New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 (90 of 2002)

Schedule 14   Loss integrity rules: global method of valuing assets

Part 1   Income Tax Assessment Act 1997

6   Section 165-115G

Repeal the section, substitute:

165-115GA What this Subdivision is about

This Subdivision prevents multiple recognition of a company's losses when significant equity and debt interests that entities (not individuals) have in the company are realised.

165-115GB When adjustments must be made

(1) The operation of this Subdivision is triggered at an alteration time, which is when:

(a) an alteration takes place in the ownership or control of the company; or

(b) the liquidator of the company declares that shares in the company are worthless (CGT event G3).

(2) An alteration time is the trigger for making reductions and other adjustments to the reduced cost base of significant equity and debt interests in the company that are owned by an entity (not an individual) that, alone or with its associates, has a controlling stake in the company and either:

(a) has a direct or indirect equity interest of at least 10% in the company; or

(b) is owed a debt of at least $10,000 by the company or by another entity that has a significant equity or debt interest in the company.

Deductions that relate to such interests held as trading stock or otherwise on revenue account are also reduced.

(3) Adjustments may also be made when such an entity's interests in the company are partly realised within 12 months before an alteration time or if, under an arrangement, such interests are realised partly within that period or at the alteration time and partly at an earlier time.

(4) However, entities in which there are no interests in respect of which the company's losses have been, or can be, duplicated are not affected by this Subdivision.

165-115GC How adjustments are calculated

(1) Adjustments are based on the overall loss of the company. This comprises its realised losses and unrealised losses on CGT assets.

(2) Special rules, directed at saving compliance costs, apply to determine whether unrealised losses have to be counted at an alteration time and, if so, how to work them out.

(3) The company may not have to calculate its unrealised losses if the alteration time is not also a changeover time for the purposes of Subdivision 165-CC (about change of ownership or control of a company that has an unrealised net loss), and the company has no realised losses.

(4) The company does not have to count unrealised losses at an alteration time if (together with certain related entities) it has a net asset value of not more than $5,000,000 under the test in section 152-15 (for small business CGT relief).

(5) In working out its unrealised losses on CGT assets, the company can choose to work out the market value of each of its assets individually, or of all of its assets together.

(6) If the company works out the market value of each of its assets individually, unrealised losses on assets acquired for less than $10,000 do not have to be calculated at any time.

(7) Amounts (whether realised or unrealised) counted at a previous alteration time are not counted again at a later alteration time. (This does not apply to unrealised losses worked out by reference to the market value of all the company's assets together.)

(8) However, if unrealised amounts arenot counted at a previous alteration time (for example, because of the $10,000 or small business entity exclusions) and are not required to be taken into account in adjustments made at that time, they may be counted at a later time as part of a realised loss.

(9) A formula is provided for making adjustments in straightforward cases if applying the formula gives a reasonable result having regard to the object of the Subdivision. Otherwise, reasonable adjustments must be made having regard to a number of stated factors.

(10) To help entities to make the adjustments, any entity that, in its own right, has a controlling stake in the company is required to provide a written notice to its associates setting out relevant information. In limited circumstances, the company itself may have to provide a written notice to entities that, to its knowledge, have a significant equity or debt interest in it.