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Authorisation Number: 1012017352417

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Subject: Capital Gains Tax - shares - disposal

Question:

Did a capital gains tax (CGT) event happen when your shares were transferred to your self managed superannuation fund?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

Your broker selected shares from your share portfolio that were to be transferred in an off-market transfer from your personal account into your self managed superannuation fund (SMSF).

You have provided documents which form part of, and should be read in conjunction with this private ruling:

Response from you to our request for further information.

The following information has been obtained from these documents:

o You completed the transfer of these shares after 20 September 1985 as you believed the value of the shares would be an amount which would comply with the 3 year cap and comply with the SMSF obligations.

o An administrative error by the broker's assistant resulted in your entire share portfolio being transferred in an off-market transfer from your personal account into your SMSF

o The transfer of this amount to your SMSF was in excess of the amount permitted by your SMSF and as a result the transfer was rejected.

o The shares were transferred from the SMSF back into your personal account.

o The shares were transferred at the same cost base and date of original transfer, effectively reversing the error by the broker's assistant.

o The SMSF became the legal owner of the shares once they were transferred from your personal account to the SMSF.

o You have made a capital gain as a result of the transfer of the shares into the SMSF.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 106-50

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain gains you make. You make a capital gain or capital loss as a result of a CGT event happening to a CGT asset. The most common event, CGT event A1, occurs when your ownership interest in a CGT asset is transferred to another entity.

The disposal of the shares, which are a CGT asset, causes a CGT event A1 to occur under the Income Tax Assessment Act 1997 104-10. (ITAA 1997) This change of ownership happens when the contract is signed, or if there is no contract, when the change of ownership actually takes place.

In your particular situation it is necessary to determine the issue of you being absolutely entitled to the asset as against the trustee. The phrase "absolutely entitled to the asset as against the trustee" is not defined in the Australian capital gains tax legislation. It was, however, taken from the United Kingdom legislation and consideration of that country's case law, while not binding, provides assistance in interpreting this phrase.

The United Kingdom approach is that a beneficiary would be 'absolutely entitled' to an asset as against the Trustee where the interest of the beneficiary is not contingent but is vested, indefeasible and is of a kind which enables the beneficiary to direct the trustee to convey the asset to the beneficiary or otherwise. (Tomlinson v Glyns Executor & Trustee Co; Hoare Trustees V Gardiner (1978) STC 89).

Walton J in Stephenson v Barclay's Bank Co (1975) 1 All ER 625 explained that a beneficiary who is only one of several sui juris beneficiaries can only require a distribution of her/his share of the trust assets and then only if the assets are readily divisible. This would mean that whether such a beneficiary would be absolutely entitled to a share of the trust assets as against the trustee would depend on the nature of the assets in the trust e.g. would be entitled if the asset was money but not if the asset was land. This would raise major practical difficulties in the operation of trusts.

It should also be noted that once the asset is transferred to the SMSF you would not have any direct entitlement to that asset until events specified in the trusts deed actually occurred. Members of superannuation funds only have a contingent interest (contingent upon the happening of a future event, eg retirement or death) in the assets of the fund and, as stated by OLoughlin J in Coram, re: Ex parte Official Trustee in bankruptcy v. Inglis (192) 36 FCR 250; 109 ALR 353 at 257:

a member of a superannuation fund is neither the legal or beneficial owner of the amount that stands to the credit of his account from time to time[Hence] the present right of a member of a superannuation fund is no more than an expectancy. [emphasis added].

Conclusion

You entered into an arrangement where your shares were transferred in an off-market transfer from your personal account into your SMSF. Your broker's assistant completed the transfer documents in error and the transfer has subsequently been reversed by your SMSF.

Applying the CGT provisions to your particular circumstances, the disposal of your shares to the SMSF means that you did not remain the legal owner of the shares once they were transferred from your personal account to your SMSF. This event triggered CGT event A1 and as such there will be a CGT tax liability as a result.

Whilst we acknowledge and appreciate your particular circumstances, the Commissioner does not have discretion to disregard any capital gain that you are liable for as a result of the transfer of the shares to the SMSF