Income tax: general value shifting regime - direct value shift involving a debt interest in a company

For the purposes of Division 725 of the Income Tax Assessment Act 1997 (ITAA 1997) , is there a pre-shift loss for a debt interest that decreases in value under a scheme if, immediately before the decrease, the market value of the debt interest was equal to its cost base and reduced cost base?

Yes. Subsection 725-210(3) of the ITAA 1997 provides that an interest has a pre-shift loss if, immediately before the decrease time, its market value was equal to , or less than, its adjustable value. As a result, there will be consequences for the adjustable value of the debt provided the other threshold conditions mentioned in Division 725 are satisfied.

The market value of a debt owed by a company is equal to its cost base and reduced cost base.

Something is done under a scheme involving interests in the company that causes a decrease in the market value of the debt and an increase in the market value of shares in the company.

Where there is a direct value shift involving interests in an entity under a scheme, and the tests in sections 725-50 and 725-70 of the ITAA 1997 are satisfied with respect to a particular individual, there may be consequences for interests that the individual holds that reduce in value because of something done under the scheme ('down interests').

For a 'down interest' that is not held as a revenue asset or held as trading stock, these consequences are worked out by referring to the tables in sections 725-245 and 725-250 of the ITAA 1997. Some of the items in the table in section 725-250 of the ITAA 1997 identify particular consequences for down interests having pre-shift losses.

Whether an interest has a pre-shift loss depends on the relationship between the market value of the interest, immediately before the decrease time when the interest decreases in value, and its adjustable value (for example, cost base). Where an interest has more than one adjustable value, the existence of a pre-shift loss is determined for each of those values. Subsection 725-210(3) of the ITAA 1997 provides that an interest has a pre-shift loss if, immediately before the decrease time, it has a market value that is equal to or less than its adjustable value.

So where a debt decreases in value under a scheme, and immediately before the decrease time its market value is equal to its cost base and reduced cost base, it has a pre-shift loss for each of those adjustable values.

As a result, if the value is shifted to another interest of the individual's or to an interest that is held by another affected owner, items 5 and 7 in the table in section 725-250 of the ITAA 1997 are applied to work out reductions for the cost base and reduced cost base of the debt. Note: Where value is shifted from a debt interest that is held as a revenue asset or as trading stock, a similar table in section 725-335 of the ITAA 1997 is applied to work out reductions for the interest's adjustable values (including adjustments to cost base and reduced cost base).