Avoiding Value Shifting Rules

Value shifting occurs where transactions are structured to shift value out of assets so that the assets market values and tax values are distorted. The general value shifting regime (GVSR) was introduced in 2002 to prevent value shifting occurring whereby the tax values of assets were reduced below the assets market values so less capital gains are made (and consequently less tax was paid).

The value shifting rules apply where new shares are issued in a company at a discount from their market value and they result in the value (or worth) of the existing shareholders shares decreasing by more than $150,000.

When this occurs, CGT event K8 occurs. The existing shareholders make a capital gain equal to the value that their shares decreased in value due to the new discounted share issue.

So, to avoid the value shifting rules the number of discounted shares issued to the new shareholder should be limited to the amount that causes the existing shareholders’ shares to decrease by a maximum value of $149,999.

So, for example, a husband owning 100 shares in a company valued at $300,000 could issue 99 shares to the wife for nil consideration without triggering the value shifting rules.

A taxpayer may want to implement this strategy so their spouse can gain a shareholding in the company and receive dividend income (so effectively an income splitting strategy). This strategy has the advantage that it doesn’t involve the husband selling any of his shareholding to his spouse, so no capital gains tax implications for the husband.