Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
CHAPTER 5 - Capital gains tax - roll-over relief for merging superannuation fund
5.1 Part 3 of Schedule 3 of the Bill amends the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1936 (ITAA) to allow certain superannuation funds which merge on or after 1 July 1994 and before 1 July 1997 to defer (roll-over) any accrued capital gains or losses that would be realised as a result of the merger on the assets transferred.
Purpose of the amendments
5.2 This measure gives effect to one of the changes announced by the Treasurer in his Statement on Superannuation Policy of 28 June 1994 to alleviate problems with small amounts in superannuation funds.
Date of effect
5.3 The amendment will apply to superannuation funds that merge on or after 1 July 1994 and before 1 July 1997. [New paragraph 160ZZPIA(2)(d)]
Examples of mergers
5.4 The following examples outline ways superannuation funds can merge.
5.5 Superannuation funds A, B and C ( transferor funds ) merge to form new superannuation fund D ( transferee fund ) with a new trustee and a new superannuation trust deed. Superannuation funds A, B and C are terminated.
5.6 Superannuation fund E merges with existing superannuation fund F. Superannuation fund F retains its existing trustee and its superannuation trust deed is modified to accommodate the merger. Superannuation fund E is terminated.
Current CGT treatment of the transferor fund
5.7 Currently if superannuation funds merge, section 160M of the ITAA provides that a change in ownership of the assets of the transferor fund has occurred. That is, the transferor fund is deemed to dispose of the assets and the transferee fund is deemed to acquire them.
5.8 Accordingly Part IIIA of the ITAA brings to account a capital gain or loss in respect of the assets transferred. If there is no consideration for the disposal it is deemed to be the market value of the assets transferred (subsection 160ZD(2)).
5.9 Although the application of Part IIIA is generally limited to the disposal of an asset acquired on or after 20 September 1985, subsection 306(1) provides that Part IIIA also applies to assets acquired by the trustee of a complying superannuation fund prior to 20 September 1985.
Current CGT treatment of the transferee fund
5.10 If superannuation funds merge there is no change in ownership of the assets owned by the transferee. That is, there is no transfer or notional disposal of the transferee's assets as a result of the merger. Therefore, Part IIIA will not apply as a result of the merger to the assets owned by the transferee.
Current CGT treatment of members
5.11 Part IIIA will not apply to any disposal of a member's interest in a superannuation fund (whether the member has a beneficial interest in the assets of the fund or merely a contingent right to receive a benefit) (section 160ZZJ).
Treatment of gains and losses
5.12 When superannuation funds merge the transferor can not transfer losses of a capital or revenue nature to the transferee.
5.13 If a transferee disposes of a merger asset and makes a capital gain or loss, it may be offset against capital gains and losses from other assets of the fund and against any CGT losses carried forward.
Problem with the current tax treatment
5.14 With the adoption of 'member protection' measures, superannuation funds may come under greater pressure to merge to improve their economies of operation. The payment of CGT arising from these mergers may affect the short term liquidity of such superannuation funds.
CGT roll-over relief
5.15 The Bill will allow the trustee of a transferor fund that merges on or after 1 July 1994 and before 1 July 1997 to defer (roll-over) any CGT gains or losses that would be realised as a result of the merger if:
- the merging funds are qualifying superannuation funds ;
- the transferor fund is in existence on 1 July 1994;
- the disposal of the asset occurs under a merger between the transferor and the transferee;
- the transferor and transferee elect that CGT roll-over relief will apply to all the assets transferred under the merger; and
- the transferor keeps the election and gives a copy of it to the transferee.
[New subsections 160ZZPI(1) and (2)]
What is a qualifying superannuation fund
5.16 A qualifying superannuation fund is a superannuation fund that is not an excluded superannuation fund or an eligible roll-over fund. [New subsection 160ZZPIA(5)]
5.17 A fund is a superannuation fund if:
- it is a resident or non-resident scheme that pays superannuation benefits upon retirement or death; or
- it qualifies as a superannuation fund under section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA)
(subsection 6(1) of the ITAA).
5.18 An excluded superannuation fund is a superannuation fund with less than 5 members (section 10 of the SISA). A superannuation fund is an eligible roll-over fund if it has been declared by the Insurance and Superannuation Commissioner as being eligible to receive roll-over benefits from other funds (section 242 of the SISA).
When is a disposal of an asset under a merger?
5.19 A disposal of an asset between a transferor and a transferee occurs under a merger if:
- the disposal is during the merger period ; and
- the disposal relates to a merger between the transferor and the transferee.
[New subsection 160ZZPIA(1)]
What is the merger period
5.20 The merger period is the period in which the conditions for roll-over relief need to be met. The merger period is from the merger beginning to the merger end . [New subsection 160ZZPIA(3)]
5.21 The merger beginning is the time the first asset that relates to the transfer of member benefits is disposed of by the transferor to the transferee (as determined by section 160U) [new paragraph 160ZZPIA(2)(a)] . Member benefits include a member's beneficial interest in a fund and a member's future and contingent rights to receive a benefit from the fund (including benefits not yet allocated to the member).
5.22 If the first asset transferred to the transferee is unconnected with member benefits, for example, if the asset only represents the entitlement of the employer sponsor in the fund, this will not be the merger beginning and CGT will apply to the asset. However the asset will receive CGT roll-over relief if it is transferred to the transferee after the first asset which represents the transfer of member benefits.
5.23 The merger end is the time when the transferor fund does not have any assets, member benefits or members and is closed to new members [new paragraph 160ZZPIA(2)(b)] . CGT roll-over relief will not apply if the transferor only transfers part of its assets to a transferee fund or transfers all of its assets but continues to operate as a superannuation fund and receives contributions.
5.24 The merger period must start on or after 1 July 1994 and end before 1 July 1997. [New paragraph 160ZZPIA(2)(d)]
5.25 The merger beginning and merger end must be during one year of income of the transferor fund [new paragraph 160ZZPIA(2)(e)] . However, as a transitional measure, the merger period can be during more than one year of income if:
- the transferor's income year ends on or before 30 September 1995; and
- the merger begins on or after 1 July 1994 and ends on or before 30 September 1995.
[New subsection 160ZZPIA(6)]
5.26 The Toosmall superannuation fund wants to merge with Maxeff superannuation fund. Toosmall transfers its first asset which represents part of a member's benefit to Maxeff on 15 June 1995. Toosmall's year of income ends on 30 June 1995.
5.27 Toosmall completes the merger by 15 August 1995. Although the merger period was not completed within Toosmall's 1994/95 year of income, the merger ended on or before 30 September 1995. Therefore, if all of the conditions are met, Toosmall will not be liable to CGT on any of the assets transferred to Maxeff in the merger period.
When is there a merger between the transferor and the transferee?
5.28 There is a merger between the transferor and the transferee if:
- there is a merger beginning (explained in paragraph 5.21);
- there is a merger end (explained in paragraph 5.23);
- all of the transferor fund's member benefits, other than eligible benefit payments, that exist at any time during the merger period are transferred to the transferee fund and;
- the transferor and the transferee involved in the merger are complying superannuation funds during the year or years of income of each fund in which the merger beginning and the merger end occurs. Therefore CGT roll-over relief will not apply if either fund is a non-resident superannuation fund during this time.
[New subsection 160ZZPIA(2)]
Eligible benefit payments
5.29 A payment is an eligible benefit payment if:
- the payment is an eligible termination payment (as defined in subsection 27A(1));
- it is paid to a member because he or she meets a payment standard prescribed under subsection 31(1) of the SISA; and
- all of the payment relates to one or more of the following matters:
- permanent or temporary incapacity;
- permanent departure from Australia;
- financial hardship;
- the attainment of a particular age; or
- termination of employment.
[New subsection 160ZZPIA(4)]
5.30 The conditions that relate to the above matters are prescribed under subsection 31(1) of the SISA in Division 6.3 of the Superannuation Industry (Supervision) Regulations.
5.31 The transferor and transferee involved in the merger must jointly elect in writing that CGT roll-over relief will apply to all the assets transferred during the merger period. The election must be made before the merger starts [new paragraph 160ZZPI(1)(c)] . However, if a fund starts to merge before the date the Bill receives Royal Assent, the election can be made within 2 months from the date of Royal Assent [new subsection 160ZZPI(5)] .
5.32 A transferor can only make one election which results in a successful merger. A transferee can make an election with more than one transferor in a merger period.
The effect of gaining roll-over relief
5.33 If all the conditions are met, the capital gains tax provisions in Part IIIA will not apply to the merger assets until the transferee disposes of them.
5.34 When the transferee disposes of a merger asset, the amount that is taken to have been paid as consideration for the acquisition of the merger asset will depend on whether the transferee makes a capital gain or loss.
5.35 To work out whether the transferee makes a capital gain , the consideration paid for the merger asset will be as follows:
- if the asset was sold by the transferee within 12 months after the day on which the asset was acquired by the transferor, the consideration will be the amount that would have been the cost base to the transferor if the CGT roll-over provisions did not apply to the asset when it was transferred to the transferee [new paragraph 160ZZPI(3)(a)] ; or
- if the asset was sold by the transferee 12 months or more after the day on which the asset was acquired by the transferor, the consideration will be the amount that would have been the indexed cost base to the transferor if the CGT roll-over provisions did not apply to the asset when it was transferred to the transferee [new paragraph 160ZZPI(3)(b)] .
5.36 To work out whether the transferee makes a capital loss , the transferee is deemed to have paid as consideration for the merger asset the amount that would have been the reduced cost base to the transferor if the CGT roll-over provisions did not apply to the asset when it was transferred to the transferee. [New subsection 160ZZPI(4)]
What if any of the conditions for CGT roll-over relief are not met?
5.37 If any of the conditions for CGT roll-over relief are not met, the current tax treatment will apply to the assets transferred.
5.38 The transferor must keep the original election as well as records that prove:
- the identity of the transferee;
- that an asset was a merger asset; and
- that all of the conditions for CGT roll-over relief were met
[New subsection 160ZZU(6A)]
5.39 The transferor must also give a copy of the election to the transferee. [New paragraph 160ZZPI(1)(d)]
5.40 The transferor must keep these records for five years after the end of the merger period. [New paragraph 160ZZU(6C)(a)]
5.41 The transferee must keep a copy of the original election as well as records that prove:
- the identity of the transferor;
- that an asset was a merger asset;
- that all of the conditions for CGT roll-over relief were met; and
- the amount of consideration it is taken to have paid for acquiring each asset. That is, the amount used to work out if the transferee made a capital gain or loss when it sells the asset
[New subsection 160ZZU(6B)]
5.42 The transferee must keep these records for five years after the transferee disposes of the last merger asset. [New paragraph 160ZZU(6C)(b)]
5.43 The records must be kept in the English language [new subsection 160ZZU(6A)] . If the transferor fails to keep the necessary records it is liable to a penalty of up to 30 penalty units. A penalty unit is currently $100 (subsection 4AA(1) of the Crimes Act 1914 ). The same penalty applies to the transferee in these circumstances. However, the penalty will not apply if the trustee has a reasonable excuse for failing to comply with the requirements. For example, a trustee will have a reasonable excuse if the records are lost or destroyed due to factors outside the trustee's control [new subsection 160ZZU(6D)] .
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