Edited version of private ruling

Authorisation Number: 1011481661719

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Ruling

Subject: CGT event E2

Question

Should you include any capital gain or capital loss made as a result of the transfer by you of publicly listed shares to the trustees of your self managed superannuation fund in the year ended 30 June 2009 as a result of a CGT event E2 happening under section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) in your assessable income?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You owned shares in a publicly listed company.

You completed and lodged a share transfer form to transfer your shares to your self managed superannuation fund (the super fund). The form was dated during the year ended 30 June 2009. The form lists the transferees as:

- surname(s): listed you and another individual

- Christian name(s): the super fund.

You and another individual are the trustees and only two members of the super fund.

The super fund owned several investments that trustees of the super fund expected to mature to fund the purchase of the shares. The investments held by the super fund did not mature and there were not enough funds available to satisfy the purchase price for all of the shares.

An amount in cash was paid to you as consideration for a portion of the shares.

You have stated that you had retired and could not transfer the shares to the super fund as a contribution, and your only option available was to transfer the shares that the trustees were not able to provide funds for (the excess shares) back to you.

A share transfer form was completed and lodged to transfer the excess shares from the super fund to you. This represented the shares that the trustees were unable to provide full consideration for. The form was dated between the initial transfer form and 30 June 2009. The form lists the transferors as:

- surname(s): listed you and another individual

- Christian name(s): the super fund.

The only documents that were created in relation to the two transfers were the transfer forms mentioned previously.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 subsection 102-25(1)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 104-60

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Summary

Your transfer of shares in the publicly listed company to the super fund represents a CGT event E2 happening under section 104-60 of the ITAA 1997. Therefore, you are required to include any capital gain or capital loss you make as a result of the CGT event happening in your assessable income under section 102-5 of the ITAA 1997.

Detailed reasoning

Section 102-5 of the ITAA 1997 provides that your assessable income for an income year includes your net capital gain. Your net capital gain includes any capital gains or losses you made during the income year.

Subsection 102-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where more than one of the CGT events outlined in division 104 of the ITAA 1997 can apply in a situation, you use the CGT event that is most specific to your situation.

CGT event A1 happens under section 104-10 of the ITAA 1997 if you dispose of an asset. Shares in a company are CGT assets under section 108-5 of the ITAA 1997. You are taken to have disposed of an asset if a change of ownership occurs from you to another entity, whether because of some act or event; or because of an operation of law. The time of the event is when you enter into a contract for the disposal; or when the change of ownership occurs if there is no contract.

CGT event E2 happens under section 104-60 of the ITAA 1997 if you transfer a CGT asset to an existing trust. The time of the event is when the asset is transferred. CGT event E2 does not happen where:

- there is merely a change in the trustee of a trust; or

- the transfer occurs; and you are the sole beneficiary of the trust; and you are absolutely entitled to the asset against the trustee of the trust; and the trust is not a unit trust

ATO Interpretative Decision ATO ID 2003/559 provides that where a CGT asset is transferred to a trust, CGT event E2 will be the most specific CGT event where the transferor is a beneficiary or object of that trust.

The capital gain or capital loss is made at the time of the event. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base of the CGT asset. A capital loss is made if the capital proceeds are less than the reduced cost base.

A superannuation fund is considered to be a trust, and as such fits into the general definition of a trust. Assets are held in the fund for the future benefit of the named recipients of the fund. However, unlike a normal trust fund, members in a super fund do not have the same rights of entitlement as most beneficiaries in a trust.

The reason for that distinction is that members of a superannuation fund have a right to receive benefits from the fund but are not absolutely entitled to the assets themselves. Once they place assets into the fund (whether by sale or an in specie transfer) they give up their claim to those assets until the fund ceases to function.

Upon transferring your shares into your superannuation fund, both the legal and beneficial ownership of those shares changes. This is due to the fact that you are no longer able to access the shares in your fund, even though you are still entitled to receive the benefits arising from those shares.

Paragraphs 200 to 203 of Taxation Ruling TR 2010/1 states that a change in the legal ownership of shares is recognised when the superannuation provider's name is registered in the company's share register (this occurring when a transfer of shares in a publicly listed company is effected through the Clearing House Electronic Subregister System); or when the trustee obtains a properly executed off-market share transfer in registrable form. In the absence of evidence showing that beneficial ownership is not transferred at the same time as legal ownership, the Commissioner will treat a transfer of beneficial ownership of shares to a superannuation provider as happening at the time of the transfer.

Example 11 in Taxation Ruling TR 2004/D25 considers a situation where an individual contributes shares to his own self-managed superannuation fund. The individual held the shares in his own name prior to the transfer and is the only member of the fund. It is stated that CGT event E2 will happen as a result of the transfer, as the individual is not absolutely entitled to the assets of the superannuation fund.

A constructive trust is a trust imposed by operation of law, regardless of the intentions of the parties concerned, whenever equity considers it unconscionable for the party holding title to the property in question to deny the interest claimed by another. The existence of a constructive trust is, however, dependent upon the order of the court, even though that order may operate retrospectively by dating the origin of the trust from some earlier wrongful act.

Application to your circumstances

You held shares in a publicly listed company. These were your CGT assets under section 108-5 of the ITAA 1997.

You completed a transfer of the shares to the trustees of the super fund. The transfer form lists the trustees as transferees in their capacity as trustees of the super fund. You were a trustee and member of the super fund. In accordance with TR 2010/1 you are taken to have passed the legal and beneficial ownership of the shares to the super fund as a result of the transfer.

There is no evidence that a constructive trust has been imposed by an order of the court, therefore, a constructive trust cannot be said to exist based on your current circumstances. Further, there is no evidence that it was not intended for the beneficial ownership in the shares to pass to the trustees of the super fund on behalf of the super fund at the time of the transfer.

The transfer satisfies the requirements of both a CGT event A1 and a CGT event E2 happening as there is a disposal of both legal and beneficial ownership of the publicly listed shares. None of the exceptions to a CGT event E2 happening are present in your circumstances. In accordance with ATO ID 2003/559 and example 11 in TR 2004/D25 CGT event E2 is the most specific to your situation as you were a beneficiary (or member) of the super fund.

Given that a CGT event E2 happened as a result of you transferring your publicly listed shares, you are required to include any capital gain or capital loss you made as a result of the transfer in your assessable income under section 102-5 of the ITAA 1997.