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Ruling
Subject: Tax treatment of previously non-complying superannuation fund
Questions
1. Is the Fund to be treated as a complying superannuation fund for the full 2010-11 income year?
2. Will the net capital gain on the sale of one of the Fund's investment properties be subject to tax as though the Fund were a complying superannuation fund?
Advice/Answers
1. No.
2. No.
This ruling applies for the following period
Year ending 30 June 2011
The scheme commenced on
1 November 2010
Relevant facts
The Fund has been a non-complying superannuation fund since it was established in the 19XX income year.
A contract for the sale of one of the Fund's investment properties (the Property) was exchanged in the 2010-11 income year.
The directors of the trustee of the Fund (the Trustee Company) have elected that the Fund become a regulated superannuation fund in accordance with the requirements of the SISA and the Superannuation Industry (Supervision) Regulations 1994 (SISR).
It is only after the sale of the Property that the Fund elected to become a regulated superannuation fund.
The Fund has not received a notice of compliance from the Commissioner.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-5
Income Tax Assessment Act 1997 Division 104
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 295-325
Income Tax Assessment Act 1997 Section 995-1
Superannuation Industry (Supervision) Act 1993 Section 45
Superannuation Industry (Supervision) Regulations 1994
Reasons for decision
Summary of decision
In this case the Fund has been a non-complying superannuation fund since it was established in the 1998-99 income year. The Fund has not received a notice of compliance from the Commissioner. Therefore, the Fund is not a complying superannuation fund.
A contract for the sale of one of the Fund's investment properties (the Property) was exchanged in the 2010-11 income year. Therefore, a CGT event occurred in the 2010-11 income year. It is only after the sale of the Property that the Fund elected to become a regulated superannuation fund. Therefore the CGT event occurred when the Fund was a non-complying superannuation fund. The net capital gain will therefore be taxed accordingly.
In addition, income earned by a non-complying superannuation fund that has become a complying superannuation fund within an income year will not be taxed as though the fund has been a complying superannuation fund for the whole year.
Detailed reasoning
Complying superannuation funds are subject to concessional tax treatment.
Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines a complying superannuation fund to mean a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993 (SISA).
Section 45 of SISA states:
(1) A fund is a complying superannuation fund for the purposes of the Income Tax Assessment Act in relation to a year of income (the current year of income) if, and only if:
(a) the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to the current year of income; or
(b) the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to a previous year of income and has not given a notice to a trustee of the fund under that section stating that the fund was not a complying superannuation fund in relation to:
(i) the current year of income; or
(ii) a year of income that is:
(A) later than that previous year of income; and
(B) earlier than the current year of income.
In addition, only an Australian superannuation funds can qualify as complying superannuation funds.
In this case the Fund has been a non-complying superannuation fund since it was established in the 1998-99 income year. The directors of the trustee of the Fund (the Trustee Company) have elected that the Fund become a regulated superannuation fund in accordance with the requirements of the SISA and the Superannuation Industry (Supervision) Regulations 1994 (SISR). However, the Fund has not received a notice of compliance from the Commissioner.
Therefore, the Fund is not a complying superannuation fund under section 45 of SISA and is not a complying superannuation fund under the ITAA 1997.
It is noted that a non-complying superannuation fund that was a complying superannuation fund for the previous income year will be subject to tax on an amount calculated under section 295-325 of the ITAA 1997 to recoup the tax advantages the fund was granted under its former status. The amount calculated under section 295-325 of the ITAA 1997 is included in the assessable income of the non-complying superannuation fund following the income year in which it was a complying superannuation fund, that is the first year in which the fund's status is different from the preceding year. A similar provision does not exist where a non-complying superannuation fund becomes a complying superannuation fund. The income earned by a non-complying superannuation fund that has become a complying superannuation fund within an income year will not be taxed as though the fund has been a complying superannuation fund for the whole year.
You have advised that in the 2010-11 income year contracts for the sale of one of the Fund's investment properties (the Property) were exchanged and that the sale resulted in a net capital gain.
Section 102-5 of the ITAA 1997 sets out to include in an entities assessable income includes their net capital gain for the income year.
Division 104 of the ITAA 1997 sets out the capital gains tax (CGT) events for which a entity can make a capital gain or loss. Division 104 sets out how to work out a gain or loss from each event and the timing of each event.
The most common CGT event is CGT event A1. Section 104-10 of the ITAA 1997 explains that this event and states:
(1) CGT event A1 happens if you dispose of a CGT asset.
(2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.
(3) The time of the event is:
(a) when you enter into the contract for the disposal; or
(b) if there is no contract - when the change of ownership occurs.
Example:
In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000.
The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place).
(4) You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.
Exceptions
(5) A capital gain or capital loss you make is disregarded if:
(a) you acquired the asset before 20 September 1985; or
(b) for a lease that you granted:
(i) it was granted before that day; or
(ii) if it has been renewed or extended - the start of the last renewal or extension occurred before that day.
Compulsory acquisition
(6) If the asset was acquired from you by an entity under a power of compulsory acquisition conferred by an Australian law or a foreign law, the time of the event is the earliest of:
(a) when you received compensation from the entity; or
(b) when the entity became the asset's owner; or
(c) when the entity entered it under that power; or
(d) when the entity took possession under that power.
(7) CGT event A1 does not happen if the disposal of the asset was done:
(a) to provide or redeem a security; or
(b) because of the vesting of the asset in a trustee under the Bankruptcy Act 1966 or under a similar foreign law; or
(c) because of the vesting of the asset in a liquidator of a company, or the holder of a similar office under a foreign law.
In this case the contract for the sale of the Property was exchanged in the 2010-11 income year. Therefore, the CGT event occurred in the 2010-11 income year.
It is only after the sale of the Property that the directors of the Trustee Company elected that the Fund become a regulated superannuation fund in accordance with the requirements of the SISA and SISR.
Therefore the CGT event occurred when the Fund was a non-complying superannuation fund. The net capital gain will therefore be taxed accordingly.