Edited version of private ruling

Authorisation Number: 1011712325908

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Ruling

Subject: Calculation Methodology for CGT

Question 1

Will the Commissioner accept the manner in which the capital gain or capital loss is calculated by the taxpayer for the purposes of section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) by nominating the specific shares (that is, the parcel of shares) from the taxpayer's aggregated portfolio is allowable in determining the taxpayer's overall net capital gain or loss for a particular income year and satisfies the requirements of subsection 121-20(1) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year Ended June 2011

Year Ended June 2012

Year Ended June 2013

Question 2

Will the Commissioner confirm that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) does not apply to the application of the proposed arrangement?

Answer

Yes.

This ruling applies for the following periods:

Year Ended June 2011

Year Ended June 2012

Year Ended June 2013

Relevant facts and circumstances

The taxpayer is a complying superannuation fund (the Fund). The Fund has different asset classes including Australian equities and international equities. The trustee of the Fund engages a number of fund managers to make investment decisions on its behalf, and a Custodian to hold all shares as nominee for the Fund and settle transactions. The Custodian also maintains the accounting and capital gain tax (CGT) records and calculations to assist the trustee in meeting its obligations.

The Custodian offers a system (the Custodian's system) in which the records of all acquisitions and disposals of shares for all fund managers at sub-portfolio level will also be available on an aggregate level. Under the proposed system, parcel selection can be performed at both sub-portfolio level and also at the aggregate level. This is likely to result in different parcels being selected at the sub-portfolios and aggregate levels. Calculations made at the sub-portfolio level will continue to be used to solely monitor manager's post-tax performance while calculations at the aggregate level will be used for calculating the Fund's tax position.

With respect to the assets supporting pensions, the Fund uses an actuarial approach to determining the exemption for the assets supporting current pensions. The proposed Custodian's system will not change this process.

The Custodian's system is designed to record at the individual manager level:

§ the date that an investment manager entered the contract to buy or dispose of a parcel of assets (that is, a parcel of identical shares);

§ the name and security identifier (for example, SEDOL or ISIN) of the assets required;

§ the type and class of asset (for example, ordinary shares);

§ the number of assets (for example, the number of shares in the parcel) that have been acquired or disposed;

§ the cost elements of the parcel of shares including of any incidental costs;

§ the reduced cost base when a tax deferred distribution is received;

§ the 'frozen indexed' cost base where relevant;

§ the impact of corporate actions including bonus issues, return of capital, share splits, takeovers and so on;

§ the proceeds received and any incidental costs incurred (for example, brokerage) in case of a disposal;

§ the notional 'nominal parcel of assets' that was subject to the CGT event;

§ the remaining balance of the parcel where it has been partially disposed;

§ the unique transaction ID number of each transaction; and

§ transactions in a foreign currency are converted to Australian dollars at the exchange rate on the contract date.

The above information is replicated at the aggregate level with further detail of:

§ the nominated parcel of assets that was subject to the CGT event. This nominated parcel of assets is what is then used for the Fund's tax records.

§ the method of selecting the nominated parcel of assets subject to the CGT event is automated within the system.

The Custodian also performs the following reconciliations:

§ the closing balance of assets recorded in its custody system to its accounting and tax system at the individual manager level; and

§ the closing balance of assets recorded in the aggregate portfolio to the sum of the individual manager portfolios.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 100-45.

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Subsection 121-20(1).

Income Tax Assessment Act 1997 Section 121-25.

Income Tax Assessment Act 1936 Subsection 177A(1).

Income Tax Assessment Act 1936 Subsection 177C(1).

Income Tax Assessment Act 1936 Section 177D.

Income Tax Assessment Act 1936 Section 177F.

Question 1

For CGT purposes, where a disposal of a CGT asset (for example, a parcel of shares) occurs, a capital gain or loss for most capital gains events is worked out in accordance with section 100-45 of the ITAA 1997.

For CGT purposes, the Commissioner will accept the taxpayer's selection of the identity of shares that have been disposed of. CGT Determination TD 33 Capital Gains: How do you identify individual shares within a holding of identical shares? (TD 33), at paragraph 4 provides:

In the past, where unidentifiable shares have been disposed of, the Commissioner has accepted 'first-in first-out' as a reasonable basis of identification. For CGT purposes, the Commissioner will also accept the taxpayer's selection of the identity of shares disposed of.

Under the taxpayer's selection of the identity of shares method, the taxpayer must keep detailed records of the assets sold and this must be used in determining any capital gain or loss.

Under the proposed Custodian's system, all relevant information will continue to be recorded in both sub-portfolio level and the aggregate level. The system would also perform the parcel selection at the aggregate level and decide which particular parcel of shares from the aggregate assets that have been disposed of for CGT purposes. Gains or losses at the aggregate level will be used to determine the Fund's CGT tax position.

Where the taxpayer maintains sufficient records to specifically identify the shares and its cost base, TD 33 allows the taxpayer to select the identity of shares they wish to nominate as having disposed of. However, the average cost is not an acceptable method (paragraph 5 of TD 33).

The Fund has asserted that the proposed system is capable of maintaining appropriate accounting records of the acquisition and disposal of the relevant shares which will enable the Fund to identify the shares sold and their actual costs.

On this basis, the Commissioner will accept the selection of specific assets that is 'nominated parcel of shares' for the CGT event, from the Fund's aggregate assets in order to determine the Fund's overall capital gain or loss for the income year.

Record keeping requirements

Subsection 121-20 (1) of the ITAA 1997 specifies that:

You must keep records of every act, transaction, event or circumstance that can reasonably be expected to be relevant to working out whether you have made a capital gain or capital loss from a CGT event. (It does not matter whether the CGT event has already happened or may happen in the future.)

Section 121-20 specifies that records that are relevant to determine the CGT liability are records that:

§ identify the date on which the assets are bought or sold

§ identify the price at which the assets are purchased and sold
record the details of every act, transaction, event or circumstance that is relevant to

§ work out the capital gain or capital loss from a CGT event, and

§ are in English or readily accessible and convertible into English.

Where electronic records are kept, the Taxation Ruling TR 2005/9: Record keeping - electronic records (TR 2005/9) provides:

Advances in technology (including the internet) have meant that many taxpayers who carry on a business now process and keep their records electronically rather than through a paper based system. This includes encrypted records. The Tax Office requires that records, whether kept on paper or electronically, must be kept accurately so as to enable that person's tax liability to be readily ascertained. The records must be in a form which Tax Office staff can access and understand in order to ascertain that person's taxation liability.

Where the taxpayer acquires identical shares in a company, and the taxpayer wishes to adopt the selection of identity of shares disposed of method specified in TD 33, adequate records must be kept to specifically identify the shares.

Taxation Ruling TR 96/4 Income tax: valuing shares acquired as revenue assets specifically deals with the valuation of shares that are held by the taxpayer as revenue assets. The Ruling provides guidance on appropriate methods used to value unidentifiable shares where the shares are revenue assets. However, paragraph 3 of the Ruling specifies that the Ruling does not apply to the trustee of a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust. Further, paragraph 2 of the Ruling particularly states that the Ruling does not apply to taxpayers who acquired shares as capital assets. The situation is dealt with in TD 33.

Nevertheless, the Ruling provides some guidance on what records should be kept for the purpose of identifying shares. In this respect, it is considered that the key records that a taxpayer needs to maintain for CGT purposes with respect to the identical shares must include (but not limited to) the following:

§ allocate a specific identity code to, or otherwise identify specifically, each buy or sell transaction;

§ identify the company in which a parcel of shares is acquired;

§ identify the class of shares acquired;

§ identify the date on which shares are bought or sold;

§ record the price at which shares are purchased and sold;

§ record the balance of shares acquired in a particular trade where a proportion of those shares are appropriated to a subsequent sale transaction; and

§ preserve the integrity of those codes and system through inbuilt system audit trails.

In the present case, the Fund asserts that the Custodian's system is designed to keep the detailed records of both the accounting and tax results at the Fund level. The Fund also states that the records are kept electronically and the Custodian's system meets the record keeping requirements set out in TR 2005/9 with respect to:

§ record retention;

§ data security and integrity;

§ system documentation;

§ retaining archival copies; and

§ accessibility.

Based on the information provided, it is considered that the Fund has sufficient records to enable the Fund to specifically identify the shares that have been disposed (at the aggregate portfolio), and calculate the gain or loss in respect of the disposal of the shares.

Accordingly, the Commissioner confirms that the records maintained by the proposed Custodian's system satisfy the requirements of subsection 121-20(1) of the ITAA 1997.

Question 2

Part IVA of the ITAA 1936 (Part IVA) is the general anti-avoidance provision which gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained by a taxpayer in connection with a scheme to which Part IVA applies.

In order for Part IVA to apply, a number of elements must be satisfied, namely:

§ there is a 'scheme' as defined in subsection 177A(1) of the ITAA 1936;

§ there is a 'tax benefit' as defined in subsection 177C(1) of the ITAA 1936; and

§ after consideration of a number of factors specified in subsection 177D of the ITAA 1936, it is concluded that the scheme was entered or is entered into for the dominant purpose of obtaining the tax benefit.

The scheme

Subsection 177A (1) of the ITAA 1936 widely defines a scheme as:

(a) 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

(b) any scheme, plan, proposal, action, course of action or course of conduct.

In the present case, the broad definition of 'scheme' would encompass the arrangement proposed. The applicant also recognises that the establishment and use of the new record keeping system, the creation of aggregate portfolio and the selection of share parcels from the aggregate portfolio is likely to be within the definition of scheme.

The tax benefit

Subsection 177C(1) of the ITAA 1936 defines the tax benefit that may be obtained by a taxpayer in connection with a scheme.

In the arrangement, the reasonable expectation is that if the scheme is not entered into, the Fund would continue to select the nominated parcel of shares from the manager investment portfolios and the CGT position for the Fund is determined by adding up all the individual gains or losses from each investment manager portfolio.

After the scheme is put in place, the likely benefit would be the enhanced capacity to select the parcels from the entire aggregate portfolio rather than from the individual portfolios.

The applicant also stated that it is likely that the following tax benefits would arise:

§ reduction of capital gains for a year of income; or

§ capital losses rather than capital gains for a year of income; or

§ discount capital gains rather than non-discount capital gains for a year of income.

It is concluded that there is a reasonable expectation that the Fund will obtain a tax benefit as defined in connection with the scheme.

Dominant purpose of the scheme

For Part IVA to apply to the scheme, it must have been entered into for the dominant purpose of obtaining the tax benefit.

Having regard to the relevant factors specified in section 177D of the ITAA 1936, it is concluded that the scheme will not be entered into for the sole or dominant purpose of obtaining a tax benefit in connection with the scheme.

Conclusion

This leads to the conclusion that the tax benefit arising from the scheme will not be one to which Part IVA applies.

Accordingly, the Commissioner confirms that Part IVA will not apply to the proposed arrangement.