Practical Compliance Guideline

PCG 2017/D16 (Finalised)

Propagation arrangements adopted by registrable superannuation entities

Table of Contents Paragraph
What this draft Guideline is about
Date of effect
What does this draft Guideline apply to
What is propagtion
Our compliance approach
Where propagation is appropriate
When propagation isn't appropriate
When propagation may attract the application of the general anti-avoidance provisions
Your comments

Relying on this draft Guideline

This Practical Compliance Guideline is a draft for consultation purposes only. When the final Guideline issues, it will have the following preamble:

This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this guideline in good faith, the Commissioner will administer the law in accordance with this approach.

What this draft Guideline is about

1. This draft Guideline sets out the ATO's compliance approach to the use of propagation to select assets for disposal.

Date of effect

2. When finalised, this draft Guideline will apply from 1 July 2016.

Who does this draft Guideline apply to

3. This draft Guideline applies to registrable superannuation entities (RSEs) that contract with custodians to provide custodial and investment administration services for the RSE's assets.

4. An RSE is a regulated superannuation fund, an approved deposit fund or a pooled superannuation trust, but does not include a self-managed superannuation fund.


5. The Commissioner's view on asset identification principles and record keeping methodologies are contained in CGT Determination TD 33 Capital Gains: How do you identify individual shares within a holding of identical shares?, Taxation Ruling TR 96/4 Income tax: valuing shares acquired as revenue assets and Taxation Ruling TR 96/7 Income tax: record keeping - section 262A - general principles.

6. TD 33 confirms, for capital gains tax purposes, where a disposal occurs:

shares are identifiable where they are individually distinguishable, for example, by reference to share numbers or distinctive rights or obligations attached to them
it may not always be possible to identify the particular shares disposed of where they form part of a holding of identical shares, and
for unidentifiable shares within an identical holding, the Commissioner accepts 'first-in first-out' as a reasonable basis of share identification.

7. TR 96/4 provides that where shares cannot be individually identified:

appropriate accounting records of the acquisition and disposal of shares will be considered sufficient to specifically identify shares to determine their value for taxation purposes, and
no appropriate records are maintained, the taxpayer can't specifically identify these shares to a particular sale for taxation purposes.

8. The Commissioner's view on records sufficiently maintained to record and explain all transactions in accordance with section 262A of the Income Tax Assessment Act 1936 is provided in TR 96/7.

What is propagation?

9. Propagation is a term adopted by custodians to describe a tax parcel selection process. Under propagation, the tax parcel selection methodology agreed with the RSE is applied across the RSE's asset class level holdings instead of being confined to the individual fund manager level.

10. When assets are disposed of, the relevant parcel is selected from the propagated portfolio for each transaction, based on the parcel selection methodology agreed with the RSE.

Our compliance approach

11. This section explains the Commissioner's compliance approach to propagation arrangements satisfying the asset identification principles and record keeping methodologies described in TD 33, TR 96/4 and TR 96/7.

Where propagation is appropriate

12. The Commissioner will generally not apply compliance resources to propagation arrangements when all of the following circumstances are satisfied:

the custodian is the legal owner of all relevant assets of the RSE
all assets subject to the propagation arrangement are held for the purposes of the relevant RSE
the relevant assets are fungible, that is they are identical in all respects
asset identification and selection are contemporaneous with the actual disposal transaction
where the RSE uses either:

a single pool of assets to support member interests, or
multiple pools of assets to support specific member interests and any propagated portfolios are confined within each specific pool.

where applicable, propagation only occurs within a sub-fund of an RSE, and
assets identified for disposal under a propagation arrangement are also reflected as the assets disposed for non-tax regulatory or accounting purposes.

13. The Commissioner may devote limited compliance resources to confirm that propagation arrangements satisfy these parameters.

Where propagation isn't appropriate

14. The Commissioner considers that propagation isn't appropriate where an arrangement doesn't satisfy each of the subparagraphs 12(a) to 12(g) of this draft Guideline.

15. For the purposes of paragraph 12 of this draft Guideline the Commissioner considers that propagation isn't appropriate where:

an RSE has segregated assets to support specific member interests in any way, including assets specifically identified under a member directed investment option, or assets segregated for members in retirement phase and propagation occurs across both segregated and unsegregated pools
an RSE includes a sub-fund that is to be treated as a separate RSE and propagation occurs across the assets of both RSEs, and
propagation occurs across assets held by separate sub-custodians and each sub-custodian holds legal title to that portion of the portfolio.

16. If propagation is considered inappropriate, the Commissioner may apply compliance resources to undertake a more detailed examination.

When propagation may attract the application of the general anti-avoidance provisions

17. A propagation arrangement adopted by an RSE may attract the application of the general anti-avoidance provisions, for example where it is part of a scheme that exhibits the following type of features:

an RSE is unsegregated for tax purposes, using the proportionate method for determining its exempt income under section 295-390 of the Income Tax Assessment Act 1997 (ITAA 1997)
it uses propagation to form a segregated current pension asset pool in accordance with section 295-385 of the ITAA 1997 containing an unbalanced allocation of assets with large unrealised gains
these assets are realised, resulting in gains that are exempt from income tax, and
once the assets are realised, the RSE ceases to maintain a segregated current pension asset pool resulting in the unwinding of the arrangement and returning the RSE to its original unsegregated status for tax purposes.

18. In these circumstances, it may be appropriate for the Commissioner to infer that the scheme was entered into, and carried out, to enable an RSE to make a choice to segregate and then unwind the segregation of its current pension asset pool, resulting in the obtaining of a tax benefit in the form of omitted assessable income.

Commissioner of Taxation
21 August 2017

Your comments

19. You are invited to comment on this draft Practical Compliance Guideline including the proposed date of effect. Please forward your comments to the contact officer by the due date.

Due date: 2 October 2017
Contact officer details have been removed following publication of the final guideline.


You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

ATO references: File 1-ASH6CTG

Business Line:  PGI

Related Rulings/Determinations:
TD 33
TR 96/4
TR 96/7

Legislative References:
ITAA 1936
ITAA 1936 262A
ITAA 1997
ITAA 1997 295-385
ITAA 1997 295-390