Edited version of private ruling

Authorisation Number: 1011696583953

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Ruling

Subject: Loss transfer and asset roll-over

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

The scheme has already commenced

Question

Can the acting trustee of the superannuation fund (the 'fund') rely on the exception provided in subsection 310-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997) to satisfy the requirement that the fund ceases to have any members for the purpose of paragraph 310-10(3)(a) of the ITAA 1997?

Answer

Yes, to the extent that the retainment of members is beyond the control of the acting trustee.

Relevant facts

The acting trustee of the fund (a complying superannuation fund), is seeking to transfer the members and assets of the fund to another complying superannuation fund under a successor fund transfer. In accordance with the provisions provided under Division 310 of the ITAA 1997, the acting trustee is seeking to transfer revenue and capital losses (tax losses). It is likely (but not certain) that the transferred assets will be cash.

The fund currently holds (directly and indirectly) a number of assets which are unlikely to yield the value at which they were formerly carried in their records and fund accounts (the 'Impaired Assets').

The acting trustee is either actively seeking (or may seek) compensation from certain third parties in respect of the Impaired Assets. It is proposed that this will take some time to complete and is unlikely to be resolved by the time of the proposed successor fund transfer (and possibly some years after that time).

The applicant contends that it is highly likely that the successor fund will not be prepared to acquire the Impaired Assets (with their accompanying potential claims, obligations and complexities). Further, some of the claims (more likely to succeed) can only be brought by the acting trustee of the fund and not by a successor fund.

As such, the acting trustee considers that at this time, it has no practical alternative other than to retain the Impaired Assets (and their accompanying actual or potential rights of claim) within the fund after the transfer of all of the other assets to the successor fund.

It is also anticipated that the fund will need to retain sufficient cash to ensure the continuing administration of the fund for a limited period and for the pursuit of legal claims in respect of the Impaired Assets. The acting trustee considers that it is not in the interests of members to write off the assets (and potentially valuable claims) or otherwise dispose of the assets at a heavy discount (reflecting their impaired value).

As a result it is expected that after the time of the transfer, a subset of existing members will continue to hold some residual membership interests in the fund. Members with no exposure to the Impaired Assets will be transferred in full to the successor fund.

The applicant contends that the retainment of members is beyond the control of the acting trustee.

Relevant legislative provisions

Division 310 of the ITAA 1997

Subsection 310-10(1) of the ITAA 1997

Subsection 310-10(2) of the ITAA 1997

Subsection 310-10(3) of the ITAA 1997

Subsection 310-10(4) of the ITAA 1997

Subsection 310-10(5) of the ITAA 1997

Subsection 104-195(1) of the ITAA 1997

Paragraph 104-195(1)(b) of the ITAA 1997

Paragraph 104-195(2)(b) of the ITAA 1997

Reasons for decision

All references are to the ITAA 1997 unless otherwise specified.

Summary

The acting trustee is able to rely on the exception provided in subsection 310-10(5) to the extent that the retainment of members is beyond their control.

Detailed reasoning

Division 310 provides optional roll-over relief for the transfer of capital losses (and revenue losses) where a complying superannuation fund or a complying approved deposit fund (ADF) merges with a complying superannuation fund with five or more members. This is achieved through the provision of a loss transfer and an asset roll-over. The transferring fund may also transfer previously realised capital losses and revenue losses, including its prior year losses. Division 310 applies to mergers that occur on or after 24 December 2008 and before 1 July 2011.

Division 310 allows two options for the asset roll-over depending on the net capital gain or loss position of the entity in relation to the transferred assets. If an entity is in a net capital loss position in relation to the transferred assets for the current year, it may choose either the global asset approach or the individual approach. If the entity is not in that position, it can only choose the individual asset approach.

Subdivision 310-B specifies what entities are eligible for the loss relief and sets out three conditions that must be satisfied (subsection 310-10(1)).

The first condition - assets held by a fund

The first condition for the loss transfer is satisfied under subsection 310-10(2), if, just before the arrangement was made, the transferring entity's assets included assets other than:

a) a complying superannuation/FHSA life insurance policy; or

b) units in a pooled superannuation trust.

The second condition - fund ceases to have members

Subsection 310-10(3) provides that the second condition is satisfied if, under the arrangement:

a) the transferring entity ceases to have any members (within the meaning of the Superannuation Industry Supervision Act 1993 (SIS Act)) at a particular time (the completion time); and

b) the individuals who cease to be members (within the meaning of that Act) of the transferring entity become members (within the meaning of that Act) of one or more complying superannuation funds (the continuing funds).

The third condition - number of members of the continuing fund

The third condition is satisfied under subsection 310-10(4) if either:

a) none of the continuing funds was a small superannuation fund, and all existed, just before the arrangement was made; or

b) the following subparagraphs apply:

I. only one of the continuing funds either was a small superannuation fund, or did not exist, just before the arrangement was made;

II. under the arrangement, a complying superannuation fund or complying approved deposit fund, other than the original fund, ceases to have any members (within the meaning of the SIS Act);

III. under the arrangement, the individuals who cease to be members (within the meaning of that Act) of that other fund become members (within the meaning of that Act) of the continuing fund;

IV. either the other fund or the original fund was not a small superannuation fund just before the arrangement was made; and

V. the continuing fund is not a small superannuation fund just after the earliest time when both the other fund and the original fund cease to have any members (within the meaning of that Act).

Application of Division 310 to the proposed successor fund transfer

It is considered that the fund will satisfy both the first condition under subsection 310-10(2) and third condition under subsection 310-10(4) as their assets include assets other than those listed in paragraphs 310-10(2)(a) and (b) and they comply with the small fund provisions, that is the continuing fund will not have four or fewer members.

However, it is considered that the fund will be unable to satisfy the second condition under subsection 310-10(3) as at the time of transfer, a subset of existing members will continue to hold some residual membership interests in the fund, representing their interests in the Impaired Assets (and their accompanying rights of claim).

There is a limited exception however to the requirement that the transferring superannuation fund must have no members at the completion of the transfer of assets. Under subsection 310-10(5), a transferring entity can ignore an individual who remains a member of a complying superannuation fund because of circumstances beyond the control of the trustee of that fund. This exception recognises that the transferring entity may be in a position which renders the trustee incapable of transferring some of the fund's members to the continuing fund at the time of the successor fund transfer.

Although subsection 310-10(5) is relatively new legislation, there are existing legislative provisions which are similarly framed. In particular, paragraphs 104-195(1)(b) and (2)(b) both specify the time period within which a trust must cease to exist to avoid the application of CGT event J4. The time period is six months after the start of the 'trust restructuring period'. The six month period is extended where the trust fails to cease to exist and that failure was caused by circumstances that were outside the control of the trustee and the trust then ceases to exist as soon as practicable after that time. The example at the end of subsection 104-95(1) provides that circumstances outside the control of the trustee would include the trustee being involved in litigation concerning the trust and cannot wind the trust up until the litigation is finished.

Specific guidance on the application of subsection 310-10(5) is provided at paragraphs 2.24 to 2.26 of the Explanatory Memorandum (Tax Laws Amendment (2009 measures no.6) 2009) (EM) and states:

2.24 …..This exception recognises that there may be circumstances beyond the control of the trustee of a superannuation fund that will not allow the trustee to transfer some of the fund's members to the continuing fund. [Schedule 2, part 1, item 1, subsection 310-10(5)]

2,25 These circumstances may include:

§ Family court orders;

§ An unsettled insurance claim for death or disability with the transferring fund; or

§ Extant legal proceedings that relate to a member of the transferring fund which mean that the member retains rights against the trustee of the transferring fund.

2.26 This exception allows funds that merge to obtain the loss relief even though they cannot fully satisfy the requirement that all members be transferred to the continuing entity due to legal impediments beyond the control of the trustee. [Schedule 2, part 1, item 1, subsection 310-10(5)]

Presently, the acting trustee is either actively seeking (or may seek) compensation from relevant third parties in relation to the Impaired Assets, it is noted that these actions may take several years to come into fruition. Further, the acting trustee has lodged an application under Part 23 of the SIS Act in respect of some of the fund's investments and intends to lodge additional applications for other investments where allegations of fraudulent conduct can be substantiated.

Based on the guidance provided by the EM it is considered that at the time of the proposed successor fund transfer the following would be beyond the control of the acting trustee:

a) legal proceedings brought against the acting trustee of the fund (the transferring fund) by a member of the transferring fund (extant legal proceedings);

b) legal proceedings brought by the acting trustee necessary to fulfil its duty (for example its fiduciary duty) under the trust deed, affecting the transfer of fund members (extant legal proceedings); and

c) pending legal proceedings which are certain to proceed because the acting trustee is compelled to enter into the proceedings to fulfil its duty (for example its fiduciary duty) under the trust deed, affecting the transfer of fund members.

Consequently, it is considered that any legal proceedings the acting trustee is compelled to undertake in its proper administration of the trust and claims which may arise from fund members (including a pre-existing right of claim) due to those proceedings would be beyond the control of the acting trustee. This would be the case even if those proceedings were pending but definite at the time the successor fund transfer takes place.

However, any pending legal proceedings at the time of the successor fund transfer which the acting trustee, in its proper administration of the trust can initiate, but which it is not compelled to undertake as a matter of necessity, given its fiduciary duty to fund members, would not be beyond the acting trustee's control. Similarly any claims fund members may have which are dependant on such legal proceedings are not beyond the acting trustee's control.

As noted previously, the acting trustee has lodged an application pursuant to Part 23 of the SIS Act. The acting trustee also intends to lodge additional applications where the allegations of fraudulent conduct can be substantiated. The acting trustee is still currently investigating these claims as part of its proper administration of the trust.

By virtue of section 229 of the SIS Act, any application under Part 23 of the SIS Act must be made by the trustee of the superannuation fund that suffered the loss, that is, it can only be made by the acting trustee of the fund and not by the trustee of any successor fund. As such, affected members of the fund will retain their rights against the acting trustee in terms of these Impaired Assets. In these circumstances it is considered that the retainment of affected members is beyond the control of the acting trustee as it is a requirement of the SIS Act that the application be lodged by the acting trustee, consequently they are under a legal impediment which is beyond their control.

Further, the acting trustee is also continuing to work on potential recoveries which relate directly to the affected members, as such, these members will continue to have an interest in the acting trustee upon transfer to the successor fund.

As provided at paragraph 2.25 of the EM, extant legal proceedings are listed as a circumstance which 'may be included', allowing for other situations to occur which would trigger the exemption under subsection 310-10(5). With this in mind it is considered that pending but definite legal proceedings, because the acting trustee is compelled to undertake them to fulfil their fiduciary duty, are considered appropriate and would qualify for the exception under subsection 310-10(5).

Based on the facts of this case it is considered that the acting trustee can rely on the exception provided under subsection 310-10(5) to satisfy the requirement that the fund ceases to have any members for the purpose of paragraph 310-10(3)(a) as the retainment of members at the time of the proposed successor fund transfer is beyond their control.