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Ruling

Subject: Transfer of shares between SMSFs

Question

Is the transfer of shares from one self-managed superannuation fund (SMSF) to a similar SMSF a CGT event?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Your new accounting firm did not want to provide services for your former SMSF, so you, as trustee, established another SMSF. You transferred shares from your former SMSF to the new SMSF. Both funds have similar deeds and beneficial entitlements.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-60

Income Tax Assessment Act 1997 Section 104-70

Income Tax Assessment Act 1997 Section 126-230

Reasons for decision

Section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) provides CGT event E2 happens when a CGT asset is transferred to an existing trust. However, subsection 104-60(5) provides CGT event E2 does not happen if you are the sole beneficiary of the trust and you are absolutely entitled to the asset as against the trustee (disregarding any legal disability) and the trust is not a unit trust.

Draft Taxation Ruling TR 2004/D25 is about the meaning of the words 'absolutely entitled to a CGT asset as against the trustee of a trust'. In summary, paragraph 139 states a member of a superannuation fund is not treated as if they are absolutely entitled for CGT purposes to the assets of the fund or to assets held in the member's account. Paragraphs 176 and 177 provide the following example:

Bill contributes to his own self-managed superannuation fund. He transfers some shares to the fund which he had previously purchased in his own name. Bill is the only member of the fund. The transfer of the shares from Bill to the fund will cause CGT event E2 to happen. The exception to CGT event E2 that applies if the transferor of assets to a trust is the sole beneficiary of the trust and is absolutely entitled to the assets does not apply in the case of a transfer of an asset to a superannuation fund.

Prior to 1 November 2008, sections 104-55 and 104-60 of the ITAA 1997 contained an exception to the happening of CGT events E1 and E2, widely known as the 'trust cloning' exception. Here, the CGT event was disregarded where the assets were transferred to a trust from another trust and the beneficiaries and terms of both trusts were the same.

From 1 November 2008, the Tax Laws Amendment (2009 Measures No. 6) Act 2010 repealed the trust cloning exceptions to CGT events E1 and E2 and, under Subdivision 126-G of the ITAA 1997, introduced a limited CGT roll-over for the transfer of assets between certain trusts with the same beneficiaries with the same interests in each trust.

To qualify for a CGT roll-over under Subdivision 126-G of the ITAA 1997, two requirements under section 126-230 of the ITAA 1997 must be met, namely: (i) CGT event E4 is capable of happening; and (ii) beneficiaries' entitlements not discretionary.

CGT event E4 in section 104-70 of the ITAA 1997 happens if a non-assessable payment is received in respect of a unit or interest in a trust. If CGT event E4 happens, the consequences include cost base and reduced cost base reductions for the unit or trust interest. Section 104-70 of the ITAA 1997 includes the following example of its operation:

Mandy owns units in a unit trust that she bought on 1 July 1998 for $10 each. During the 1999-2000 income year the trustee makes 4 non-assessable payments of $0.50 per unit. If at the end of the income year Mandy's cost base for each unit (including indexation) would otherwise be $10.10, the payments require that it be reduced by $2, giving a new cost base of $8.10. If Mandy sells the units (CGT event A1) in the 2000-01 year for more than their cost base at that time, she will make a capital gain equal to the difference.

In summary, CGT event E4 is not capable of happening in relation to beneficial interests in a self managed superannuation fund because a beneficiary of a superannuation fund does not hold units in the fund by which payments from the fund will cause changes to the cost base of units held.

To conclude, in your case, the taxation laws that disregarded the happening of a CGT event when assets were transferred from one trust to an identical trust were repealed on 1 November 2008. Further, TR 2004/D25 explains the exemption to CGT event E2 due to a beneficiary being absolutely entitled does not apply to superannuation funds. It follows CGT event E2 under section 104-60 of the ITAA 1997 happened when the shares were transferred from one SMSF to the other SMSF.

Therefore you are required to account for the CGT events in the year of the transfer and you cannot defer the CGT consequences to a later year.

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