(upbeat music)
-: Henry has the controlling interest in Company H
which has two classes of shares of equal market value,
A-Class ordinary shares acquired as pre-CGT assets,
and B-Class ordinary shares acquired as post-CGT assets.
Henry, as the controller, causes Company H
to vary the rights attached to the B-Class shares
such that they no longer have any voting rights
and only limited rights to participate
in dividends and capital returns.
This scheme decreases the value
of the post-CGT B-Class shares,
and increases the value of the pre-CGT A-Class shares.
In other words, Henry has caused a value shift
from the post-CGT B-Class shares
referred to as a down interest
to the pre-CGT A-Class shares
referred to as an up interest.
In the absence of any anti-avoidance
provision or adjustment,
Henry could sell his pre-CGT A-Class shares
completely free from CGT,
and enjoy a reduced capital gain
or perhaps a capital loss
on the post-CGT B-Class shares.
However, under the value shifting provisions,
it is likely that disposal treatment applies
given that Henry has shifted value
from a post-CGT asset to a pre-CGT asset.
The cost base and reduced cost base
of Henry's A-Class shares would increase
based on the value shifted.
As there was no pre-shift gain for the down interest,
the cost base and reduced cost base
of Henry's B-Class shares would decrease
in line with the proportion of market value
of the down interest shifted.
Jenny owns all the shares in Company J,
and wishes to introduce her son, Jason, as an equity holder.
A simple direct sale or gifting of shares by Jenny to Jason
would trigger CGT in Jenny's shares.
Instead, Jenny causes Company J to issue
new shares to Jason at less than market value.
This effectively shifts value
from Jenny's shares, a down interest,
into Jason's newly issued shares, an up interest.
In the absence of any anti-avoidance
provision or adjustment,
Jenny would avoid CGT
on the shifting of unrealized capital gains,
and enjoy a reduced capital gain
or perhaps a capital loss
on the future disposal of her shares.
However, under the value shifting provisions,
it is likely that disposal treatment applies
given that the value of interests
has shifted between separate owners.
The cost base and reduced cost base of Jenny's shares
would decrease in line with the proportion of market value
of the down interest shifted.
Further, as Jenny has a pre-shift gain
for the down interest,
CGT event K8 will occur,
and Jenny will be liable for capital gains
in respect of the entity interest direct value shift.
For Jason, the cost base and reduced cost base of his shares
would increase by the value shifted.
The purpose of the value shifting regime
is to counteract arrangements
that shift value out of some assets into others,
causing a distortion between market values and tax values.
The shifting of value could artificially
create a loss or reduce a gain in one interest,
and create or defer a gain in another interest.
Division 725 considers direct value shifting
between equity or debt interests in a company or a trust.
This could be by varying rights between interests
such as different classes of shares,
or issuing new interests at a discount to market value
such as issuing new shares for nominal value.
Only affected owners are impacted
by the value shifting regime.
These include controllers or their associates
or any active participant in a scheme
involving a closely held entity.
The consequences for affected owners
depend on whether disposal treatment
or rollover treatment is triggered
which in turn depends on the type of asset,
the type of interest, and the affected owners.
In general for the holder of an up interest,
there is an increase in tax values
reflecting the value shifted in
such as an increase in cost base.
For the holder of a down interest,
there is a decrease in tax values
based on the proportion of market value shifted out
such as a reduction in cost base.
CGT event K8 may also be triggered
where there is a pre-shift gain
in the down interest under disposal treatment.
However, the direct value shifting provisions
relating to entity interests are ignored
where the de minimis exception applies,
being where the direct value shift
in down interests is less than $150,000,
or the reversal exception applies,
being where under a scheme,
any value shift is likely to be reversed within four years.
That said, the Commissioner still reserves the right
to apply the general anti-avoidance provisions
in Part IVA of the ITAA36
in situations where the direct value
shifting regime is not triggered.
To recap, Division 725 considers
direct value shifting schemes
for equity or loan interests in companies and trusts.
The provisions aim to protect against artificial
shifting of value from one interest to another
whether through varying rights of the interests
or issuing of new shares at a discount.
In such cases adjustments will be made
to the tax values of the interests,
and CGT event K8 may also be triggered.