Edited version of your written advice

Authorisation Number: 1051301052647

Date of advice: 15 November 2017

Ruling

Subject: Superannuation – transitional capital gains tax relief for a complying superannuation fund – Part IVA

Question 1

Where the Trustee for the Fund (the Fund) makes a valid choice pursuant to section 294-120 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) to defer the recognition of a capital gain (deferred notional gain) with respect to an Eligible asset, is that deferred notional gain treated as a capital gain under Step 1 of the method statement within subsection 102-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year when the Eligible asset is realised?

Answer

Yes.

Question 2

In circumstances where the Fund makes a valid choice under section 294-120 of the IT(TP)A 1997 in respect to all or most of its Eligible assets, will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to cancel the 'tax benefit' resulting from that choice in the income year when the Eligible asset is realised?

Answer

No.

This ruling applies for the following periods:

Multiple income years

The scheme commences on:

November 2016

Relevant facts and circumstances

All legislative references are to the Income Tax (Transitional Provisions) Act 1997 unless otherwise specified.

The Superannuation Fund is a complying superannuation fund within the meaning of the term in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) since its inception.

Entity A acts as the trustee for the Superannuation Fund (the Fund).

The Fund does not hold any assets which are segregated current pension assets nor segregated non-current assets, since its inception.

The Fund calculates its exempt current pension income (ECPI) using the proportionate method in accordance with subsection 295-390(3) of the ITAA 1997.

For the income year ended 30 June 2017, the Fund’s ECPI is calculated to be greater than nil in accordance with subsection 295-390(3) of the ITAA 1997.

An actuarial certificate is obtained each year to support the exempt proportion.

The Fund’s assets include the following capital gains tax (CGT) assets:

● Eligible asset:

● is a CGT asset held by the Fund for the entire period from November 2016 to 30 June 2017 (the pre-commencement period)

● is not a segregated current pension asset nor a segregated non-current asset of the Fund at any stage during the pre-commencement period, and

● has an unrealised capital gain as at 30 June 2017;

● Unrealised loss asset:

● is a CGT asset held by the Fund for the entire pre-commencement period

● is not a segregated current pension assets nor a segregated non-current assets of the Fund at any stage during the pre-commencement period, and

● has an unrealised capital loss as at 30 June 2017;

and

● Ineligible asset:

● is a CGT asset that was not held throughout the entire pre-commencement period.

As at 30 June 2017, the Fund had unrealised capital gains on Eligible assets and unapplied net capital losses from earlier income years.

Subject to operational constraints, the Fund, working with its custodian, will make a choice for the purposes of paragraph 294-115(1)(e) in accordance with subsection 294-115(2) in respect to all, or most, of the Eligible assets.

The Fund will not make a choice for the purposes of paragraph 294-115(1)(e) in respect to all of the Unrealised loss assets.

Subject to operational constraints, the Fund, working with its custodian, will make a choice for the purposes of paragraph 294-120(1)(c) in accordance with subsection 294-120(2) in respect to all, or most, of the Eligible assets.

It is estimated that the Fund’s ECPI in the realisation year will be lower than the ECPI for the 2016-17 income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 177A(1)

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Subsection 177C(1)

Income Tax Assessment Act 1936 Subsection 177C(2)

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1936 Subsection 177F(1)

Income Tax Assessment Act 1997 Subsection 102-5(1)

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 295-385

Income Tax Assessment Act 1997 Section 295-390

Income Tax Assessment Act 1997 Subsection 295-390(3)

Income Tax Assessment Act 1997 Section 295-395

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax (Transitional Provisions) Act 1997 Section 294-105

Income Tax (Transitional Provisions) Act 1997 Section 294-115

Income Tax (Transitional Provisions) Act 1997 Subsection 294-115(1)

Income Tax (Transitional Provisions) Act 1997 Paragraph 294-115(1)(c)

Income Tax (Transitional Provisions) Act 1997 Paragraph 294-115(1)(e)

Income Tax (Transitional Provisions) Act 1997 Subsection 294-115(2)

Income Tax (Transitional Provisions) Act 1997 Subsection 294-115(3)

Income Tax (Transitional Provisions) Act 1997 Section 294-120

Income Tax (Transitional Provisions) Act 1997 Subsection 294-120(2)

Income Tax (Transitional Provisions) Act 1997 Subsection 294-120(4)

Income Tax (Transitional Provisions) Act 1997 Subsection 294-120(5)

Income Tax (Transitional Provisions) Act 1997 Subsection 294-120(7)

Reasons for decision

Question 1

Detailed reasoning

All legislative references are to the Income Tax (Transitional Provisions) Act 1997 unless otherwise specified.

Subdivision 294-B provides temporary relief from certain capital gains that might arise as a result of individuals complying with the introduction of a transfer balance cap or the transition to retirement income streams (and similar income streams) reforms.

The temporary relief from certain capital gains (CGT relief) may apply to capital gains tax (CGT) assets that were held by a complying superannuation fund as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), throughout the ‘pre-commencement period’.

The pre-commencement period, for the purposes of section 294-105, means the period starting on the start of November 2016 to just before 1 July 2017.

The CGT assets eligible for CGT relief depends on whether the complying superannuation fund, throughout the pre-commencement period, uses the segregated method under section 295-385 of the ITAA 1997, or starts to use or continues using the proportionate method under section 295-390 of the ITAA 1997, to calculate its exempt current pension income (ECPI).

Application of section 294-115

Pursuant to section 294-115, if a complying superannuation fund is using, and continues to use, the proportionate method under section 295-390 of the ITAA 1997 throughout the pre-commencement period, it may choose CGT relief for a CGT asset provided:

● the fund is a complying superannuation fund throughout the pre-commencement period, and held the asset throughout that period

● for the 2016-17 income year, the average value of the fund’s current pension liabilities divided by the average value of its superannuation liabilities exceeds zero (that is, the proportion worked out in subsection 295-390(3) of the ITAA 1997 exceeds zero)

● throughout the pre-commencement period, the asset was not a segregated current pension asset nor a segregated non-current asset, and

● the irrevocable choice to apply the CGT relief is made in the approved form, on or before the day the trustee of the fund is required to lodge the fund’s 2016-17 income tax return.

The trustee may choose to apply CGT relief to any, or all, of their fund’s CGT assets that meet the conditions of section 294-115.

If CGT relief is chosen for a CGT asset, subsection 294-115(3) deems, for the purposes of Parts 3-1 and 3-3 of the ITAA 1997:

● a sale by the fund of the relevant CGT asset for market value consideration immediately before 1 July 2017 (that is on 30 June 2017), and

● a repurchase by the fund of the relevant CGT asset, for the market value, just after the deemed sale time. That is, on 30 June 2017.

The deemed sale means that the fund:

● has disposed of the relevant CGT asset on 30 June 2017

● has CGT event A1 apply under section 104-10 of the ITAA 1997 in relation to the relevant CGT asset, and

● recognises any capital gain or loss for the relevant CGT asset at Step 1 of the method statement within subsection 102-5(1) of the ITAA 1997 for the 2016-17 income year.

In this case, the Fund is a complying superannuation fund throughout the pre-commencement period and its ECPI proportion is calculated to be an amount greater than nil in accordance with subsection 295-390(3) of the ITAA 1997 for the 2016-17 income year.

The Fund’s Eligible assets were held throughout the pre-commencement period, and they were not segregated current pension assets nor segregated non-current assets for that period.

When the Fund makes a choice to apply CGT relief for the relevant Eligible assets, in the approved form, on or before the day it is required to lodge the 2016-17 income tax return, all the requirements of section 294-115 are satisfied.

At this time, the Fund has a capital gain as a result of the application of section 294-115.

Application of section 294-120

Section 294-120 provides a choice for the trustee of a fund to defer a capital gain it makes on the CGT asset as a result of the application of section 294-115.

The choice to defer a capital gain is irrevocable and is to be made in the approved form, on or before the day the trustee of the fund is required to lodge the fund’s 2016-17 income tax return.

When a trustee makes a choice under section 294-120, the fund disregards the initial capital gain as a result of the application of section 294-115 and instead calculates a ‘deferred notional gain’ for the relevant CGT asset that will be taken into account in the income year in which the relevant CGT asset has a realisation event.

Calculation of the deferred notional gain

Subsections 294-120(4) and 294-120(7) outline the calculation methodology for a ‘deferred notional gain’. The trustee is required to:

● hypothesise that the capital gain on the deemed sale of the relevant CGT asset in the 2016-2017 income year is not going to be deferred

● assume that the gain is the only capital gain for the 2016-2017 income year, and that capital gain is recognised at Step 1 of the method statement

● assume that there are no current year losses nor any unapplied net capital losses from earlier income years at Steps 1 and 2 respectively of the method statement

● apply, where applicable, the relevant CGT discount at Step 3 of the method statement, and

● reduce the net capital gain remaining at Step 5 of the method statement for the relevant exempt portion calculated pursuant to subsection 295-390(3) of the ITAA 1997 for the 2016-2017 income year.

The resulting amount is the deferred notional gain for that relevant CGT asset.

Recognition of the deferred notional gain

Subsection 294-120(5) provides that when a realisation event (a subset of CGT events listed in section 104-5 of the ITAA 1997) happens to a relevant CGT asset, the trustee, for the purposes of Division 102 of the ITAA 1997, is to:

● treat the fund as having made a capital gain in that income year equal to the deferred notional gain

● disregard section 102-20 of the ITAA 1997 in respect of that capital gain, and

● to treat that capital gain as not being a discount capital gain when applying the method statement for the realisation year.

Consistent with paragraph 102 of Law Companion Guideline LCG 2016/8 Superannuation reform: transfer balance cap and transition-to-retirement reforms: transitional CGT relief for superannuation funds, the fund should include that capital gain at Step 1 of the method statement. Subsequently that gain may be reduced by any capital losses made in the realisation year, and may be further reduced by any unapplied net capital losses from previous income years under Step 2 of the method statement.

The trustee then reduces the net capital gain remaining at Step 5 of the method statement for the relevant proportion calculated in accordance with subsection 295-390(3) of the ITAA 1997 for the realisation year. However, the trustee cannot reduce the Step 5 net capital gain to the extent that a net capital gain is increased, or is created, because the deferred notional gain was recognised for the year.

In this case, when the Fund makes a choice to defer the capital gain for the relevant Eligible asset in accordance with section 294-120, the Fund:

● disregards the initial capital gain it makes on the relevant Eligible asset as a result of section 294-115, and

● calculates a ‘deferred notional gain’ in accordance with subsections 294-120(4) and 294-120(7) for the relevant Eligible asset that will be taken into account in the income year which the relevant Eligible asset has a realisation event.

When a realisation event happens to the relevant Eligible asset, the deferred notional gain for that asset is deemed as a ‘capital gain’ under Step 1 of the method statement in the income year when the Fund realises that asset.

Accordingly, when the Eligible asset is realised by the Fund, any capital losses made during that income year, or unapplied net capital losses from earlier income years, may be applied to reduce that capital gain.

Question 2

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1936 unless otherwise specified.

Part IVA is a general anti-avoidance provision, giving the Commissioner the discretion to cancel a ‘tax benefit’ that has been obtained, or would (but for section 177F), have been obtained by a taxpayer in connection with a scheme to which Part IVA applies.

In order for Part IVA to apply, the following requirements must be satisfied:

● there is a scheme to which Part IVA applies;

● a tax benefit was or would (but for subsection 177F(1)) have been obtained;

● the identified tax benefit was or would have been obtained in connection with the identified scheme; and

● the person who entered into or carried out the identified scheme (or any part of the scheme) did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit.

Scheme

A ‘scheme’ is broadly defined in subsection 177A(1) as:

● any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

● any scheme, plan, proposal, action, course of action or course of conduct.

Under this definition, a scheme can be a series of steps taken together or a single step.

Based on the relevant facts and circumstances, the Commissioner considers that making the choice to apply for CGT relief and to defer the capital gain for all, or most, of the Eligible assets pursuant to sections 294-115 and 294-120 of the IT(TP)A 1997 (the Scheme), will meet the definition of a scheme for the purposes of subsection 177A(1).

Tax benefit

Having established the existence of a scheme, Part IVA will only apply if it is determined that a tax benefit was or would have been obtained in connection with that scheme.

Subsection 177C(1) identifies tax benefits to include:

● an amount not being included in the taxpayer’s assessable income

● a deduction being allowable to the taxpayer

● a capital loss being incurred by the taxpayer

In order to determine that a tax benefit has been obtained, it is necessary to compare the tax consequences of the Scheme in question with the tax consequences that would have arisen, or might reasonably be expected to have arisen, if the Scheme had not been entered into or carried out.

In this instance, the Scheme will result in an amount not being included in the Fund’s assessable income (that is, a net capital gain). The making of the choice under section 294-120 of the IT(TP)A 1997 (as described in the detailed reasoning under Question 1) may reasonably be anticipated to result in less capital losses being applied against the amount deemed as a capital gain (notional capital gain) as compared to the outcomes if the relevant choices (sections 294-115 and 294-120 of the IT(TP)A 1997) were not made.

Further, the making of these choices may also result in a lesser amount being included in assessable income in the income year the Eligible asset is realised than would otherwise have been the case. This outcome will arise where the ECPI proportion in the realisation year is lower than that applicable in the 2016-17 income year. In that case, for an equivalent amount of capital gain on the relevant asset, a greater amount would be excluded from assessable income by the higher 2016-17 income year ECPI proportion than by the lower proportion that will otherwise apply in the realisation year.

However, subsection 177C(2) provides that a tax benefit will not arise in connection with a scheme where the non-inclusion of an amount in assessable income, a deduction being allowable or a capital loss being incurred is attributable to:

● the making of an agreement, choice, declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option (expressly provided for by the ITAA 1936 or ITAA 1997); and

● the scheme was not entered into or carried out for the purpose of creating the circumstances necessary to enable that agreement, choice, declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option.

Subdivision 294-B of the IT(TP)A 1997 provides temporary CGT relief that might arise as a result of individuals complying with the introduction of a transfer balance cap or the transition to retirement income streams (and similar income streams) reforms.

Subsections 294-115 and 294-120 of the IT(TP)A 1997 provide a trustee of a complying superannuation fund the choice to apply CGT relief for eligible CGT assets and the choice to defer the capital gain for eligible CGT assets. The choices can apply to any, or all, of the eligible CGT assets.

The Commissioner proceeds in this ruling on the basis that the required criteria are satisfied.

Pursuant to subsections 294-115(2) and 294-120(2) of the IT(TP)A 1997, a trustee of the fund must make the choices, in the approved form, on or before the day the trustee of the fund is required to lodge the fund’s 2016-17 income tax return, to apply CGT relief and to defer a capital gain.

It is considered that in the present case, the choices made by the Fund under sections 294-115 and 294-120 of the IT(TP)A 1997 are choices for the purposes of subsection 177C(2).

The relevant facts and circumstances demonstrate that the Fund:

● remains a complying superannuation fund since inception

● remains an ‘unsegregated’ fund (does not hold any assets which are segregated current pension assets nor segregated non-current assets) since inception

● held Eligible assets throughout the pre-commencement period; and

● subject to operational constraints, will make choices under sections 294-115 and 295-120 of the IT(TP)A 1997 in respect to all, or most, of the Eligible assets.

Therefore, it is considered that the Fund is not entering into the Scheme for the purpose of creating the circumstances whereby the Fund can make the choices under sections 294-115 and 294-120 of the IT(TP)A 1997 to apply CGT relief and to defer capital gains.

The Commissioner considers that the choices the Fund makes pursuant to sections 294-115 and 294-120 of the IT(TP)A 1997 to apply the CGT relief and to defer the capital gain for all, or most, of the Eligible assets are choices for the purposes of subsection 177C(2). Therefore, given the facts and circumstances of the Fund, the Commissioner does not consider that the Scheme:

● has been entered into for the purposes of creating a circumstance or state of affairs necessary to enable that choice to be made

● goes further than is necessary to provide temporary relief from CGT in accordance with the above mentioned provisions

● results in a tax benefit being obtained from the differential between a higher ECPI proportion in the 2016-17 income year and a lower ECPI proportion applying to the realisation of an Eligible asset in a later income year, and

● results in a tax benefit being obtained from less capital losses being applied against the amount deemed as a capital gain (notional capital gain), as compared to the taxation outcomes if the relevant choices were not made.

For these reasons, the application of CGT relief and deferral of capital gains under Subdivision 294-B of the IT(TP)A 1997 by the Fund in respect to all, or most, of the Eligible assets, will not be taken to be the obtaining of a tax benefit for the purposes of section 177C.

Conclusion as to the application of Part IVA

Taking into consideration the relevant facts and circumstances pertaining to the scheme described above, the Fund will not be taken to have obtained a tax benefit in connection with a scheme to which Part IVA applies.

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