Section 589 Shares in close company transferring assets at undervalue

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(1) Where a close company transfers an asset to any person otherwise than by means of a bargain made at arm's length and for a consideration of an amount or value less than the market value of the asset, an amount equal to the difference shall be apportioned among the issued shares of the company, and the holders of those shares shall be treated in accordance with subsections (2) and (3).

What are the consequences on the issued shares of a close company if it transfers assets below market value and other than at arm's length?

(1) If a close company transfers an asset to you other than at arm's length, for less than market value, the shortfall is to be apportioned among the company's issued shares.

(2) For the purposes of the computation of a chargeable gain accruing on the disposal of any of those shares by the person owning them on the date of transfer, an amount equal to the amount so apportioned to that share shall be excluded from the expenditure allowable as a deduction under section 552(1)(a) from the consideration for the disposal.

Is my deductible expenditure on a later disposal affected by the earlier transfer of assets at an undervalue?

(2) In a CGT computation on a later disposal of any such shares, the apportioned amount is not allowed as deductible expenditure.

(3) Where the person owning any of those shares at the date of transfer is itself a close company, an amount equal to the amount apportioned to the shares so owned under subsection (1) to that close company shall be apportioned among the issued shares of that close company, and the holders of those shares shall be treated in accordance with subsection (2), and so on through any number of close companies.

How is the shortfall apportioned where the shareholder is itself a close company?

(3) If the company's issued shares are owned by a close company, the appropriate shortfall apportionment is to be made among that company's issued shares (and so on if that company's issued shares are owned by another close company).

(4) This section shall apply to a company within section 590 as it applies to a close company.

Do the shortfall apportionent rules apply to a non-resident company?

(4) These rules also apply where a non-resident company transfers an asset to you other than at arm's length; the shortfall is to be apportioned among the company's issued shares....

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