The recovery provision in section 727-250 (all references are to ITAA97 unless stated otherwise) is designed to prevent the operation of the indirect value shifting rules when the gaining entity receives assessable income or a dividend. The issue identified relates to the change of dividends being exempt income to non-assessable non-exempt income in 2004 without a consequential amendment in section 727-250(2).
In summary, the law as currently drafted has an unintended consequence pursuant to section 23AJ ITAA36 /section 768-5 dividends changing from exempt income to non-assessable non-exempt *(NANE) income in 2004 without a consequential amendment in section 727-250. To read section 727-250(2) as currently drafted as not also including dividends which are non-assessable, and non-exempt income for Australian income tax purposes would give rise to an unintended, and egregious, outcome whereby any section 768-5 dividend paid by a foreign resident entity to either its Australian parent, or foreign parent, would trigger an indirect value shift in relation to the shares in the entity paying the dividend.
The issue also occurs where Australia pays a dividend to a foreign parent and the dividend is NANE in the hands of the foreign parent due to application of section 128D ITAA36 or section 802-15 and therefore dividend doesn't fall within 727-250(2) and seemingly triggers an indirect value shift.