Value shifting in commercial transactions

It seems that everywhere you turn when structuring commercial transactions or when raising capital in Australia, tax issues need to be considered.  “Value shifting” is one such issue.

What is value shifting?

Value shifting refers to an arrangement where value shifts between assets and when the dealings between two (2) parties are not at market value.  The result must be a reduction in value of one (1) asset and an increase in the value of another.  Value shifting can be of two (2) types: direct value shifting (DVS) or indirect value shifting (IVS), defined by sections 725.145 and 727.5 respectively of the Income Tax Assessment Act 1997(Cth) (ITAA). The value shifting provisions in Divisions 723, 725 and 727 of the ITAA apply to:

• shares or other interests in companies;
• units or other interests in trusts;
• loan interests in companies and trusts; and
• interests held as trading stock and on revenue account.

The ATO has replaced the various rules contained in Divisions 138, 139, and 140 of the ITAA with the ‘general value shifting regime’ (GVSR).  This covers three (3) categories of value shifting:

• DVS through creation of rights over non-depreciating assets;
• DVS or equity of loan interests in a single company or trust; and
• IVS or equity or loan interests in companies not dealing with each other at arm’s length.

Direct value shifts in relation to equities

Section 725.145 of the ITAA provides that a DVS occurs when:

• there is a decrease in the market value of one or more equity or loan interests in an entity;
• the decrease is attributable to one or more interests issued further to a scheme; and
• the decrease in market value can be attributed to one or more things done under a scheme.

Exceptions to indirect value shifting rules

There are various exclusions to the IVS rules, including:

• Entity interest DVS rules (applies where total value are less than $150,000);
• Created rights DVS rules (where the market value of the right granted exceeds the proceeds by less than $50,000); or
• IVS rules (total value shifted is equal to or less than $50,000).

Safe harbour exceptions

There are also several safe harbours to ensure that GVSR does not apply to assets transferred at cost or value shifts relating to services.  Safe harbours in relation to IVS include:

• small business entities; or
• entities that that satisfies the ‘maximum net asset value test’;

Generally, value shifts do not occur where the transaction is completed at market value.

How can you comply with the value shifting rules?

According to the ATO, you can ensure that the GVSR does not apply by ensuring that:

(a)        equity and loan interests in entities are issued at market value;

(b)        rights over any underlying asset are granted for full market value consideration, and

(c)        entities provide economic benefits to each other at market value or otherwise deal at arm’s length.

In summary, care needs to be taken when structuring transactions to ensure compliance with the GVSR.

Links and further references

Guidance

Guide to general value shifting, ATO

Guide to the general value shifting regime, ATO (PDF version)

Legislation

Income Tax Assessment Act 1997 (Cth)

Further information about transaction structuring

If you need advice on transaction structuring or the value shifting regime as it applies to your circumstances, please contact us for an obligation free and confidential discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

---

Related insights about transaction structuring