The Court said at paras 35-6:
"In my view, the legislature has deliberately identified two main concepts, ‘value’ on the one hand, and ‘state or nature’ on the other. Each concept has significance for each limb to be considered in the application of s 160ZH(3)(c)...It seems to me that the structure of the provision indicates that what must be reflected in the state or nature of the asset is not the value of the asset, but the expenditure of a capital nature. It is immaterial whether or not the expenditure in fact enhances the value of the asset. It may be that the expenditure incurred may not have increased the value of the asset at the time of its being incurred. For that matter, the expenditure may never increase the value of the asset, but may nevertheless be incurred for the relevant purpose (ie. enhancing the value of the asset), and be reflected in the state and nature of the asset at the time of disposal."
The Court then said at para 53:
"Even by just considering the words ‘state’ or ‘nature’ themselves, I am also of the view that it cannot be said in relation to a share as an item of property, which may be bought and sold, that ‘value’ forms any part of the nature or state of that form of asset. The ‘nature’ of a share refers to the bundle of rights (and obligations) attaching to a share, as described previously, being the inherent qualities of a share. Those rights exist, and may be exercised, irrespective of their value. The ‘state’ of a share does not refer to its ‘value’, but refers to other matters, such as whether a share is fully paid up or not. The value of a share does not affect the ‘state’ of a share, if one focuses on the particular condition of a share as an item of property."
National Mutual Life Association of Australia Limited v FCT  FCA 1871 (Federal Court, Middleton J, 10 December 2008).
For a copy of the decision, go here.
TAXVINE COMMENT: Note that for CGT events happening on or after 1 July 2005, s 110-25(5) ITAA 1997 (which replaced the former s 160ZH(3)(c)) was amended to remove the "state or nature" requirement found in the second limb of s 160ZH(3)(c).