, the increase in the cost of an 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 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.
(5) If this Division provides for the *adjustable value of the interest to be both reduced and uplifted:
(a) the reduction and uplift offset each other to the extent of whichever of them is the lesser, and subsection (3) of this section applies accordingly; but
(b) to the extent that the amount of the uplift is no longer reflected in the *market value of the interest, this section is taken always to have applied on the basis that the amount of the uplift was reduced to the same extent.
727‑840 Revenue assets
(1) This section deals with:
(a) how this Division applies to an *equity or loan interest that is a *revenue asset of an entity at the time (the adjustment time) immediately before the *IVS time; and
(b) the income tax consequences of this Division reducing or uplifting the *adjustable value of the interest.
(2) The interest’s adjustable value at a particular 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 the entity disposed of it at that time.
(3) If this Division reduces or uplifts the interest’s *adjustable value, the entity is treated as if:
(a) immediately before the adjustment time, the entity had sold the interest to someone else (at *arm’s length and in the ordinary course of business) for its adjustable value immediately before that time; and
(b) immediately after the adjustment time, the entity had bought the interest back for the reduced or uplifted adjustable value.
Note: The notional sale and repurchase are separated in time. As a result, if this section is applied to another indirect value shift that happens later in the same income year, the interest’s adjustable value will be based on the cost on the notional repurchase: see subsection (2).
(4) However, an uplift in the *adjustable value of the interest 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.
(5) If this Division provides for the *adjustable value of the interest to be both reduced and uplifted:
(a) the reduction and uplift offset each other to the extent of whichever of them is the lesser, and subsection (3) of this section applies accordingly; but
(b) to the extent that the amount of the uplift is no longer reflected in the *market value of the interest, this section is taken always to have applied on the basis that the amount of the uplift was reduced to the same extent.
Subdivision 727‑K—Reduction of loss on equity or loan interests realised before the IVS time
Table of sections
727‑850 Consequences of scheme under this Subdivision
727‑855 Presumed indirect value shift
727‑860 Conditions about the prospective gaining entity
727‑865 How other provisions of this Division apply to support this Subdivision
727‑870 Effect of CGT roll‑over
727‑875 Application to CGT asset that is also trading stock or revenue asset
727‑850 Consequences of scheme under this Subdivision
(1) If:
(a) as at the time when a *scheme is entered into, or a later time, an entity (the prospective losing entity) has *provided, is providing, is to provide, or might provide, one or more economic benefits *in connection with the scheme; and
(b) the prospective losing entity is a company or trust (except one listed in section 727‑125 (about superannuation entities)); and
(c) a *realisation event happens to an *equity or loan interest, or to an *indirect equity or loan interest, in the prospective losing entity at a time when no *IVS time for the scheme has yet happened (whether or not one happens later); and
(d) apart from this Division, a loss would be *realised for income tax purposes by the realisation event; and
(e) because of section 727‑855, the scheme results in a *presumed indirect value shift affecting the realisation event; and
(f) section 727‑860 (about prospective gaining entities) is satisfied; and
(g) no exclusion in Subdivision 727‑C applies to the presumed indirect value shift because of section 727‑865; and
(h) on the assumptions set out in subsection 727‑865(3), the interest would be an *affected interest in the prospective losing entity;
the loss is reduced by an amount that is reasonable having regard to a reasonable estimate of the amount (if any) by which the scheme has reduced the interest’s *market value during the period that ends at the time of the realisation event and started at the later of:
(i) when the scheme was entered into; and
(j) the time of the last realisation event that happened to the interest.
Note 1: This Subdivision does not reduce gains from realisation events, but loss reductions under this Subdivision are taken into account in working out:
• gain reductions under Subdivision 727‑G for interests in a gaining entity that are realised after the IVS time for the scheme (see section 727‑625); or
• uplifts under Subdivision 727‑H in the adjustable values of interests in a gaining entity (see section 727‑810).
Note 2: Section 727‑865 provides for how other provisions of this Division apply for the purposes of this Subdivision.
Further exclusion for certain 95% services indirect value shifts
(2) The loss is not reduced if the *presumed indirect value shift is a *95% services indirect value shift because of subsection 727‑865(2), unless:
(a) the conditions in section 727‑705 (as applying because of that subsection) are met for the presumed indirect value shift; or
(b) the conditions in section 727‑710, 727‑715 or 727‑720 (as applying because of that subsection) are met for the presumed indirect value shift and for the realisation event.
727‑855 Presumed indirect value shift
(1) The *scheme results in a presumed indirect value shift affecting the *realisation event if, and only if, as at the time of the realisation event, it is reasonable to conclude that the total *market value of the economic benefits (the greater benefits) that:
(a) the *prospective losing entity has *provided, is providing, is to provide, or might provide, *in connection with the *scheme, to another entity, or to each of 2 or more other entities; and
(b) can be identified (even if the other entity or entities cannot be identified or are not all in existence, or the provision of some or all of the economic benefits is contingent);
exceeds:
(c) the total market value of the economic benefits (the lesser benefits) that:
(i) have been, are being, are to be, or might be, provided to the prospective losing entity in connection with the scheme; and
(ii) can be identified (even if the entity or entities providing the benefits cannot be identified or are not all in existence, or the provision of some or all of the economic benefits is contingent); or
(d) if there are no economic benefits covered by paragraph (c)—nil.
That excess is the amount of the presumed indirect value shift, which happens at the time of the realisation event.
(2) 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 727‑150(2)(b) is satisfied for that benefit;
if that time is before the *realisation event.
(3) Otherwise, the *market value of the economic benefit is to be determined as at the time immediately before the *realisation event, taking account of any contingency to which provision of the benefit is subject at that time.
For more rules affecting how the market value of an economic benefit is determined, see Subdivision 727‑D (as applying because of
subsection 727‑865(1)).
(4) An entity referred to in paragraph (1)(a) need not be a party to the *scheme. A benefit can be provided by act or omission.
727‑860 Conditions about the prospective gaining entity
(1) By the deadline set out in subsection (5), the conditions in subsections (2) and (3) must be satisfied for at least one of these entities:
(a) the entity or entities referred to in paragraph 727‑855(1)(a);
(b) if at the time of the *realisation event it is reasonable to conclude that the entity, or at least one of the entities, referred to in paragraph 727‑855(1)(a) will be one of 2 or more entities, but it cannot be determined which—those 2 or more entities.
(2) Enough must be known about the identity of an entity covered by subsection (1) for it to be reasonable to conclude that, if:
(a) the *presumed indirect value shift were an *indirect value shift resulting from the *scheme; and
(b) the *IVS period for the scheme ended at the time of the *realisation event; and
(c) that entity were the *gaining entity for the indirect value shift;
(d) the *prospective losing entity were the *losing entity for the indirect value shift; and
either or both of these would be satisfied for the indirect value shift:
(e) section 727‑105 (Ultimate controller test); and
(f) section 727‑110 (Common‑ownership nexus test).
(3) Enough must be known about the identity of the entity referred to in subsection (2) for it also to be reasonable to conclude that, in relation to either or both of the following:
(a) the *prospective losing entity *providing one or more economic benefits to that entity *in connection with the *scheme; or
(b) that entity providing one or more economic benefits to the prospective losing entity in connection with the scheme;
that entity and the prospective losing entity were not, are not, will not be, or would not be, dealing with each other at *arm’s length.
(4) Each entity that is covered by subsection (1), and for which subsections (2) and (3) are satisfied, is called a prospective gaining entity for the *scheme.
(5) The deadline is:
(a) if the entity that owned the *equity or loan interest immediately before the *realisation event must lodge an *income tax return for the income year in which the event happens—the time by which the return must be lodged; or
(b) otherwise—the end of the 6 months immediately after that income year.
727‑865 How other provisions of this Division apply to support this Subdivision
(1) To avoid doubt, these provisions apply for the purposes of working out whether there has been a *presumed indirect value shift and, if so, the amount of it:
(a) sections 727‑155, 727‑160 and 727‑165 (about economic benefits);
(b) section 727‑315 (Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000).
(2) For the purposes of section 727‑850, these provisions:
(a) Subdivision 727‑C (Exclusions), except section 727‑260 (about a shift down a wholly‑owned chain of entities);
(b) sections 727‑700 to 727‑725 (about 95% services indirect value shifts), except subsection 727‑700(1);
apply to the *presumed indirect value shift on the assumptions set out in subsection (3).
(3) The assumptions are:
(a) the *presumed indirect value shift is an *indirect value shift resulting from the *scheme; and
(b) the *prospective losing entity for the scheme is the *losing entity for that indirect value shift; and
(c) each *prospective gaining entity for the scheme is the *gaining entity for that indirect value shift; and
(d) the *greater benefits under the presumed indirect value shift are the greater benefits under that indirect value shift; and
(e) the *lesser benefits (if any) under the presumed indirect value shift are the lesser benefits under that indirect value shift; and
(f) the time of the realisation event mentioned in paragraph 727‑850(1)(c) is the *IVS time for the scheme; and
(g) the *IVS period for the scheme ends at the time of the realisation event; and
(h) section 727‑105 (Ultimate controller test) is satisfied for that indirect value shift according to what it is reasonable to conclude under subsection 727‑860(2) as applying to the presumed indirect value shift; and
(i) section 727‑110 (Common‑ownership nexus test) is satisfied for that indirect value shift according to what it is reasonable to conclude under subsection 727‑860(2) as applying to the presumed indirect value shift; and
(j) a reference to the realisation event mentioned in subsection 727‑700(1) were a reference to the realisation event mentioned in paragraph 727‑850(1)(c); and
(k) the interest to which the realisation event mentioned in paragraph 727‑850(1)(c) happens were the interest referred to in paragraph 727‑700(1)(a); and
(l) a reference in any of sections 727‑700 to 727‑725 (about 95% services indirect value shifts), except subsection 727‑700(1), to the owner were a reference to the entity that, at the time of the realisation event mentioned in paragraph 727‑850(1)(c), owns the interest to which the event happens.
(4) Sections 727‑635 and 727‑640 affect how this Subdivision applies to *equity or loan interests, and *indirect equity or loan interests, in the *prospective losing entity that are split or merged during the period:
(a) starting when the *scheme is entered into; and
(b) ending at the time of the *realisation event mentioned in paragraph 727‑850(1)(c);
in the same way as those sections affect how Subdivision 727‑G would apply to those interests on the assumptions set out in subsection (3) of this section.
(5) The application of a provision because of this section is additional to, and is not intended to limit, any other application of the provision.
727‑870 Effect of CGT roll‑over
(1) If:
(a) the *realisation event mentioned in paragraph 727‑850(1)(c) is a *CGT event; and
(b) section 727‑850 reduces a loss that would, apart from this Division, be *realised for income tax purposes by the CGT event; and
(c) there is a roll‑over for the CGT event;
the interest’s *reduced cost base at the time of the CGT event is taken to have been reduced by the amount by which section 727‑850 reduces that loss, but is so taken only for the purposes of working out:
(d) the interest’s reduced cost base, from time to time after the roll‑over, for the entity that *acquired the interest because of the CGT event; and
(e) in the case of a *replacement‑asset roll‑over—the reduced cost base of the replacement CGT asset, from time to time after the roll‑over, for the entity that *disposed of the interest.
Note: Because of the roll‑over, the loss reduction under section 727‑850 will have no tax effect. This subsection ensures that the loss reduction is passed on, through the reduction in reduced cost base, to prevent or reduce a loss arising on a later CGT event.
727‑875 Application to CGT asset that is also trading stock or revenue asset
If an *equity or loan interest is also an item of *trading stock or a *revenue asset, this Subdivision applies to the interest once in its character as a CGT asset and again in its character as trading stock or a revenue asset.
Subdivision 727‑L—Indirect value shift resulting from a direct value shift
Table of sections
727‑905 How this Subdivision affects the rest of this Division
727‑910 Treatment of value shifted under the direct value shift
727‑905 How this Subdivision affects the rest of this Division
(1) This Subdivision affects how the rest of this Division applies to a *scheme (the IVS scheme) that is or includes a scheme (the DVS scheme) under which there is a *direct value shift.
(2) If the *direct value shift:
(a) has consequences under Division 725 for an entity as an *affected owner of *down interests (or would do so apart from section 725‑90 (about direct value shifts that will be reversed)); and
(b) also has consequences under that Division for another entity as an affected owner of *up interests (or would do so apart from section 725‑90);
the rest of this Subdivision has effect, for the purposes of Subdivisions 727‑A to 727‑K, in order to determine:
(c) whether the IVS scheme results in an *indirect value shift, from the first entity to the other entity, that has consequences under this Division; and
(d) whether the IVS scheme has consequences under Subdivision 727‑K because it results in a *presumed indirect value shift affecting a *realisation event happening to *equity or loan interests, or to *indirect equity or loan interests, in the first entity; and
(e) those consequences.
Note: Section 725‑50 sets out when a direct value shift has consequences under Division 725.
(3) If:
(a) the IVS scheme is the DVS scheme; and
(b) subsection 725‑145(2) is satisfied for the *direct value shift (because one or more equity or loan interests in the target entity are issued at a discount); but
(c) subsection 725‑145(3) (about an increase in the market value of one or more equity or loan interests in the target entity) is not satisfied for the direct value shift;
Subdivisions 727‑A to 727‑K apply to the IVS scheme only as provided in this section.
(4) Otherwise, those Subdivisions apply to the IVS scheme as provided in this section in addition to any other application they have to the scheme.
727‑910 Treatment of value shifted under the direct value shift
(1) The first entity is treated as *providing economic benefits to the other entity, *in connection with the IVS scheme, at the time of a decrease (or future decrease) in the *market value of any of the *down interests, to the extent that the decrease is (or will be) covered by subsection 725‑155(1).
(2) Despite subsections 727‑150(4) and 727‑855(2) and (3), the *market value of all economic benefits that subsection (1) of this section treats the first entity as providing to the other entity:
(a) is to be determined as at the time immediately before the *IVS time, or immediately before the *realisation event, as appropriate; and
(b) is equal to the total value shifted from the *down interests to the *up interests, as worked out under one or more applications of step 2 of the method statement in section 725‑365 or 725‑380.
(3) The 2 entities are treated as not dealing with each other at *arm’s length in relation to the providing of those benefits.
(4) None of those benefits is treated as consisting of, or including, services provided or a right to have services provided.
Note: This means that the exclusions in Subdivisions 727‑C and 727‑G for indirect value shifts involving services will not apply.
(5) Except as provided in this section, none of the following is treated as the *providing of economic benefits *in connection with the IVS scheme:
(a) a decrease (or future decrease) in the *market value of *down interests owned by the first entity or the other entity, to the extent that the decrease is (or will be) covered by subsection 725‑155(1);
(b) an increase (or future increase) in the market value of *up interests owned by the first entity or the other entity, to the extent that the increase is (or will be) covered by subsection 725‑145(3);
(c) an issue of *up interests at a *discount to the first entity or the other entity, to the extent that the issue is (or will be) covered by subsection 725‑145(2).
Note: Value shifted from down interests owned by the other entity to up interests owned by the first entity are dealt with by a separate application of this Subdivision to those interests (because of paragraphs 727‑905(2)(a) and (b).
Chapter 4—International aspects of income tax
Part 4‑5—General
Division 768—Foreign non‑assessable income and gains
Table of Subdivisions
768‑A Returns on foreign investment
768‑B Some items of income that are exempt from income tax
768‑G Reduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies
768‑R Temporary residents
Subdivision 768‑A—Returns on foreign investment
Guide to Subdivision 768‑A
768‑1 What this Subdivision is about
If:
(a) an Australian corporate tax entity receives a foreign equity distribution from a foreign company, either directly or indirectly through one or more interposed trusts or partnerships; and
(b) the Australian corporate tax entity holds a participation interest of at least 10% in the foreign company;
the distribution is non‑assessable non‑exempt income for the Australian corporate tax entity.
Table of sections
Foreign equity distributions on participation interests
768‑5 Foreign equity distributions on participation interests
768‑7 Foreign equity distributions entitled to a foreign income tax deduction
768‑10 Meaning of foreign equity distribution
768‑15 Participation test—minimum 10% participation
Foreign equity distributions on participation interests
768‑5 Foreign equity distributions on participation interests
Foreign equity distributions received directly
(1) A *foreign equity distribution is not assessable income, and is not *exempt income, of the entity to which it is made if:
(a) the entity is an Australian resident and a *corporate tax entity; and
(b) at the time the distribution is made, the entity satisfies the participation test in section 768‑15 in relation to the company that made the distribution; and
(c) the entity:
(i) does not receive the distribution in the capacity of a trustee; or
(ii) receives the distribution in the capacity of a trustee of a *public trading trust; and
(d) the distribution is not one to which section 768‑7 (which is about foreign income tax deductions) applies.
Foreign equity distributions received through interposed trusts and partnerships
(2) An amount is not assessable income, and is not *exempt income, of an entity if:
(a) the entity is a beneficiary of a trust or a partner in a partnership, an Australian resident and a *corporate tax entity; and
(b) the amount is all or part of the *net income of the trust or partnership that would, apart from this subsection, be included in the entity’s assessable income because of:
(i) Division 276; or
(ii) Division 5 or 6 of Part III of the Income Tax Assessment Act 1936; and
(c) the amount can be attributed (either directly or indirectly through one or more interposed trusts or partnerships that are not *corporate tax entities) to a *foreign equity distribution; and
(d) at the time the distribution is made, the entity satisfies the participation test in section 768‑15 in relation to the company that made the distribution; and
(e) the entity:
(i) does not receive the distribution in the capacity of a trustee; or
(ii) receives the distribution in the capacity of a trustee of a *public trading trust; and
(f) the distribution is not one to which section 768‑7 (which is about foreign income tax deductions) applies.
(3) An amount that is *non‑assessable non‑exempt income under subsection (2) is taken, for the purpose of section 25‑90 (about deductions relating to foreign non‑assessable non‑exempt income) to be derived from the same source as the *foreign equity distribution.
768‑7 Foreign equity distributions entitled to a foreign income tax deduction
(1) This section applies to a *foreign equity distribution if:
(a) all or part of the distribution gives rise to a *foreign income tax deduction; and
(b) the exception in subsection (2) does not apply to the distribution.
Exception for foreign corporate collective investment vehicles
(2) This subsection applies to a *foreign equity distribution if:
(a) the *foreign income tax deduction arises because the company that made the distribution is recognised under the law of the foreign country in which the deduction arises as being used for collective investment; and
(b) *foreign income tax or a withholding‑type tax was payable in respect of the distribution.
768‑10 Meaning of foreign equity distribution
A foreign equity distribution is a *distribution or *non‑share dividend made by a company that is a foreign resident in respect of an *equity interest in the company.
768‑15 Participation test—minimum 10% participation
An entity satisfies the participation test in this section in relation to another entity at a time if, at that time, the sum of the following is at least 10%:
(a) the *direct participation interest the entity would have in the other entity if rights on winding‑up were disregarded;
(b) the *indirect participation interest the entity would have in the other entity if:
(i) rights on winding‑up were disregarded; and
(ii) section 960‑185 only applied to intermediate entities that are not *corporate tax entities.
Subdivision 768‑B—Some items of income that are exempt from income tax
Table of sections
768‑100 Foreign government officials in Australia
768‑105 Compensation arising out of Second World War
768‑110 Foreign residents deriving income from certain activities in Australia’s exclusive economic zone or on or above Australia’s continental shelf
768‑100 Foreign government officials in Australia
(1) The amounts of *ordinary income and *statutory income covered by the table are exempt from income tax. In some cases, the exemption is subject to exceptions or special conditions, or both.
Note 1: Ordinary and statutory income that is exempt from income tax is called exempt income: see section 6‑20. The note to subsection 6‑15(2) describes some of the other consequences of it being exempt income.
Note 2: Even if an exempt payment is made to you, the Commissioner can still require you to lodge an income tax return or information under section 161 of the Income Tax Assessment Act 1936.
Exempt amounts |
Item | If you are: | the following amounts are exempt from income tax: | subject to these exceptions and special conditions: |
1 | (a) a representative in Australia of the government of a foreign country; or (b) a member of the official staff of such a representative; and you are neither an Australian citizen nor ordinarily resident in Australia | (a) your official salary; and (b) your *ordinary income, and your *statutory income, from a source outside Australia | (a) no Convention listed in subsection (2) applies to the representative; and (b) the country concerned grants in relation to Australia exemptions from taxes on income that correspond with the exemption in this item |
2 | (a) an officer of the government of a *Commonwealth of Nations country; and (b) temporarily in Australia to render service on behalf of that country, or an *Australian government agency, in accordance with an *arrangement between the governments of that country and of the Commonwealth or of a State or Territory | (a) your official salary; and (b) your *ordinary income, and your *statutory income, from a source outside Australia | that country exempts from income tax the salaries of officers of the government of the Commonwealth temporarily in that country for similar purposes in accordance with a similar arrangement |
(2) The Conventions are:
(a) the Vienna Convention on Diplomatic Relations, as having the force of law because of the Diplomatic Privileges and Immunities Act 1967;
(b) the Vienna Convention on Consular Relations, as having the force of law because of the Consular Privileges and Immunities Act 1972.
Note: Those Conventions have the force of law in Australia because of those Acts and achieve substantially the same effect as item 1 of the table: see Article 34 of the Vienna Convention on Diplomatic Relations and Article 49 of the Vienna Convention on Consular Relations.
768‑105 Compensation arising out of Second World War
(1) A payment to you is exempt from income tax if:
(a) you are an Australian resident at the time when it would otherwise be included in your assessable income; and
(b) the payment is from a source in a foreign country; and
(c) the payment is in connection with:
(i) any wrong or injury; or
(ii) any loss of, or damage to, property; or
(iii) any other detriment;
suffered by you or another individual as a result of:
(iv) persecution by the National Socialist regime of Germany during the National Socialist period; or
(v) persecution during the Second World War by any other enemy of the Commonwealth or by a regime covered by subsection (3); or
(vi) flight from persecution mentioned in subparagraph (iv) or (v); or
(vii) participation in a resistance movement during the Second World War against forces of the National Socialist regime of Germany or against forces of any other enemy of the Commonwealth; and
(d) the payment is not directly or indirectly from any of your *associates.
Note: An example of a detriment covered by subparagraph (c)(iii) is if you lost the opportunity to qualify for a pension because your period of contribution was cut short because you had to flee persecution by the National Socialist regime.
Duration of Second World War
(2) Subsection (1) applies to:
(a) the period immediately before the Second World War; and
(b) the period immediately after the Second World War;
in the same way as it applies to the period of the Second World War.
Regimes associated with an enemy of the Commonwealth
(3) This subsection covers a regime that was:
(a) in alliance with; or
(b) occupied by; or
(c) effectively controlled by; or
(d) under duress from; or
(e) surrounded by;
either or both of the following:
(f) the National Socialist regime of Germany;
(g) any other enemy of the Commonwealth.
Legal personal representative
(4) Subsection (1) applies to a payment to:
(a) your *legal personal representative; or
(b) a trust established by your will;
in a corresponding way to the way in which it would have applied if:
(c) the payment had been to you; and
(d) if the payment is made after your death—you were still alive.
768‑110 Foreign residents deriving income from certain activities in Australia’s exclusive economic zone or on or above Australia’s continental shelf
(1) The object of this section is to ensure Australia’s compliance with certain provisions of the *United Nations Convention on the Law of the Sea.
Note: The text of the United Nations Convention on the Law of the Sea is in Australian Treaty Series 1994 No. 31 ([1994] ATS 31) and could in 2014 be viewed in the Australian Treaties Library on the AustLII website (http://www.austlii.edu.au).
(2) If you are a foreign resident, your *ordinary income and *statutory income is neither assessable income, nor *exempt income, to the extent that:
(a) the income is from an activity carried on in an area that is:
(i) part of Australia’s exclusive economic zone; or
(ii) part of, or above, Australia’s continental shelf; and
(b) the activity is specified by regulation to be a prescribed activity for the purpose of this section.
Subdivision 768‑G—Reduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies
Guide to Subdivision 768‑G
768‑500 What this Subdivision is about
If:
(a) a company has a capital gain or capital loss arising from a CGT event that happens in relation to a share in a foreign company; and
(b) the company holds a direct voting percentage of 10% or more in the foreign company for a certain period before the CGT event happens;
the gain or loss is reduced by a percentage that reflects the degree to which the assets of the foreign company are used in an active business.
Table of sections
Operative provisions
768‑505 Reducing a capital gain or loss from certain CGT events in relation to certain voting interests
Active foreign business asset percentage
768‑510 Active foreign business asset percentage
768‑515 Choices to apply market value method or book value method
768‑520 Market value method—choice made under subsection 768‑515(1)
768‑525 Book value method—choice made under subsection 768‑515(2)
768‑530 Active foreign business asset percentage—modifications for foreign life insurance companies and foreign general insurance companies
768‑533 Foreign company that is a FIF using CFC calculation method—treatment as AFI subsidiary under this Subdivision
768‑535 Modified rules for foreign wholly‑owned groups
Types of assets of a foreign company
768‑540 Active foreign business assets of a foreign company
768‑545 Assets included in the total assets of a foreign company
Voting percentages in a company
768‑550 Direct voting percentage in a company
768‑555 Indirect voting percentage in a company
768‑560 Total voting percentage in a company
Operative provisions
768‑505 Reducing a capital gain or loss from certain CGT events in relation to certain voting interests
(1) The *capital gain or *capital loss a company (the holding company) that is an Australian resident makes from a *CGT event that happened at a particular time (the time of the CGT event) to a *share in a company (the foreign disposal company) that is a foreign resident is reduced if:
(a) the holding company held a *direct voting percentage of 10% or more in the foreign disposal company throughout a 12 month period that:
(i) began no earlier than 24 months before the time of the CGT event; and
(ii) ended no later than that time; and
(b) the share is not:
(i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936); or
(ii) a widely distributed finance share (within the meaning of that Part); and
(c) the CGT event is CGT event A1, B1, C2, E1, E2, G3, J1, K4, K6, K10 or K11.
(2) The gain or loss is reduced by the *active foreign business asset percentage (see sections 768‑510, 768‑530 and 768‑535) of the foreign disposal company in relation to the holding company at the time of the CGT event.
Active foreign business asset percentage
768‑510 Active foreign business asset percentage
(1) The active foreign business asset percentage of a company (the foreign company) that is a foreign resident, in relation to the holding company mentioned in section 768‑505, at the time of the CGT event mentioned in that section, is worked out in accordance with this section.
Market value method
(2) Work out that percentage under section 768‑520 if:
(a) the holding company has made a choice under subsection 768‑515(1) in relation to the foreign company for that time; and
(b) there is sufficient evidence of the *market value at that time of:
(i) all *assets included in the total assets of the foreign company at that time; and
(ii) all *active foreign business assets of the foreign company at that time.
Book value method
(3) Work out that percentage under section 768‑525 if:
(a) the holding company has made a choice under subsection 768‑515(2) in relation to the foreign company for that time; and
(b) there are *recognised company accounts of the foreign company for a period that ends no later than that time, but no more than 12 months before that time; and
(c) if the foreign company was in existence before the start of the period mentioned in paragraph (b)—there are recognised company accounts of the foreign company for a period that ends at least 6 months, but no more than 18 months, before the end of the period mentioned in paragraph (b).
Default method
(4) Otherwise, that percentage is:
(a) 100% (if this section is being applied for the purposes of section 768‑505 to reduce a *capital loss of the holding company); or
(b) zero (in any other case).
768‑515 Choices to apply market value method or book value method
Choice for market value method
(1) The holding company may choose to work out the *active foreign business asset percentage of the foreign company for the time of the CGT event under section 768‑520.
Choice for book value method
(2) The holding company may choose to work out the *active foreign business asset percentage of the foreign company for the time of the CGT event under section 768‑525.
Method of making choice
(3) The way an entity making a choice under subsection (1) or (2) prepares its *income tax return is sufficient evidence of the making of the choice.
Note: If an entity does not make a choice under subsection (1) or (2), it will work out the active foreign business asset percentage of the foreign company in accordance with the default method in subsection 768‑510(4).
768‑520 Market value method—choice made under subsection 768‑515(1)
(1) The active foreign business asset percentage of the foreign company in relation to the holding company, at the time of the CGT event, is worked out under this section in this way.
Method statement
Step 1. Work out the *market value at that time of all *assets included in the total assets of the foreign company at that time.
Step 2. Work out the *market value (see subsection (2)) at that time of all *active foreign business assets of the foreign company at that time.
Step 3. Divide the result of step 2 by the result of step 1.
Step 4. Express the result of step 3 as a percentage, and round that percentage to the nearest whole percentage point (rounding a number ending in .5 upwards).
Step 5. The active foreign business asset percentage is:
(a) if the result of step 4 is less than 10%—zero; or
(b) if the result of step 4 is 10% or more, but less than 90%—that result; or
(c) if the result of step 4 is 90% or more—100%.
Note 1: If the foreign company is a foreign life insurance company or a foreign general insurance company, the result of step 2 is modified under section 768‑530.
Note 2: If the foreign company is a member of a wholly‑owned group, section 768‑535 may modify the way in which this section operates.
(2) If, at the time of the CGT event:
(a) an *active foreign business asset of the foreign company is a *share in another company (the subsidiary company); and
(b) the subsidiary company is a foreign resident;
then, in working out the *market value of all *active foreign business assets of the foreign company at that time for the purposes of step 2 of the method statement in subsection (1), treat the *market value of the share at that time according to the following table.
Market value of a share in subsidiary company |
Item | If: | treat the market value of the share as: |
1 | (a) the foreign company has a *direct voting percentage of 10% or more in the subsidiary company at that time; and (b) the holding company has a *total voting percentage of 10% or more in the subsidiary company at that time | the *share’s *market value at that time, multiplied by the *active foreign business asset percentage of the subsidiary company in relation to the holding company at that time |
2 | item 1 does not apply | zero |
Note: For the purposes of item 1 of the table, it is necessary to work out the active foreign business asset percentage of the subsidiary company before working out the active foreign business asset percentage of the foreign company.
768‑525 Book value method—choice made under subsection 768‑515(2)
(1) The active foreign business asset percentage of the foreign company in relation to the holding company, at the time of the CGT event, is worked out under this section in this way.
Method statement
Step 1. Work out the foreign company’s average value of total assets at that time under subsection (2).
Step 2. Work out the foreign company’s average value of active foreign business assets at that time under subsection (3).
Step 3. Divide the result of step 2 by the result of step 1.
Step 4. Express the result of step 3 as a percentage, and round that percentage to the nearest whole percentage point (rounding a number ending in .5 upwards).
Step 5. The active foreign business asset percentage is:
(a) if the result of step 4 is less than 10%—zero; or
(b) if the result of step 4 is 10% or more, but less than 90%—that result; or
(c) if the result of step 4 is 90% or more—100%.
Note: If the foreign company is a member of a wholly‑owned group, section 768‑535 may modify the way in which this section operates.
(2) The foreign company’s average value of total assets at the time of the CGT event is worked out in this way.
Method statement
Step 1. Work out the sum of the values (see subsection (5)) of every *asset included in the total assets of the foreign company at the end of the most recent period:
(a) that ends no later than that time, but no more than 12 months before that time; and
(b) for which the foreign company has *recognised company accounts.
Step 2. Work out the sum of the values (see subsection (5)) of every *asset included in the total assets of the foreign company at the end of the most recent period:
(a) that ends at least 6 months, but no more than 18 months, before the end of the period mentioned in step 1; and
(b) for which the foreign company has *recognised company accounts.
Note: See subsection (6) if the foreign company does not have recognised company accounts for a period mentioned in this step.
Step 3. Work out the sum of the results of steps 1 and 2, and divide that sum by 2.
(3) The foreign company’s average value of active foreign business assets at that time is worked out in this way.
Method statement
Step 1. Work out the sum of the values (see subsections (4) and (5)) of every *active foreign business asset of the foreign company at the end of the most recent period:
(a) that ends no later than that time, but no more than 12 months before that time; and
(b) for which the foreign company has *recognised company accounts.
Step 2. Work out the sum of the values (see subsections (4) and (5)) of every *active foreign business asset of the foreign company at the end of the most recent period:
(a) that ends at least 6 months, but no more than 18 months, before the end of the period mentioned in step 1; and
(b) for which the foreign company has *recognised company accounts.
Note: See subsection (6) if the foreign company does not have recognised company accounts for a period mentioned in this step.
Step 3. Work out the sum of the results of steps 1 and 2, and divide that sum by 2.
Note: If the foreign company is a foreign life insurance company or a foreign general insurance company, the results of steps 1 and 2 are modified under section 768‑530.
(4) If an *active foreign business asset of the foreign company is a *share in another company (the subsidiary company) that is a foreign resident, then, for the purposes of steps 1 and 2 of the method statement in subsection (3), treat the value of the share at a particular time according to the following table.
Value of a share in subsidiary company |
Item | If: | treat the value of the share as: |
1 | (a) the foreign company has a *direct voting percentage of 10% or more in the subsidiary company at that time; and (b) the holding company has a *total voting percentage of 10% or more in the subsidiary company at that time | the *share’s value (see subsection (5)) at that time, multiplied by the *active foreign business asset percentage of the subsidiary company in relation to the holding company at that time |
2 | item 1 does not apply | zero |
Note: For the purposes of item 1 of the table, it is necessary to work out the active foreign business asset percentage of the subsidiary company before working out the active foreign business asset percentage of the foreign company.
(5) For the purposes of this section, the value of an asset of a foreign company at the end of a period is taken to be:
(a) the value of the asset as shown in the *recognised company accounts of the foreign company for that period; or
(b) if the value of the asset is not shown in the recognised company accounts of the foreign company for that period—zero.
(6) The result of:
(a) step 2 of the method statement in subsection (2); and
(b) step 2 of the method statement in subsection (3);
is taken to be zero if the foreign company does not have *recognised company accounts for a period mentioned in those steps.
Note: This will only be the case if the foreign company was not in existence before the start of the period mentioned in step 1 of those method statements (see paragraph 768‑510(3)(c)).
768‑530 Active foreign business asset percentage—modifications for foreign life insurance companies and foreign general insurance companies
(1) If the foreign company is a *foreign life insurance company or a *foreign general insurance company, work out its *active foreign business asset percentage according to section 768‑510, but with the modifications set out in subsections (2) and (3).
(2) Treat a reference in the following provisions to a period as a reference to a *statutory accounting period of the foreign company:
(a) paragraphs 768‑510(3)(b) and (c);
(b) section 768‑525.
(3) Apply the modifications set out in the following table.
Modifications for foreign life insurance companies and foreign general insurance companies |
Item | The result of this step: | is increased by the amount applicable under subsection (4) for this statutory accounting period: |
1 | step 2 of the method statement in subsection 768‑520(1) | the most recent *statutory accounting period of the foreign company ending at or before the time mentioned in that step |
2 | step 1 of the method statement in subsection 768‑525(3) | the *statutory accounting period mentioned in that step (as modified by subsection (2) of this section) |
3 | step 2 of the method statement in subsection 768‑525(3) | the *statutory accounting period mentioned in that step (as modified by subsection (2) of this section) |
(4) The amount applicable under this subsection for a *statutory accounting period of the foreign company is worked out using the following formula:
where:
active insurance amount means:
(a) if the foreign company is a *foreign life insurance company—the untainted policy liabilities (within the meaning of subsection 446(2) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period; or
(b) if the foreign company is a *foreign general insurance company—the active general insurance amount worked out under subsection (5) for the statutory accounting period.
total insurance assets means:
(a) if the foreign company is a *foreign life insurance company—the total assets (within the meaning of subsection 446(2) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period; or
(b) if the foreign company is a *foreign general insurance company—the total assets (within the meaning of subsection 446(4) of that Act) of the foreign company for the statutory accounting period.
value of non‑active foreign business assets means:
(a) for the purposes of item 1 of the table in subsection (3)—the difference between:
(i) the result of step 1 of the method statement in subsection 768‑520(1); and
(ii) the result of step 2 of that method statement (apart from this section); or
(b) for the purposes of item 2 of the table in subsection (3)—the difference between:
(i) the result of step 1 of the method statement in subsection 768‑525(2); and
(ii) the result of step 1 of the method statement in subsection 768‑525(3) (apart from this section); or
(c) for the purposes of item 3 of the table in subsection (3)—the difference between:
(i) the result of step 2 of the method statement in subsection 768‑525(2); and
(ii) the result of step 2 of the method statement in subsection 768‑525(3) (apart from this section).
Active insurance amount for foreign general insurance company
(5) The active general insurance amount under this subsection for a *statutory accounting period of the foreign company is worked out using the following formula:
where:
net assets means the net assets (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period.
solvency amount means the solvency amount (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period.
tainted outstanding claims means the tainted outstanding claims (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period.
total general insurance assets means the total assets (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period.
768‑533 Foreign company that is a FIF using CFC calculation method—treatment as AFI subsidiary under this Subdivision
(1) This section applies if:
(a) the foreign company is a FIF (within the meaning of former section 481 of the Income Tax Assessment Act 1936); and
(b) the holding company has made a choice under former subsection 559A(1) of the Income Tax Assessment Act 1936 in relation to the foreign company in respect of a notional accounting period (within the meaning of former section 486 of that Act) of the foreign company that ends in the 2009‑10 income year; and
(c) because of the choice, the foreign company has been treated under former paragraph 559A(3)(c) of that Act as an AFI subsidiary (within the meaning of that Act) in relation to that holding company; and
(d) the holding company makes a choice under subsection (1A) in relation to the foreign company; and
(e) the holding company has not failed to make a choice under that subsection for the 2010‑11 income year or any later income year.
(1A) A holding company may make a choice under this subsection in relation to a foreign company if the holding company could have made a choice in relation to the foreign company under former section 559A of the Income Tax Assessment Act 1936 if it had not been repealed by item 37 of Schedule 1 to the Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010.
(2) For the purposes of this Subdivision, treat the foreign company as an AFI subsidiary in relation to that holding company at that time.
768‑535 Modified rules for foreign wholly‑owned groups
(1) This section applies if:
(a) for the purposes of section 768‑505, it is necessary to work out the *active foreign business asset percentage of a company (the top foreign company) in relation to the holding company mentioned in that section, at the time of the CGT event mentioned in that section; and
(b) the top foreign company is not:
(i) an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936); or
(ii) a *foreign life insurance company; or
(iii) a *foreign general insurance company; and
(c) for the purposes of section 768‑505, it is also necessary (apart from this section) to work out the active foreign business asset percentage at that time of 1 or more other companies in relation to the holding company, at that time, where:
(i) the top foreign company and 1 or more of those other companies (the subsidiary foreign companies) are members of a *wholly‑owned group; and
(ii) each of the subsidiary foreign companies is a *100% subsidiary of the top foreign company.
(2) The holding company may choose to work out the *active foreign business asset percentage of the top foreign company in accordance with subsections (4) and (6).
(3) The way an entity making a choice under subsection (2) prepares its *income tax return is sufficient evidence of the making of the choice.
(4) If the holding company has made a choice under subsection (2), the provisions mentioned in subsection (5) operate, for the purposes of section 768‑505, as if each subsidiary foreign company were a part of the top foreign company, rather than a separate entity.
Note 1: This subsection means that certain assets are not treated as active foreign business assets, or as assets included in the total assets, of any of the subsidiary foreign companies or of the top foreign company. For example:
(a) a share owned by one of those companies in another of those companies; and
(b) a debt owed by one of those companies to another of those companies.
Note 2: If an asset (other than an asset mentioned in Note 1) is actually an active foreign business asset, or an asset included in the total assets, of a subsidiary foreign company, it is treated under this subsection as an active foreign business asset, or as an asset included in the total assets, of the top foreign company.
(5) For the purposes of subsection (4), the provisions are:
(a) section 768‑540 (active foreign business assets of a foreign company); and
(b) section 768‑545 (assets included in the total assets of a foreign company).
(6) If the holding company has made a choice under subsection (2), then for the purposes of sections 768‑510 and 768‑525, treat the *recognised consolidated accounts of the top foreign company and all of the subsidiary foreign companies as the *recognised company accounts of the top foreign company.
Types of assets of a foreign company
768‑540 Active foreign business assets of a foreign company
(1) An asset is, at a particular time, an active foreign business asset of a company (the foreign company) that is a foreign resident if, at that time:
(a) the asset is an *asset included in the total assets of the company; and
(b) the asset satisfies any of these conditions:
(i) the asset is used, or held ready for use, by the company in the course of carrying on a *business;
(ii) the asset is goodwill;
(iii) the asset is a *share; and
(c) the asset is not any of the following:
(i) *taxable Australian property;
(ii) a *membership interest in a company that is an Australian resident;
(iii) a membership interest in a *resident trust for CGT purposes;
(iv) an option or right to acquire a membership interest mentioned in subparagraph (ii) or (iii); and
(d) the asset is not covered by subsection (2); and
(e) if the foreign company is an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business—the asset is not covered under subsection (4).
(2) An asset is covered by this subsection if it is:
(a) a financial instrument (other than a *share or a trade debt); or
(b) either:
(i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936); or
(ii) a widely distributed finance share (within the meaning of that Part); or
(c) an interest in a trust or *partnership; or
(d) a *life insurance policy; or
(e) a right or option in respect of:
(i) a financial instrument; or
(ii) an interest in a company, trust or partnership; or
(iii) a life insurance policy; or
(f) cash or cash equivalent; or
(g) an asset whose main use in the course of carrying on the *business mentioned in subparagraph (1)(b)(i) is to *derive interest, an *annuity, rent, *royalties or foreign exchange gains unless:
(i) the asset is an intangible asset and has been substantially developed, altered or improved by the foreign company so that its *market value has been substantially enhanced; or
(ii) its main use for deriving rent was only temporary.
(3) If, at the time mentioned in subsection (1), the foreign company is an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business (within the meaning of that Part), subsection (2) operates as if:
(a) paragraphs (2)(a) and (f) were omitted; and
(b) paragraph (2)(g) did not contain a reference to interest, an *annuity or foreign exchange gains; and
(c) subparagraph (2)(e)(i) were omitted and the following subparagraph were substituted:
(i) a financial instrument, other than an asset mentioned in paragraph 450(1)(b) of the Income Tax Assessment Act 1936; or
(4) The asset is covered under this subsection if:
(a) all of these conditions are satisfied:
(i) the asset is an asset mentioned in subparagraph 450(4)(b)(i) or (ii) of the Income Tax Assessment Act 1936;
(ii) the asset was acquired from another entity;
(iii) either of the conditions mentioned in subparagraph 450(6)(c)(i) and (ii) of the Income Tax Assessment Act 1936 were satisfied in relation to the other entity at the time of the acquisition; or
(b) both of these conditions are satisfied:
(i) the asset relates to a debt to which factoring income (within the meaning of Part X of the Income Tax Assessment Act 1936) of the foreign company relates;
(ii) the condition in paragraph 450(8)(b) of the Income Tax Assessment Act 1936 is satisfied in relation to the debt.
768‑545 Assets included in the total assets of a foreign company
(1) At a particular time, an asset is an asset included in the total assets of a company (the foreign company) that is a foreign resident if:
(a) the asset is a *CGT asset at that time; and
(b) the foreign company owns the asset at that time; and
(c) if at that time the foreign company is not an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business (within the meaning of that Part)—the asset is not a foreign company derivative asset covered by subsection (2).
(2) An asset is a foreign company derivative asset covered by this subsection if:
(a) the asset is an *arrangement covered by subsection (3), unless the regulations declare the asset not to be a foreign company derivative asset covered by this subsection; or
(b) the regulations declare the asset to be a foreign company derivative asset covered by this subsection.
(3) An *arrangement is covered by this subsection if:
(a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and
(b) that future time is not less than the number of days, prescribed by regulations made for the purposes of paragraph 761D(1)(b) of the Corporations Act 2001, after the day on which the arrangement is entered into; and
(c) the amount of the consideration, or the value of the arrangement, is ultimately determined, *derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following:
(i) an asset;
(ii) a rate (including an interest rate or exchange rate);
(iii) an index;
(iv) a commodity; and
(d) subsection (4) does not apply in relation to the arrangement.
(4) An *arrangement under which one person has an obligation to buy, and another person has an obligation to sell, property is not an arrangement covered by subsection (3) merely because the arrangement provides for the consideration to be varied by reference to a general inflation index such as the Consumer Price Index.
Voting percentages in a company
768‑550 Direct voting percentage in a company
(1) An entity’s direct voting percentage at a particular time in a company is:
(a) if the entity has a voting interest (within the meaning of section 334A of the Income Tax Assessment Act 1936) in the foreign company at that time amounting to a percentage of the voting power of the company—that percentage; or
(b) otherwise—zero.
(2) In applying section 334A of the Income Tax Assessment Act 1936 for the purposes of subsection (1) of this section, assume that:
(a) the entity is a company; and
(b) the entity is not the beneficial owner of a *share in the company if a trust or partnership is interposed between the entity and the company.
768‑555 Indirect voting percentage in a company
(1) An entity’s indirect voting percentage at a particular time in a company (the subsidiary company) is worked out by multiplying:
(a) the entity’s *direct voting percentage (if any) in another company (the intermediate company) at that time;
by:
(b) the sum of:
(i) the intermediate company’s direct voting percentage (if any) in the subsidiary company at that time; and
(ii) the intermediate company’s indirect voting percentage (if any) in the subsidiary company at that time (as worked out under one or more other applications of this section).
(2) If there is more than one intermediate company to which subsection (1) applies at that time, the entity’s indirect voting percentage is the sum of the percentages worked out under subsection (1) in relation to each of those intermediate companies.
768‑560 Total voting percentage in a company
An entity’s total voting percentage at a particular time in a company is the sum of:
(a) the entity’s *direct voting percentage in the company at that time; and
(b) the entity’s *indirect voting percentage in the company at that time.
Subdivision 768‑R—Temporary residents
Guide to Subdivision 768‑R
768‑900 What this Subdivision is about
This Subdivision modifies the general tax rules for people in Australia who are temporary residents, whether Australian residents or foreign residents.
Generally foreign income derived by temporary residents is non‑assessable non‑exempt income and capital gains and losses they make are also disregarded for CGT purposes. There are some exceptions for employment‑related income and capital gains on shares and rights acquired under employee share schemes.
Temporary residents are also partly relieved of record‑keeping obligations in relation to the controlled foreign company rules.
Interest paid by temporary residents is not subject to withholding tax and may be non‑assessable non‑exempt income for a foreign resident.
Table of sections
Operative provisions
768‑905 Objects
768‑910 Income derived by temporary resident
768‑915 Certain capital gains and capital losses of temporary resident to be disregarded
768‑950 Individual becoming an Australian resident
768‑955 Temporary resident who ceases to be temporary resident but remains an Australian resident
768‑960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules
768‑970 Modification of rules for accruals system of taxation of certain non‑resident trust estates
768‑980 Interest paid by temporary resident
Operative provisions
768‑905 Objects
The objects of this Subdivision are to:
(a) provide *temporary residents with tax relief on most foreign source income and capital gains; and
(b) relieve the burdens associated with complying with certain record‑keeping obligations and interest withholding tax obligations.
768‑910 Income derived by temporary resident
(1) The following are *non‑assessable non‑exempt income:
(a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source if you are a *temporary resident when you derive it;
(b) your *statutory income (other than a *net capital gain) from a source other than an Australian source if you are a temporary resident when you derive it.
This subsection has effect subject to subsections (3) and (5).
Note: A capital gain or loss you make may be disregarded under section 768‑915.
(2) For the purposes of paragraph (1)(b):
(a) if you have statutory income because a particular circumstance occurs, you derive the statutory income at the time when the circumstance occurs; and
(b) if you have statutory income because a number of circumstances occur, you derive the statutory income at the time when the last of those circumstances occurs.
Exception to subsection (1)
(3) However, the following are not *non‑assessable non‑exempt income under subsection (1):
(a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source to the extent that it is remuneration, for employment undertaken, or services provided, while you are a *temporary resident;
(b) your *statutory income (other than a *net capital gain) from a source other than an Australian source to the extent that it relates to employment undertaken, or services provided, while you are a temporary resident;
(c) an amount included in your assessable income under Division 86.
Note: This subsection only makes an amount not non‑assessable non‑exempt income under subsection (1). It does not prevent that amount from being non‑assessable non‑exempt income under some other provision of this Act or the Income Tax Assessment Act 1936.
768‑915 Certain capital gains and capital losses of temporary resident to be disregarded
(1) A *capital gain or *capital loss you make from a *CGT event is disregarded if:
(a) you are a *temporary resident when, or immediately before, the CGT event happens; and
(b) you would not make a capital gain or loss from the CGT event, or the capital gain or loss from the CGT event would have been disregarded under Division 855, if you were a foreign resident when, or immediately before, the CGT event happens.
(2) Subsection (1) does not apply in relation to *CGT event I1 if:
(a) the CGT event happens in relation to an *ESS interest that is a beneficial interest in a right (or to a *share acquired by exercising such a right); and
(b) the provisions referred to in paragraphs 83A‑33(1)(a) to (c) (about start ups) apply to the ESS interest.
768‑950 Individual becoming an Australian resident
Section 855‑45 does not apply to your becoming an Australian resident if you are a *temporary resident immediately after you become an Australian resident.
768‑955 Temporary resident who ceases to be temporary resident but remains an Australian resident
(1) If you are a *temporary resident and you then cease to be a temporary resident (but remain, at that time, an Australian resident), there are rules relevant to each *CGT asset that:
(a) you owned just before you ceased to be a temporary resident; and
(b) is not *taxable Australian property; and
(c) you *acquired on or after 20 September 1985.
(2) The first element of the *cost base and *reduced cost base of the asset (at the time you cease to be a *temporary resident) is its *market value at that time.
(3) Also, Parts 3‑1 and 3‑3 apply to the asset as if you had *acquired it at the time you ceased to be a *temporary resident.
(4) This section does not apply to an *ESS interest if:
(a) Subdivision 83A‑C (about employee share schemes) applies to the interest, and the *ESS deferred taxing point for the interest has not yet occurred; or
(b) the provisions referred to in paragraphs 83A‑33(1)(a) to (c) (about start ups) apply to the ESS interest.
768‑960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules
For the purposes of Part X of the Income Tax Assessment Act 1936 (which deals with the attribution of income in respect of controlled foreign companies), you are taken not to be an *attributable taxpayer in relation to a *CFC or *CFT at any time you are a *temporary resident.
768‑970 Modification of rules for accruals system of taxation of certain non‑resident trust estates
At any time when you are a *temporary resident, you are taken not to be a resident for the purposes of section 102AAZD of the Income Tax Assessment Act 1936.
768‑980 Interest paid by temporary resident
Interest that is paid by a *temporary resident:
(a) is an amount to which section 128B (liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply; and
(b) is *non‑assessable non‑exempt income if the interest is:
(i) *derived by a foreign resident; and
(ii) is not derived from carrying on *business in Australia at or through a *permanent establishment in Australia.
Division 770—Foreign income tax offsets
Table of Subdivisions
Guide to Division 770
770‑A Entitlement rules for foreign income tax offsets
770‑B Amount of foreign income tax offset
770‑C Rules about payment of foreign income tax
770‑D Administration
Guide to Division 770
770‑1 What this Division is about
You may get a non‑refundable tax offset for foreign income tax paid on your assessable income.
There is a limit on the amount of the tax offset.
A resident of a foreign country does not get the offset for some foreign income taxes.
You may also get the offset for foreign income tax paid on some amounts that are not taxed in Australia.
770‑5 Object
(1) The object of this Division is to relieve double taxation where:
(a) you have paid foreign income tax on amounts included in your assessable income; and
(b) you would, apart from this Division, pay Australian income tax on the same amounts.
(2) To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts.
Note 1: This Division applies in relation to Medicare levy and Medicare levy (fringe benefits) surcharge in the same way as it applies to Australian income tax. See section 90‑1 in Schedule 1 to the Taxation Administration Act 1953.
Note 2: The tax offset under this Division can be applied against your Medicare levy and Medicare levy (fringe benefits) surcharge liability for the year, if an amount of it remains after you apply it against your basic income tax liability. See item 22 of the table in subsection 63‑10(1).
Subdivision 770‑A—Entitlement rules for foreign income tax offsets
Table of sections
Basic entitlement rule for foreign income tax offset
770‑10 Entitlement to foreign income tax offset
770‑15 Meaning of foreign income tax, credit absorption tax and unitary tax
Basic entitlement rule for foreign income tax offset
770‑10 Entitlement to foreign income tax offset
(1) You are entitled to a *tax offset for an income year for *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.
Note 1: The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax—even if you paid the foreign income tax in another income year.
Note 2: If the foreign income tax has been paid on an amount that is part non‑assessable non‑exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)).
Note 3: For offshore banking units, the amount of foreign income tax paid in respect of offshore banking income is reduced: see subsection 121EG(3A) of the Income Tax Assessment Act 1936.
Taxes paid on section 23AI or 23AK amounts
(2) An amount of *foreign income tax counts towards the *tax offset for you for the year if you paid it in respect of an amount that is your *non‑assessable non‑exempt income under either section 23AI or 23AK of the Income Tax Assessment Act 1936 for the year.
Note 1: Sections 23AI and 23AK of the Income Tax Assessment Act 1936 provide that amounts paid out of income previously attributed from a controlled foreign company or a foreign investment fund are non‑assessable non‑exempt income.
Note 2: Foreign income taxes covered by this subsection are direct taxes (for example, a withholding tax on a dividend payment) and not underlying taxes, only some of which are covered by section 770‑135.
Exception for certain residence‑based foreign income taxes
(3) An amount of *foreign income tax you paid does not count towards the *tax offset for the year if you paid it:
(a) to a foreign country because you are a resident of that country for the purposes of a law relating to the foreign income tax; and
(b) in respect of an amount derived from a source outside that country.
Exception for previously complying funds and previously foreign funds
(4) An amount of *foreign income tax paid by a *superannuation provider in relation to a *superannuation fund does not count towards the *tax offset for the year if:
(a) the tax was paid in respect of an amount included in the fund’s assessable income under table item 2 or 3 in section 295‑320; and
(b) the provider paid the tax before the start of the income year.
Note: Table items 2 and 3 in section 295‑320 include additional amounts in the assessable income of superannuation funds that change their status from complying to non‑complying or from foreign to Australian.
Exception for credit absorption tax and unitary tax
(5) An amount of *credit absorption tax or *unitary tax you paid does not count towards the *tax offset for the year.
770‑15 Meaning of foreign income tax, credit absorption tax and unitary tax
(1) Foreign income tax means tax that:
(a) is imposed by a law other than an *Australian law; and
(b) is:
(i) tax on income; or
(ii) tax on profits or gains, whether of an income or capital nature; or
(iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.
Note: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953), has been correctly imposed in accordance with that tax treaty.
(2) Credit absorption tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country to the extent that the tax would not have been payable if the entity concerned or another entity had not been entitled to an offset in respect of the tax under this Division.
(3) Unitary tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country, being a law which, for the purposes of taxing income, profits or gains of a company derived from sources within that country, takes into account, or is entitled to take into account, income, losses, outgoings or assets of the company (or of a company that for the purposes of that law is treated as being associated with the company) derived, incurred or situated outside that country, but does not include tax imposed by that law if that law only takes those matters into account:
(a) if such an associated company is a resident of the foreign country for the purposes of the law of the foreign country; or
(b) for the purposes of granting any form of relief in relation to tax imposed on dividends received by one company from another company.
Subdivision 770‑B—Amount of foreign income tax offset
Guide to Subdivision 770‑B
770‑65 What this Subdivision is about
The amount of your tax offset is based on the amount of foreign income tax you have paid.
However, there is a limit on the maximum amount of your offset. The limit is the greater of $1,000 and an amount worked out under this Subdivision. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreign‑taxed and foreign‑sourced income and related deductions were disregarded.
You may choose to use the limit of $1,000 and not work out this amount.
There is an increase in the limit to ensure foreign income tax paid on some amounts that are not taxed always forms part of the offset.
Table of sections
Operative provisions
770‑70 Amount of foreign income tax offset
770‑75 Foreign income tax offset limit
770‑80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply
Operative provisions
770‑70 Amount of foreign income tax offset
The amount of your *tax offset for the year is the sum of the *foreign income tax you paid that counts towards the offset for the year.
Note 1: The amount of foreign income tax you paid may be affected by Subdivision 770‑C.
Note 2: The amount of the offset might be increased under section 770‑230 of the Income Tax (Transitional Provisions) Act 1997, if you have pre‑commencement excess foreign income tax.
770‑75 Foreign income tax offset limit
(1) There is a limit (the offset limit) on the amount of your *tax offset for a year. If your tax offset exceeds the offset limit, reduce the offset by the amount of the excess.
(2) Your offset limit is the greater of:
(a) $1,000; and
(b) this amount:
(i) the amount of income tax payable by you for the income year; less
(ii) the amount of income tax that would be payable by you for the income year if the assumptions in subsection (4) were made.
Note 1: If you do not intend to claim a foreign income tax offset of more than $1,000 for the year, you do not need to work out the amount under paragraph (b).
Note 2: The amount of the offset limit might be increased under section 770‑80.
(3) For the purposes of paragraph (2)(b), work out the amount of income tax payable by you, or that would be payable by you, disregarding any
