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Ruling
Subject: TOFA - Application of Division 230 of the Income Tax Assessment Act 1997
Question 1
Where the entity elects to use the fair value method in Subdivision 230-C of the Income Tax Assessment Act 1997 (ITAA 1997), does paragraph 295-85(2)(aa) of the ITAA 1997 apply so that any gains or losses made under subsection 230-230(1) of the ITAA 1997 from shares held are not assessable or deductible under section 230-15 of the ITAA 1997?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
The entity is an Australian resident superannuation fund.
The entity does not have assets less than $100 million for the purposes of section 230-455 of the ITAA 1997 and is therefore subject to Division 230: Taxation of Financial Arrangements, from 1 July 2010.
The entity principally invests in widely held unit trusts and shares in public companies. These are classified as equity interests for the purposes of Division 974 of the ITAA 1997. From time to time the entity also invests in debt interests.
The entity prepares its accounts in accordance with Australian Accounting Standard AAS 25: Financial reporting by Superannuation Plans, and has them audited annually. Under AAS 25, assets are valued at market value in the accounts, with movements in market value of assets being reflected in the operating statement (profit and loss account). The definition of 'accounting standard' in the ITAA 1997 includes AAS 25.
The entity makes a fair value election effective from 1 July 2011, under Division 230-C of the ITAA 1997.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 230-C
Income Tax Assessment Act 1997 Section 230-15
Income Tax Assessment Act 1997 Subsection 230-230(1)
Income Tax Assessment Act 1997 Section 295-85
Income Tax Assessment Act 1997 Subsection 295-85(1)
Income Tax Assessment Act 1997 Subsection 295-85(2)
Income Tax Assessment Act 1997 Paragraph 295-85(2)(aa)
Reasons for decision
As the entity has made a fair value election, effective from 1 July 2011, the application of subsection 230-230(1) of the ITAA 1997 would result in the fund bringing the gains and losses to account under section 230-15 of the ITAA 1997 for each income year that ends after 1 July 2011, subject to the operation of section 295-85 of the ITAA 1997.
Subsection 295-85(1) of the ITAA 1997 provides:
The modifications in subsection (2) apply if a *CGT event happens involving a *CGT asset that was owned by one of these entities just before the time of the event:
(a) a *complying superannuation fund;
(b) a *complying approved deposit fund;
(c) a *pooled superannuation trust.
Subsection 295-85(2) of the ITAA 1997 provides:
These provisions do not apply to the *CGT event:
(a) …
(aa) section 230-15 (about financial arrangements);
(b) ….
As the modifications in subsection 295-85(2) of the ITAA 1997 only apply if a CGT event happens involving the equity interest held by the entity, any gains or losses made under subsection 230-230(1) in respect of the equity interest will be brought to account under section 230-15 for the income years in which no CGT event happens.
This aligns with the policy expressed in paragraph 11.26 of the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009, which states:
As part of the re-write of the provisions contained in Part IX of the ITAA 1936, Part 3-30 was introduced into the ITAA 1997. In particular, section 295-85 was introduced to ensure that only the CGT provisions (and not the general income provisions) apply if a CGT event happens involving a CGT asset owned by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust. Paragraph 295-85(2)(a) of the ITAA 1997 will be amended to add a reference to Division 230 to ensure that where a CGT event happens to a CGT asset that is also a financial arrangement, the relevant gain or loss is brought to account under the CGT provisions and not Division 230. However, the exceptions to the rule in subsection 295-85(2) that are contained in subsection 295-85(3) will still operate to apply Division 230 where there is a gain or loss made in respect of foreign currency fluctuations or there is a disposal of certain types of securities. [Schedule 1, item 80, paragraph 295-85(2)(a )] [emphasis added]
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