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Chapter 29: Towards a systemic solution to CGT value shifting

A case for reform

Value shifting is a threat to the integrity of the CGT regime by shifting the value of assets, often to other assets. Without an effective set of principles and rules, tax liability may be inappropriately deferred or avoided. The existing rules are extremely complex and neither comprehensive nor robust in operation.

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A strategy for reform

To apply a coherent and targeted structural framework, appropriately balancing the objectives of equity and integrity on the one hand and lower compliance and administration costs on the other. The policy framework, brought together in a generalised model, would include design features to address both direct and indirect value shifting.

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Key policy issues Who should be the subject of generalised rules? How could direct value shifting (in relation to assets) be addressed? How could indirect value shifting (value shifting in relation to interests in entities) be addressed?
Option

- Affected entities that control (or are controlled by) other entities and their associates.

- Non-resident entities where affected assets are subject to tax in Australia.
Option

- Deem a capital gain or capital loss to be realised.

- Use an adjustment mechanism only.

Special rules are necessary where rights are created out of existing assets.

Design of interest in entity adjustments

Option 1
Achieve conceptual objective.

Option 2
Proportional adjustment approach.

Option 3
Loss-focused approach.

Mechanism of interest in entity adjustments. Three options are considered
- Adjust capital proceeds on subsequent realisation.
- Adjust gain/loss on subsequent realisation.
- Adjust cost base at time of value shift.
- What safeharbour rules and specific exceptions should be provided?