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Income Tax Assessment Act 1997

Authoritative Version
  • - C2019C00148
  • In force - Superseded Version
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Act No. 38 of 1997 as amended, taking into account amendments up to Treasury Laws Amendment (Protecting Your Superannuation Package) Act 2019
An Act about income tax and related matters
Administered by: Treasury
General Comments: Division 40, Subdivision 40-D, Section 40-340, Subdivision 328-G and Sections 328-430 and 328-450 of this Act have been modified by the operation of the Commissioner’s Remedial Power, click here to see the modification
Registered 18 Apr 2019
Start Date 01 Apr 2019
End Date 05 Apr 2019

Commonwealth Coat of Arms of Australia

Income Tax Assessment Act 1997

No. 38, 1997

Compilation No. 192

Compilation date:                              1 April 2019

Includes amendments up to:            Act No. 16, 2019

Registered:                                         18 April 2019

This compilation is in 12 volumes

Volume 1:       sections 1‑1 to 36‑55

Volume 2:       sections 40‑1 to 67‑30

Volume 3:       sections 70‑1 to 121‑35

Volume 4:       sections 122‑1 to 197‑85

Volume 5:       sections 200‑1 to 253‑15

Volume 6:       sections 275‑1 to 313‑85

Volume 7:       sections 315‑1 to 420‑70

Volume 8:       sections 615‑1 to 721‑40

Volume 9:       sections 723‑1 to 855‑55

Volume 10:     sections 900‑1 to 995‑1

Volume 11:     Endnotes 1 to 3

Volume 12:     Endnotes 4 and 5

Each volume has its own contents

This compilation includes commenced amendments made by Act No. 7, 2019, Act No. 8, 2019 and Act No. 15, 2019

About this compilation

This compilation

This is a compilation of the Income Tax Assessment Act 1997 that shows the text of the law as amended and in force on 1 April 2019 (the compilation date).

The notes at the end of this compilation (the endnotes) include information about amending laws and the amendment history of provisions of the compiled law.

Uncommenced amendments

The effect of uncommenced amendments is not shown in the text of the compiled law. Any uncommenced amendments affecting the law are accessible on the Legislation Register (www.legislation.gov.au). The details of amendments made up to, but not commenced at, the compilation date are underlined in the endnotes. For more information on any uncommenced amendments, see the series page on the Legislation Register for the compiled law.

Application, saving and transitional provisions for provisions and amendments

If the operation of a provision or amendment of the compiled law is affected by an application, saving or transitional provision that is not included in this compilation, details are included in the endnotes.

Editorial changes

For more information about any editorial changes made in this compilation, see the endnotes.

Modifications

If the compiled law is modified by another law, the compiled law operates as modified but the modification does not amend the text of the law. Accordingly, this compilation does not show the text of the compiled law as modified. For more information on any modifications, see the series page on the Legislation Register for the compiled law.

Self‑repealing provisions

If a provision of the compiled law has been repealed in accordance with a provision of the law, details are included in the endnotes.

  

  

  


Contents

Chapter 3—Specialist liability rules                                                           1

Part 3‑95—Value shifting                                                                                                  1

Division 723—Direct value shifting by creating right over non‑depreciating asset       1

Subdivision 723‑A—Reduction in loss from realising non‑depreciating asset               1

723‑1..................... Object................................................................................. 1

723‑10................... Reduction in loss from realising non‑depreciating asset over which right has been created     2

723‑15................... Reduction in loss from realising non‑depreciating asset at the same time as right is created over it         4

723‑20................... Exceptions.......................................................................... 5

723‑25................... Realisation event that is only a partial realisation................ 6

723‑35................... Multiple rights created to take advantage of the $50,000 threshold          7

723‑40................... Application to CGT asset that is also trading stock or revenue asset        7

723‑50................... Effects if right created over underlying asset is also trading stock or a revenue asset              7

Subdivision 723‑B—Reducing reduced cost base of interests in entity that acquires non‑depreciating asset under roll‑over                                                                                          8

723‑105................. Reduced cost base of interest reduced when interest realised at a loss     8

723‑110................. Direct and indirect roll‑over replacement for underlying asset 10

Division 725—Direct value shifting affecting interests in companies and trusts              11

Guide to Division 725                                                                                              11

725‑1..................... What this Division is about............................................... 11

Subdivision 725‑A—Scope of the direct value shifting rules                        12

725‑45................... Main object....................................................................... 12

725‑50................... When a direct value shift has consequences under this Division              13

725‑55................... Controlling entity test........................................................ 13

725‑65................... Cause of the value shift..................................................... 13

725‑70................... Consequences for down interest only if there is a material decrease in its market value           15

725‑80................... Who is an affected owner of a down interest?.................. 15

725‑85................... Who is an affected owner of an up interest?..................... 15

725‑90................... Direct value shift that will be reversed.............................. 16

725‑95................... Direct value shift resulting from reversal.......................... 17

Subdivision 725‑B—What is a direct value shift                                              17

725‑145................. When there is a direct value shift...................................... 17

725‑150................. Issue of equity or loan interests at a discount.................... 18

725‑155................. Meaning of down interests, decrease time, up interests and increase time              20

725‑160................. What is the nature of a direct value shift?.......................... 20

725‑165................. If market value decrease or increase is only partly attributable to the scheme           20

Subdivision 725‑C—Consequences of a direct value shift                             21

General                                                                                                                       21

725‑205................. Consequences depend on character of down interests and up interests    21

725‑210................. Consequences for down interests depend on pre‑shift gains and losses  22

Special cases                                                                                                              22

725‑220................. Neutral direct value shifts................................................. 22

725‑225................. Issue of bonus shares or units.......................................... 23

725‑230................. Off‑market buy‑backs....................................................... 24

Subdivision 725‑D—Consequences for down interest or up interest as CGT asset        25

725‑240................. CGT consequences; meaning of adjustable value............. 25

725‑245................. Table of taxing events generating a gain for interests as CGT assets      27

725‑250................. Table of consequences for adjustable values of interests as CGT assets  28

725‑255................. Multiple CGT consequences for the same down interest or up interest    31

Subdivision 725‑E—Consequences for down interest or up interest as trading stock or a revenue asset                32

725‑310................. Consequences for down interest or up interest as trading stock               32

725‑315................. Adjustable value of trading stock...................................... 33

725‑320................. Consequences for down interest or up interest as a revenue asset            34

725‑325................. Adjustable value of revenue asset..................................... 35

725‑335................. How to work out those consequences.............................. 36

725‑340................. Multiple trading stock or revenue asset consequences for the same down interest or up interest             39

Subdivision 725‑F—Value adjustments and taxed gains                                40

725‑365................. Decreases in adjustable values of down interests (with pre‑shift gains), and taxing events generating a gain.......................................................................................... 40

725‑370................. Uplifts in adjustable values of up interests under certain table items        42

725‑375................. Uplifts in adjustable values of up interests under other table items          43

725‑380................. Decreases in adjustable value of down interests (with pre‑shift losses)   45

Division 727—Indirect value shifting affecting interests in companies and trusts, and arising from non‑arm’s length dealings                                                              47

Guide to Division 727                                                                                              47

727‑1..................... What this Division is about............................................... 47

727‑5..................... What is an indirect value shift?......................................... 48

727‑10................... How does this Division deal with indirect value shifts?... 50

727‑15................... When does an indirect value shift have consequences under this Division?             50

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..................................................... 51

Subdivision 727‑A—Scope of the indirect value shifting rules                     51

727‑95................... Main object....................................................................... 52

727‑100................. When an indirect value shift has consequences under this Division         52

727‑105................. Ultimate controller test...................................................... 53

727‑110................. Common‑ownership nexus test (if both losing and gaining entities are closely held)              53

727‑125................. No consequences if losing entity is a superannuation entity 54

Subdivision 727‑B—What is an indirect value shift                                        54

727‑150................. How to determine whether a scheme results in an indirect value shift      54

727‑155................. Providing economic benefits............................................. 56

727‑160................. When an economic benefit is provided in connection with a scheme        57

727‑165................. Preventing double‑counting of economic benefits............ 58

Subdivision 727‑C—Exclusions                                                                            59

Guide to Subdivision 727‑C                                                                                   59

727‑200................. What this Subdivision is about......................................... 59

General                                                                                                                       60

727‑215................. Amount does not exceed $50,000..................................... 60

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............................................... 60

Indirect value shifts involving services                                                              61

727‑230................. Services provided by losing entity to gaining entity for at least their direct cost       61

727‑235................. Services provided by gaining entity to losing entity for no more than a commercially realistic price       62

727‑240................. What services certain provisions apply to......................... 63

727‑245................. How to work out certain amounts for the purposes of sections 727‑230 and 727‑235            64

Anti‑overlap provisions                                                                                          65

727‑250................. Distribution by an entity to a member or beneficiary........ 65

Miscellaneous                                                                                                            66

727‑260................. Shift down a wholly‑owned chain of entities.................... 66

Subdivision 727‑D—Working out the market value of economic benefits 67

727‑300................. What the rules in this Subdivision are for......................... 67

727‑315................. Transfer, for its adjustable value, of depreciating asset acquired for less than $1,500,000       67

Subdivision 727‑E—Key concepts                                                                       68

Ultimate controller                                                                                                  69

727‑350................. Ultimate controller........................................................... 69

727‑355................. Control (for value shifting purposes) of a company......... 69

727‑360................. Control (for value shifting purposes) of a fixed trust....... 70

727‑365................. Control (for value shifting purposes) of a non‑fixed trust 71

727‑370................. Preventing double counting for percentage stake tests...... 72

727‑375................. Tests in this Subdivision are exhaustive........................... 72

Common‑ownership nexus and ultimate stake of a particular percentage 73

727‑400................. When 2 entities have a common‑ownership nexus within a period          73

727‑405................. Ultimate stake of a particular percentage in a company..... 75

727‑410................. Ultimate stake of a particular percentage in a fixed trust... 76

727‑415................. Rules for tracing............................................................... 76

Subdivision 727‑F—Consequences of an indirect value shift                       78

Guide to Subdivision 727‑F                                                                                    78

727‑450................. What this Subdivision is about......................................... 78

Operative provisions                                                                                               79

727‑455................. Consequences of the indirect value shift........................... 79

Affected interests                                                                                                      79

727‑460................. Affected interests in the losing entity................................. 79

727‑465................. Affected interests in the gaining entity............................... 79

727‑470................. Exceptions........................................................................ 80

727‑520................. Equity or loan interest and related terms........................... 81

727‑525................. Indirect equity or loan interest.......................................... 82

Affected owners                                                                                                        82

727‑530................. Who are the affected owners............................................. 82

Choices about method to be used                                                                          84

727‑550................. Choosing the adjustable value method.............................. 84

727‑555................. Giving other affected owners information about the choice 86

Subdivision 727‑G—The realisation time method                                           87

727‑600................. What this Subdivision is about......................................... 87

Operative provisions                                                                                               88

727‑610................. Consequences of indirect value shift................................. 88

727‑615................. Reduction of loss on realisation event for affected interest in losing entity              89

727‑620................. Reduction of gain on realisation event for affected interest in gaining entity            90

727‑625................. Total gain reductions not to exceed total loss reductions... 90

727‑630................. How cap in section 727‑625 applies if affected interest is also trading stock or a revenue asset              91

727‑635................. Splitting an equity or loan interest..................................... 93

727‑640................. Merging equity or loan interests....................................... 93

727‑645................. Effect of CGT roll‑over.................................................... 94

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

727‑700................. When 95% services indirect value shift is excluded.......... 95

95% services indirect value shifts that are not excluded                               96

727‑705................. Another provision of the income tax law affects amount related to services by at least $100,000            96

727‑710................. Ongoing or recent service arrangement reduces value of losing entity by at least $100,000    97

727‑715................. Service arrangements reduce value of losing entity that is a group service provider by at least $500,000.......................................................................................... 98

727‑720................. Abnormal service arrangement reduces value of losing entity that is not a group service provider by at least $500,000......................................................................... 100

727‑725................. Meaning of predominantly‑services indirect value shift. 102

Subdivision 727‑H—The adjustable value method                                        102

Guide to Subdivision 727‑H                                                                                 102

727‑750................. What this Subdivision is about....................................... 102

727‑755................. Consequences of indirect value shift............................... 103

Reductions of adjustable value                                                                           104

727‑770................. Reduction under the adjustable value method................. 104

727‑775................. Has there been a disaggregated attributable decrease?..... 104

727‑780................. Working out the reduction on a loss‑focussed basis....... 105

Uplifts of adjustable value                                                                                   106

727‑800................. Uplift under the attributable increase method.................. 106

727‑805................. Has there been a disaggregated attributable increase?..... 109

727‑810................. Scaling‑down formula.................................................... 110

Consequences of the method for various kinds of assets                              111

727‑830................. CGT assets..................................................................... 111

727‑835................. Trading stock.................................................................. 112

727‑840................. Revenue assets................................................................ 114

Subdivision 727‑K—Reduction of loss on equity or loan interests realised before the IVS time               115

727‑850................. Consequences of scheme under this Subdivision........... 115

727‑855................. Presumed indirect value shift.......................................... 117

727‑860................. Conditions about the prospective gaining entity.............. 118

727‑865................. How other provisions of this Division apply to support this Subdivision               119

727‑870................. Effect of CGT roll‑over.................................................. 121

727‑875................. Application to CGT asset that is also trading stock or revenue asset        122

Subdivision 727‑L—Indirect value shift resulting from a direct value shift  122

727‑905................. How this Subdivision affects the rest of this Division.... 122

727‑910................. Treatment of value shifted under the direct value shift.... 123

Chapter 4—International aspects of income tax                      126

Part 4‑5—General                                                                                                              126

Division 768—Foreign non‑assessable income and gains                      126

Subdivision 768‑A—Returns on foreign investment                                     126

Guide to Subdivision 768‑A                                                                                 126

768‑1..................... What this Subdivision is about....................................... 126

Foreign equity distributions on participation interests                                127

768‑5..................... Foreign equity distributions on participation interests..... 127

768‑7..................... Foreign equity distributions entitled to a foreign income tax deduction    128

768‑10................... Meaning of foreign equity distribution........................... 129

768‑15................... Participation test—minimum 10% participation.............. 129

Subdivision 768‑B—Some items of income that are exempt from income tax               129

768‑100................. Foreign government officials in Australia....................... 130

768‑105................. Compensation arising out of Second World War............ 132

768‑110................. Foreign residents deriving income from certain activities in Australia’s exclusive economic zone or on or above Australia’s continental shelf................................. 133

Subdivision 768‑G—Reduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies                                  134

Guide to Subdivision 768‑G                                                                                 134

768‑500................. What this Subdivision is about....................................... 134

Operative provisions                                                                                             135

768‑505................. Reducing a capital gain or loss from certain CGT events in relation to certain voting interests                135

Active foreign business asset percentage                                                          136

768‑510................. Active foreign business asset percentage........................ 136

768‑515................. Choices to apply market value method or book value method  137

768‑520................. Market value method—choice made under subsection 768‑515(1)          138

768‑525................. Book value method—choice made under subsection 768‑515(2)            140

768‑530................. Active foreign business asset percentage—modifications for foreign life insurance companies and foreign general insurance companies........................................... 144

768‑533................. Foreign company that is a FIF using CFC calculation method—treatment as AFI subsidiary under this Subdivision..................................................................... 147

768‑535................. Modified rules for foreign wholly‑owned groups.......... 147

Types of assets of a foreign company                                                               149

768‑540................. Active foreign business assets of a foreign company..... 149

768‑545................. Assets included in the total assets of a foreign company 151

Voting percentages in a company                                                                      153

768‑550................. Direct voting percentage in a company........................... 153

768‑555................. Indirect voting percentage in a company......................... 153

768‑560................. Total voting percentage in a company............................. 154

Subdivision 768‑R—Temporary residents                                                      154

Guide to Subdivision 768‑R                                                                                 154

768‑900................. What this Subdivision is about....................................... 154

Operative provisions                                                                                             155

768‑905................. Objects............................................................................ 155

768‑910................. Income derived by temporary resident............................ 155

768‑915................. Certain capital gains and capital losses of temporary resident to be disregarded      157

768‑950................. Individual becoming an Australian resident.................... 157

768‑955................. Temporary resident who ceases to be temporary resident but remains an Australian resident  157

768‑960................. Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules           158

768‑970................. Modification of rules for accruals system of taxation of certain non‑resident trust estates       158

768‑980................. Interest paid by temporary resident................................. 158

Division 770—Foreign income tax offsets                                                     160

Guide to Division 770                                                                                            160

770‑1..................... What this Division is about............................................. 160

770‑5..................... Object............................................................................. 160

Subdivision 770‑A—Entitlement rules for foreign income tax offsets     161

Basic entitlement rule for foreign income tax offset                                    161

770‑10................... Entitlement to foreign income tax offset.......................... 161

770‑15................... Meaning of foreign income tax, credit absorption tax and unitary tax     163

Subdivision 770‑B—Amount of foreign income tax offset                          164

Guide to Subdivision 770‑B                                                                                 164

770‑65................... What this Subdivision is about....................................... 164

Operative provisions                                                                                             165

770‑70................... Amount of foreign income tax offset.............................. 165

770‑75................... Foreign income tax offset limit....................................... 165

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................................................................ 167

Subdivision 770‑C—Rules about payment of foreign income tax             167

Rules about when foreign tax is paid                                                                 167

770‑130................. When foreign income tax is considered paid—taxes paid by someone else             167

770‑135................. Foreign income tax paid by CFCs on attributed amounts 168

Rules about when foreign tax is considered not paid                                    170

770‑140................. When foreign income tax is considered not paid—anti‑avoidance rule    170

Subdivision 770‑D—Administration                                                                 171

770‑190................. Amendment of assessments............................................ 171

Division 775—Foreign currency gains and losses                                     172

Guide to Division 775                                                                                            172

775‑5..................... What this Division is about............................................. 172

Subdivision 775‑A—Objects of this Division                                                   173

775‑10................... Objects of this Division.................................................. 173

Subdivision 775‑B—Realisation of forex gains or losses                            174

775‑15................... Forex realisation gains are assessable............................. 175

775‑20................... Certain forex realisation gains are exempt income.......... 177

775‑25................... Certain forex realisation gains are non‑assessable non‑exempt income    177

775‑27................... Certain forex realisation gains are non‑assessable non‑exempt income    177

775‑30................... Forex realisation losses are deductible............................ 177

775‑35................... Certain forex realisation losses are disregarded.............. 179

775‑40................... Disposal of foreign currency or right to receive foreign currency—forex realisation event 1  179

775‑45................... Ceasing to have a right to receive foreign currency—forex realisation event 2        181

775‑50................... Ceasing to have an obligation to receive foreign currency—forex realisation event 3              185

775‑55................... Ceasing to have an obligation to pay foreign currency—forex realisation event 4   187

775‑60................... Ceasing to have a right to pay foreign currency—forex realisation event 5              193

775‑65................... Only one forex realisation event to be counted............... 195

775‑70................... Tax consequences of certain short‑term forex realisation gains                197

775‑75................... Tax consequences of certain short‑term forex realisation losses              202

775‑80................... You may choose not to have sections 775‑70 and 775‑75 apply to you  205

775‑85................... Forex cost base of a right to receive foreign currency..... 206

775‑90................... Forex entitlement base of a right to pay foreign currency 206

775‑95................... Proceeds of assuming an obligation to pay foreign currency 207

775‑100................. Net costs of assuming an obligation to receive foreign currency              208

775‑105................. Currency exchange rate effect......................................... 209

775‑110................. Constructive receipts and payments................................ 209

775‑115................. Economic set‑off to be treated as legal set‑off................. 210

775‑120................. Non‑arm’s length transactions........................................ 210

775‑125................. CGT consequences of the acquisition of foreign currency as a result of forex realisation event 2 or 3    211

775‑130................. Certain deductions not allowable.................................... 211

775‑135................. Right to receive or pay foreign currency......................... 211

775‑140................. Obligation to pay or receive foreign currency................. 212

775‑145................. Application of forex realisation events to currency and fungible rights and obligations           213

775‑150................. Transitional election........................................................ 213

775‑155................. Applicable commencement date...................................... 214

775‑160................. Exception—event happens before the applicable commencement date     214

775‑165................. Exception—currency or right acquired, or obligation incurred, before the applicable commencement date........................................................................................ 214

775‑168................. Exception—disposal or redemption of traditional securities 217

775‑175................. Application to things happening before commencement. 217

Subdivision 775‑C—Roll‑over relief for facility agreements                    217

Guide to Subdivision 775‑C                                                                                 217

775‑180................. What this Subdivision is about....................................... 217

Operative provisions                                                                                             219

775‑185................. What is a facility agreement?.......................................... 219

775‑190................. What is an eligible security?............................................ 219

775‑195................. You may choose roll‑over relief for a facility agreement 219

775‑200................. Forex realisation event 4 does not apply......................... 221

775‑205................. What is a roll‑over?........................................................ 221

775‑210................. Notional loan.................................................................. 222

775‑215................. Discharge of obligation to pay the principal amount of a notional loan under a facility agreement—forex realisation event 6........................................................... 226

775‑220................. Material variation of a facility agreement—forex realisation event 7        228

Subdivision 775‑D—Qualifying forex accounts that pass the limited balance test        231

Guide to Subdivision 775‑D                                                                                 231

775‑225................. What this Subdivision is about....................................... 231

Operative provisions                                                                                             232

775‑230................. Election to have this Subdivision apply to one or more qualifying forex accounts   232

775‑235................. Variation of election........................................................ 233

775‑240................. Withdrawal of election.................................................... 233

775‑245................. When does a qualifying forex account pass the limited balance test?      233

775‑250................. Tax consequences of passing the limited balance test..... 238

775‑255................. Notional realisation when qualifying forex account starts to pass the limited balance test        238

775‑260................. Modification of tax recognition time............................... 239

Subdivision 775‑E—Retranslation for qualifying forex accounts            240

Guide to Subdivision 775‑E                                                                                 240

775‑265................. What this Subdivision is about....................................... 240

Operative provisions                                                                                             241

775‑270................. You may choose retranslation for a qualifying forex account  241

775‑275................. Withdrawal of choice...................................................... 242

775‑280................. Tax consequences of choosing retranslation for an account 242

775‑285................. Retranslation of gains and losses relating to a qualifying forex account—forex realisation event 8         243

Subdivision 775‑F—Retranslation under foreign exchange retranslation election under Subdivision 230‑D       245

Guide to Subdivision 775‑F                                                                                  245

775‑290................. What this Subdivision is about....................................... 245

775‑295................. When this Subdivision applies........................................ 246

775‑300................. Tax consequences of choosing retranslation for arrangement  247

775‑305................. Retranslation of gains and losses relating to arrangement to which foreign exchange retranslation election applies—forex realisation event 9................................... 248

775‑310................. When election ceases to apply to arrangement................ 249

775‑315................. Balancing adjustment when election ceases to apply to arrangement        249

Division 802—Foreign residents’ income with an underlying foreign source    251

Subdivision 802‑A—Conduit foreign income                                                 251

Guide to Subdivision 802‑A                                                                                 251

802‑5..................... What this Subdivision is about....................................... 251

Operative provisions                                                                                             252

802‑10................... Objects............................................................................ 252

802‑15................... Foreign residents—exempting CFI from Australian tax. 252

802‑17................... Trust estates and foreign resident beneficiaries—exempting CFI from Australian tax             253

802‑20................... Distributions between Australian corporate tax entities—non‑assessable non‑exempt income                254

802‑25................... Conduit foreign income of an Australian corporate tax entity  256

802‑30................... Foreign source income amounts..................................... 256

802‑35................... Capital gains and losses.................................................. 258

802‑40................... Effect of foreign income tax offset on conduit foreign income 258

802‑45................... Previous declarations of conduit foreign income............ 259

802‑50................... Receipt of an unfranked distribution from another Australian corporate tax entity   259

802‑55................... No double benefits.......................................................... 259

802‑60................... No streaming of distributions......................................... 260

Division 815—Cross‑border transfer pricing                                             262

Subdivision 815‑A—Treaty‑equivalent cross‑border transfer pricing rules  262

Guide to Subdivision 815‑A                                                                                 262

815‑1..................... What this Subdivision is about....................................... 262

Operative provisions                                                                                             263

815‑5..................... Object............................................................................. 263

815‑10................... Transfer pricing benefit may be negated......................... 263

815‑15................... When an entity gets a transfer pricing benefit................. 264

815‑20................... Cross‑border transfer pricing guidance........................... 266

815‑25................... Modified transfer pricing benefit for thin capitalisation.. 267

815‑30................... Determinations negating transfer pricing benefit............. 267

815‑35................... Consequential adjustments.............................................. 268

815‑40................... No double taxation.......................................................... 271

Subdivision 815‑B—Arm’s length principle for cross‑border conditions between entities         271

Guide to Subdivision 815‑B                                                                                 271

815‑101................. What this Subdivision is about....................................... 271

Operative provisions                                                                                             272

815‑105................. Object............................................................................. 272

815‑110................. Operation of Subdivision................................................ 273

815‑115................. Substitution of arm’s length conditions.......................... 273

815‑120................. When an entity gets a transfer pricing benefit................. 274

815‑125................. Meaning of arm’s length conditions............................... 276

815‑130................. Relevance of actual commercial or financial relations..... 277

815‑135................. Guidance......................................................................... 278

815‑140................. Modification for thin capitalisation................................. 279

815‑145................. Consequential adjustments.............................................. 280

815‑150................. Amendment of assessments............................................ 281

Subdivision 815‑C—Arm’s length principle for permanent establishments 282

Guide to Subdivision 815‑C                                                                                 282

815‑201................. What this Subdivision is about....................................... 282

Operative provisions                                                                                             282

815‑205................. Object............................................................................. 282

815‑210................. Operation of Subdivision................................................ 283

815‑215................. Substitution of arm’s length profits................................ 283

815‑220................. When an entity gets a transfer pricing benefit................. 284

815‑225................. Meaning of arm’s length profits..................................... 284

815‑230................. Source rules for certain arm’s length profits................... 285

815‑235................. Guidance......................................................................... 285

815‑240................. Amendment of assessments............................................ 286

Subdivision 815‑D—Special rules for trusts and partnerships                   287

Guide to Subdivision 815‑D                                                                                 287

815‑301................. What this Subdivision is about....................................... 287

Operative provisions                                                                                             287

815‑305................. Special rule for trusts...................................................... 287

815‑310................. Special rules for partnerships.......................................... 287

Subdivision 815‑E—Reporting obligations for significant global entities 288

Guide to Subdivision 815‑E                                                                                 288

815‑350................. What this Subdivision is about....................................... 288

Operative provisions                                                                                             288

815‑355................. Requirement to give statements....................................... 288

815‑360................. Replacement reporting periods........................................ 290

815‑365................. Exemptions..................................................................... 290

Division 820—Thin capitalisation rules                                                          291

Guide to Division 820                                                                                            292

820‑1..................... What this Division is about............................................. 292

820‑5..................... Does this Division apply to an entity?............................ 292

820‑10................... Map of Division............................................................. 294

Subdivision 820‑A—Preliminary                                                                       295

820‑30................... Object of Division.......................................................... 296

820‑32................... Exemption for private or domestic assets and non‑debt liabilities            296

820‑35................... Application—$2 million threshold.................................. 296

820‑37................... Application—assets threshold........................................ 296

820‑39................... Exemption of certain special purpose entities.................. 299

820‑40................... Meaning of debt deduction............................................. 300

Subdivision 820‑B—Thin capitalisation rules for outward investing entities (non‑ADI)             302

Guide to Subdivision 820‑B                                                                                 302

820‑65................... What this Subdivision is about....................................... 302

Operative provisions                                                                                             303

820‑85................... Thin capitalisation rule for outward investing entities (non‑ADI)            303

820‑90................... Maximum allowable debt................................................ 306

820‑95................... Safe harbour debt amount—outward investor (general). 308

820‑100................. Safe harbour debt amount—outward investor (financial) 310

820‑105................. Arm’s length debt amount.............................................. 313

820‑110................. Worldwide gearing debt amount—outward investor that is not also an inward investment vehicle         317

820‑111................. Worldwide gearing debt amount—outward investor that is also an inward investment vehicle               319

820‑115................. Amount of debt deduction disallowed............................ 321

820‑120................. Application to part year periods...................................... 321

Subdivision 820‑C—Thin capitalisation rules for inward investing entities (non‑ADI)               324

Guide to Subdivision 820‑C                                                                                 324

820‑180................. What this Subdivision is about....................................... 324

Operative provisions                                                                                             325

820‑185................. Thin capitalisation rule for inward investing entities (non‑ADI)              325

820‑190................. Maximum allowable debt................................................ 328

820‑195................. Safe harbour debt amount—inward investment vehicle (general)            330

820‑200................. Safe harbour debt amount—inward investment vehicle (financial)          331

820‑205................. Safe harbour debt amount—inward investor (general)... 334

820‑210................. Safe harbour debt amount—inward investor (financial). 335

820‑215................. Arm’s length debt amount.............................................. 338

820‑216................. Worldwide gearing debt amount—inward investment vehicle (general)  342

820‑217................. Worldwide gearing debt amount—inward investment vehicle (financial)                343

820‑218................. Worldwide gearing debt amount—inward investor (general).. 344

820‑219................. Worldwide gearing debt amount—inward investor (financial) 345

820‑220................. Amount of debt deduction disallowed............................ 346

820‑225................. Application to part year periods...................................... 346

Subdivision 820‑D—Thin capitalisation rules for outward investing entities (ADI)     349

Guide to Subdivision 820‑D                                                                                 349

820‑295................. What this Subdivision is about....................................... 349

Operative provisions                                                                                             350

820‑300................. Thin capitalisation rule for outward investing entities (ADI) 350

820‑305................. Minimum capital amount................................................ 351

820‑310................. Safe harbour capital amount............................................ 352

820‑315................. Arm’s length capital amount........................................... 354

820‑320................. Worldwide capital amount.............................................. 356

820‑325................. Amount of debt deduction disallowed............................ 358

820‑330................. Application to part year periods...................................... 359

Subdivision 820‑E—Thin capitalisation rules for inward investing entities (ADI)       360

Guide to Subdivision 820‑E                                                                                 360

820‑390................. What this Subdivision is about....................................... 360

Operative provisions                                                                                             361

820‑395................. Thin capitalisation rule for inward investing entities (ADI) 361

820‑400................. Minimum capital amount................................................ 362

820‑405................. Safe harbour capital amount............................................ 363

820‑410................. Arm’s length capital amount........................................... 363

820‑415................. Amount of debt deduction disallowed............................ 366

820‑420................. Application to part year periods...................................... 366

Subdivision 820‑EA—Some financial entities may choose to be treated as ADIs          368

820‑430................. When choice can be made, and what effect it has............ 368

820‑435................. Conditions...................................................................... 370

820‑440................. Revocation of choice....................................................... 372

820‑445................. How this Subdivision interacts with Subdivision 820‑FA 372

Subdivision 820‑FA—How the thin capitalisation rules apply to consolidated groups and MEC groups               373

Guide to Subdivision 820‑FA                                                                               373

820‑579................. What this Subdivision is about....................................... 373

Operative provisions                                                                                             373

820‑581................. How this Division applies to head company for income year in which group comes into existence or ceases to exist................................................................................ 373

820‑583................. Classification of head company...................................... 374

820‑584................. Exempt special purpose entities treated as not being member of group    377

820‑585................. Exemption for consolidated group headed by foreign‑controlled Australian ADI or its holding company........................................................................................ 377

820‑587................. Additional application of Subdivision 820‑D to MEC group that includes foreign‑controlled Australian ADI........................................................................................ 378

820‑588................. Choice to treat specialist credit card institutions as being financial entities and not ADIs        379

820‑589................. How Subdivision 820‑D applies to a MEC group.......... 380

Subdivision 820‑FB—Grouping branches of foreign banks and foreign financial entities with a consolidated group, MEC group or single Australian resident company        381

Guide to Subdivision 820‑FB                                                                               381

820‑595................. What this Subdivision is about....................................... 381

Choice to group with branches of foreign banks and foreign financial entities             382

820‑597................. Choice by head company of consolidated group or MEC group              382

820‑599................. Choice by Australian resident company outside consolidatable group and MEC group          383

Effect of choice                                                                                                       384

820‑601................. Application..................................................................... 384

820‑603................. General........................................................................... 384

820‑605................. Effect on establishment entity if certain debt deductions disallowed        386

820‑607................. Effect on test periods under this Division....................... 387

820‑609................. Effect on classification of head company or single company 388

820‑610................. Choice not to be outward investing entity (ADI) or inward investing entity (ADI) 390

820‑611................. Values to be based on what would be in consolidated accounts for group               391

820‑613................. How Subdivision 820‑D applies.................................... 391

820‑615................. How Subdivision 820‑E applies..................................... 393

Subdivision 820‑G—Calculating the average values                                    394

Guide to Subdivision 820‑G                                                                                 394

820‑625................. What this Subdivision is about....................................... 394

How to calculate the average values                                                                 395

820‑630................. Methods of calculating average values............................ 395

820‑635................. The opening and closing balances method...................... 396

820‑640................. The 3 measurement days method.................................... 397

820‑645................. The frequent measurement method................................. 398

Special rules about values and valuation                                                         401

820‑675................. Amount to be expressed in Australian currency............. 401

820‑680................. Valuation of assets, liabilities and equity capital............. 401

820‑682................. Recognition of assets and liabilities—modifying application of accounting standards             404

820‑683................. Recognition of internally generated intangible items—modifying application of accounting standards    405

820‑684................. Valuation of intangible assets if no active market—modifying application of accounting standards        407

820‑685................. Valuation of debt capital................................................. 408

820‑690................. Commissioner’s power................................................... 408

Subdivision 820‑H—Control of entities                                                            409

Guide to Subdivision 820‑H                                                                                 409

820‑740................. What this Subdivision is about....................................... 409

Australian controller of a foreign entity                                                          410

820‑745................. What is an Australian controlled foreign entity?............. 410

820‑750................. What is an Australian controller of a controlled foreign company?          410

820‑755................. What is an Australian controller of a controlled foreign trust? 411

820‑760................. What is an Australian controller of a controlled foreign corporate limited partnership?           411

Foreign controlled Australian entity                                                                 412

820‑780................. What is a foreign controlled Australian entity?............... 412

820‑785................. What is a foreign controlled Australian company?.......... 412

820‑790................. What is a foreign controlled Australian trust?................. 414

820‑795................. What is a foreign controlled Australian partnership?...... 416

Thin capitalisation control interest                                                                   417

820‑815................. General rule about thin capitalisation control interest in a company, trust or partnership         417

820‑820................. Special rules about calculating TC control interest held by an entity        418

820‑825................. Special rules about calculating TC control interests held by a group of entities        419

820‑830................. Special rules about determining percentage of TC control interest           420

820‑835................. Commissioner’s power................................................... 421

TC direct control interest, TC indirect control interest and TC control tracing interest             421

820‑855................. TC direct control interest in a company........................... 421

820‑860................. TC direct control interest in a trust.................................. 422

820‑865................. TC direct control interest in a partnership....................... 423

820‑870................. TC indirect control interest in a company, trust or partnership 424

820‑875................. TC control tracing interest in a company, trust or partnership  427

Subdivision 820‑HA—Controlled foreign entity debt and controlled foreign entity equity       428

Guide to Subdivision 820‑HA                                                                              428

820‑880................. What this Subdivision is about....................................... 428

820‑881................. Application..................................................................... 428

820‑885................. What is controlled foreign entity debt?............................ 428

820‑890................. What is controlled foreign entity equity?......................... 429

Subdivision 820‑I—Associate entities                                                               430

Guide to Subdivision 820‑I                                                                                   430

820‑900................. What this Subdivision is about....................................... 430

820‑905................. Associate entity............................................................... 430

820‑910................. Associate entity debt....................................................... 435

820‑915................. Associate entity equity.................................................... 437

820‑920................. Associate entity excess amount....................................... 438

Subdivision 820‑J—Equity interest in a trust or partnership                     443

Guide to Subdivision 820‑J                                                                                  443

820‑925................. What this Subdivision is about....................................... 443

820‑930................. Equity interest in a trust or partnership........................... 443

Subdivision 820‑JA—Worldwide debt and equity concepts                        446

Guide to Subdivision 820‑JA                                                                               446

820‑931................. What this Subdivision is about....................................... 446

Operative provisions                                                                                             447

820‑932................. Worldwide debt and worldwide equity........................... 447

820‑933................. Statement worldwide debt, statement worldwide equity and statement worldwide assets        448

820‑935................. Meaning of audited consolidated financial statements... 449

Subdivision 820‑K—Zero‑capital amount                                                       451

Guide to Subdivision 820‑K                                                                                 451

820‑940................. What this Subdivision is about....................................... 451

820‑942................. How to work out the zero‑capital amount....................... 451

Subdivision 820‑KA—Cost‑free debt capital and excluded equity interests 455

Guide to Subdivision 820‑KA                                                                              455

820‑945................. What this Subdivision is about....................................... 455

820‑946................. Cost‑free debt capital and excluded equity interest......... 456

Subdivision 820‑L—Record keeping requirements                                       458

Guide to Subdivision 820‑L                                                                                 458

820‑950................. What this Subdivision is about....................................... 458

Records about Australian permanent establishments                                   459

820‑960................. Records about Australian permanent establishments...... 459

820‑965................. Review of Commissioner’s decision.............................. 462

Records about arm’s length amounts                                                                463

820‑980................. Records about arm’s length debt amount and arm’s length capital amount              463

Records about asset revaluations                                                                       463

820‑985................. Methodology of revaluation and independence of valuer 463

Offences committed by certain entities                                                             464

820‑990................. Offences—treatment of partnerships.............................. 464

820‑995................. Offences—treatment of unincorporated companies........ 466

Division 830—Foreign hybrids                                                                            468

Guide to Division 830                                                                                            468

830‑1..................... What this Division is about............................................. 468

Subdivision 830‑A—Meaning of “foreign hybrid”                                       468

830‑5..................... Foreign hybrid................................................................ 469

830‑10................... Foreign hybrid limited partnership.................................. 469

830‑15................... Foreign hybrid company................................................. 470

Subdivision 830‑B—Extension of normal partnership provisions to foreign hybrid companies              473

830‑20................... Treatment of company as a partnership........................... 473

830‑25................... Partners are the shareholders in the company................. 474

830‑30................... Individual interest of a partner in net income etc. equals percentage of notional distribution of company’s profits............................................................................. 474

830‑35................... Partner’s interest in assets............................................... 474

830‑40................... Control and disposal of share in partnership income...... 474

Subdivision 830‑C—Special rules applicable while an entity is a foreign hybrid         475

830‑45................... Partner’s revenue and net capital losses from foreign hybrid not to exceed partner’s loss exposure amount........................................................................................ 475

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.................. 476

830‑55................... Meaning of foreign hybrid net capital loss amount........ 478

830‑60................... Meaning of loss exposure amount.................................. 478

830‑65................... Meaning of outstanding foreign hybrid revenue loss amount  480

830‑70................... Meaning of outstanding foreign hybrid net capital loss amount              481

830‑75................... Extended meaning of subject to foreign tax.................... 481

Subdivision 830‑D—Special rules applicable when an entity becomes or ceases to be a foreign hybrid 484

830‑80................... Setting the tax cost of partners’ interests in the assets of an entity that becomes a foreign hybrid            484

830‑85................... Setting the tax cost of assets of an entity when it ceases to be a foreign hybrid       485

830‑90................... What the expression tax cost is set means....................... 485

830‑95................... What the expression tax cost setting amount means....... 487

830‑100................. What the expression tax cost means................................ 490

830‑105................. What the expression asset‑based income tax regime means 491

830‑110................. No disposal of assets etc. on entity becoming or ceasing to be a foreign hybrid      491

830‑115................. Tax losses cannot be transferred to a foreign hybrid....... 492

830‑120................. End of CFC’s last statutory accounting period............... 492

830‑125................. How long interest in asset, or asset, held........................ 493

Division 832—Hybrid mismatch rules                                                             494

Guide to Division 832                                                                                            494

832‑1..................... What this Division is about............................................. 494

Subdivision 832‑A—Preliminary                                                                       495

Guide to Subdivision 832‑A                                                                                 495

832‑5..................... What this Subdivision is about....................................... 495

Operative provisions                                                                                             495

832‑10................... Entitlement to receive payment........................................ 495

832‑15................... Entitlement to receive non‑cash benefits......................... 496

832‑20................... Losses that arise from payments or parts of payments.... 496

832‑25................... Recipients and payers of a payment................................ 497

832‑30................... Tax provisions to be disregarded in identifying payments and income or profits     498

832‑35................... Single entity rule otherwise not disregarded................... 498

832‑40................... Schemes outside Australia.............................................. 498

832‑45................... Relationship between this Division and other charging provisions in this Act         499

832‑50................... Relationship between this Division and Division 820.... 499

832‑55................... Division does not affect foreign residence rules............. 499

832‑60................... Valuation of trading stock affected by hybrid mismatch rules  500

Subdivision 832‑B—Concepts relating to mismatches                                 500

Guide to Subdivision 832‑B                                                                                 500

832‑100................. What this Subdivision is about....................................... 500

Operative provisions                                                                                             501

832‑105................. When a payment gives rise to a deduction/non‑inclusion mismatch         501

832‑110................. When a payment gives rise to a deduction/deduction mismatch               502

832‑115................. Disregard effect of Division in determining deductions.. 504

832‑120................. Meaning of foreign income tax deduction....................... 504

832‑125................. Meaning of subject to Australian income tax.................. 505

832‑130................. Meaning of subject to foreign income tax....................... 505

832‑135................. Safe harbour for translation rates.................................... 507

Subdivision 832‑C—Hybrid financial instrument mismatch                      508

Guide to Subdivision 832‑C                                                                                 508

832‑175................. What this Subdivision is about....................................... 508

Operative provisions                                                                                             509

832‑180................. Deduction not allowable—Australian primary response. 509

832‑185................. Inclusion in assessable income—Australian secondary response            510

832‑190................. Exception where entity not a party to the structured arrangement             511

832‑195................. When a hybrid financial instrument mismatch is an offshore hybrid mismatch        511

832‑200................. When a payment gives rise to a hybrid financial instrument mismatch     511

832‑205................. Meaning of Division 832 control group......................... 513

832‑210................. Meaning of structured arrangement.............................. 513

832‑215................. Hybrid mismatch............................................................ 514

832‑220................. Hybrid requirement—payments under financial instruments 515

832‑225................. Hybrid requirement—payments under transfers of certain financial instruments     516

832‑230................. Hybrid mismatch—integrity rule for substitute payments 516

832‑235................. Extended operation of this Subdivision in relation to concessional foreign taxes     517

832‑240................. Adjustment if hybrid financial instrument payment is income in a later year            518

Subdivision 832‑D—Hybrid payer mismatch                                                 519

Guide to Subdivision 832‑D                                                                                 519

832‑280................. What this Subdivision is about....................................... 519

Operative provisions                                                                                             520

832‑285................. Deduction not allowable—Australian primary response. 520

832‑290................. Inclusion in assessable income—Australian secondary response            520

832‑295................. Exception where entity not a party to the structured arrangement             521

832‑300................. When a hybrid payer mismatch is an offshore hybrid mismatch              522

832‑305................. When a payment gives rise to a hybrid payer mismatch.. 522

832‑310................. Hybrid mismatch............................................................ 523

832‑315................. Hybrid requirement—assume payment was made to same recipient but by an ungrouped payer             523

832‑320................. Hybrid payer................................................................... 525

832‑325................. Meaning of liable entity.................................................. 526

832‑330................. Neutralising amount........................................................ 528

832‑335................. Adjustment if hybrid payer has dual inclusion income in a later year       529

Subdivision 832‑E—Reverse hybrid mismatch                                              530

Guide to Subdivision 832‑E                                                                                 530

832‑375................. What this Subdivision is about....................................... 530

Operative provisions                                                                                             531

832‑380................. Deduction not allowable—Australian primary response. 531

832‑385................. Exception where entity not a party to the structured arrangement             532

832‑390................. When a reverse hybrid mismatch is an offshore hybrid mismatch           532

832‑395................. When a payment gives rise to a reverse hybrid mismatch 532

832‑400................. Hybrid mismatch............................................................ 533

832‑405................. Hybrid requirement—assume payment was made to an investor             534

832‑410................. Reverse hybrid................................................................ 535

Subdivision 832‑F—Branch hybrid mismatch                                               536

Guide to Subdivision 832‑F                                                                                  536

832‑450................. What this Subdivision is about....................................... 536

Operative provisions                                                                                             537

832‑455................. Deduction not allowable................................................. 537

832‑460................. Exception where entity not a party to the structured arrangement             538

832‑465................. When a branch hybrid mismatch is an offshore hybrid mismatch            538

832‑470................. Branch hybrid mismatch................................................. 538

832‑475................. Hybrid mismatch............................................................ 539

832‑480................. Hybrid requirement—payment made directly or indirectly to a branch hybrid         540

832‑485................. Branch hybrid................................................................. 541

Subdivision 832‑G—Deducting hybrid mismatch                                          543

Guide to Subdivision 832‑G                                                                                 543

832‑525................. What this Subdivision is about....................................... 543

Operative provisions                                                                                             544

832‑530................. Deduction not allowable................................................. 544

832‑535................. Additional requirements for secondary response............ 545

832‑540................. When a deducting hybrid mismatch is an offshore hybrid mismatch       546

832‑545................. When an amount gives rise to a deducting hybrid mismatch 546

832‑550................. Deducting hybrid............................................................ 547

832‑555................. Identifying a secondary response country....................... 547

832‑560................. Neutralising amount........................................................ 550

832‑565................. Adjustment if deducting hybrid has dual inclusion income in a later year                551

Subdivision 832‑H—Imported hybrid mismatch                                           552

Guide to Subdivision 832‑H                                                                                 552

832‑605................. What this Subdivision is about....................................... 552

Operative provisions                                                                                             553

832‑610................. Deduction not allowable................................................. 553

832‑615................. When a payment gives rise to an imported hybrid mismatch 553

832‑620................. Hybrid mismatch............................................................ 554

832‑625................. Meaning of importing payment...................................... 555

832‑630................. Working out the amount of the imported hybrid mismatch 557

832‑635................. Carry forward of residual offshore hybrid mismatches.. 558

Subdivision 832‑I—Dual inclusion income                                                      559

Guide to Subdivision 832‑I                                                                                   559

832‑675................. What this Subdivision is about....................................... 559

Operative provisions                                                                                             559

832‑680................. Dual inclusion income, and when an entity is eligible to apply it             559

Subdivision 832‑J—Integrity rule                                                                     562

832‑720................. What this Subdivision is about....................................... 562

Operative provisions                                                                                             563

832‑725................. Payments made to interposed foreign entity (integrity measure)—denial of deduction            563

832‑730................. Back to back arrangements, etc....................................... 566

832‑735................. Determination may specify kinds of scheme and circumstances where no denial of deduction                566

Subdivision 832‑K—Modifications for Division 230 (about taxation of financial arrangements)           567

Guide to Subdivision 832‑K                                                                                 567

832‑775................. What this Subdivision is about....................................... 567

Operative provisions                                                                                             567

832‑780................. Section 832‑20 applies to Division 230 losses............... 567

832‑785................. Adjusting Division 230 loss........................................... 567

832‑790................. Modifications relating to Division 230 gains and losses. 568

Division 840—Withholding taxes                                                                       570

Guide to Division 840                                                                                            570

840‑1..................... What this Division is about............................................. 570

Subdivision 840‑M—Managed investment trust withholding tax              571

Guide to Subdivision 840‑M                                                                                571

840‑800................. What this Subdivision is about....................................... 571

Operative provisions                                                                                             571

840‑805................. Liability for managed investment trust withholding tax.. 571

840‑810................. When managed investment trust withholding tax is payable 576

840‑815................. Certain income is non‑assessable non‑exempt income.... 577

840‑820................. Agency rules................................................................... 577

Subdivision 840‑S—Seasonal Labour Mobility Program withholding tax 578

Guide to Subdivision 840‑S                                                                                  578

840‑900................. What this Subdivision is about....................................... 578

Operative provisions                                                                                             578

840‑905................. Liability for Seasonal Labour Mobility Program withholding tax            578

840‑910................. When Seasonal Labour Mobility Program withholding tax is payable     579

840‑915................. Certain income is non‑assessable non‑exempt income.... 580

840‑920................. Overpayment of Seasonal Labour Mobility Program withholding tax     580

Division 842—Exempt Australian source income and gains of foreign residents            581

Subdivision 842‑B—Some items of Australian source income of foreign residents that are exempt from income tax                                                                                                       581

Guide to Subdivision 842‑B                                                                                 581

842‑100................. What this Subdivision is about....................................... 581

842‑105................. Amounts of Australian source ordinary income and statutory income that are exempt            581

Subdivision 842‑I—Investment manager regime                                          584

Guide to Subdivision 842‑I                                                                                   584

842‑200................. What this Subdivision is about....................................... 584

Object of this Subdivision                                                                                     585

842‑205................. Object of this Subdivision.............................................. 585

IMR concessions                                                                                                     586

842‑210................. IMR concessions apply only to foreign residents etc...... 586

842‑215................. IMR concessions............................................................ 586

842‑220................. Meaning of IMR entity.................................................... 590

842‑225................. Meaning of IMR financial arrangement......................... 590

IMR widely held entities                                                                                       590

842‑230................. Meaning of IMR widely held entity................................. 590

842‑235................. Rules for determining total participation interests for the purposes of the widely held test      591

842‑240................. Extended meaning of IMR widely held entity—temporary circumstances outside entity’s control            593

Independent Australian fund managers                                                           594

842‑245................. Meaning of independent Australian fund manager........ 594

842‑250................. Reductions in IMR concessions if independent Australian fund manager entitled to substantial share of IMR entity’s income................................................................ 594

Division 855—Capital gains and foreign residents                                   599

Guide to Division 855                                                                                            599

855‑1..................... What this Division is about............................................. 599

Subdivision 855‑A—Disregarding a capital gain or loss by foreign residents               599

855‑5..................... Objects of this Subdivision............................................. 600

855‑10................... Disregarding a capital gain or loss from CGT events..... 600

855‑15................... When an asset is taxable Australian property.................. 601

855‑16................... Meaning of permanent establishment article.................. 602

855‑20................... Taxable Australian real property..................................... 602

855‑25................... Indirect Australian real property interests....................... 602

855‑30................... Principal asset test........................................................... 603

855‑32................... Disregard market value of duplicated non‑TARP assets. 605

855‑35................... Reducing a capital gain or loss from a business asset—Australian permanent establishments 607

855‑40................... Capital gains and losses of foreign residents through fixed trusts            607

Subdivision 855‑B—Becoming an Australian resident                                609

855‑45................... Individual or company becomes an Australian resident.. 609

855‑50................... Trust becomes a resident trust......................................... 610

855‑55................... CFC becomes an Australian resident.............................. 610


Chapter 3Specialist liability rules

Part 3‑95Value shifting

Division 723Direct 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‑AReduction 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‑BReducing 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 725Direct 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‑AScope 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‑BWhat 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‑CConsequences 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‑DConsequences 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‑EConsequences 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‑FValue 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 727Indirect 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‑AScope 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‑BWhat 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‑CExclusions

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