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Ruling

Subject: Transferred capital losses

Question 1

Is any part of the earlier year net capital losses and transfer year net capital losses (the transferred capital losses) disregarded by the Trust under section 118-320 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is any part of the transferred capital losses disregarded by the Trust under section 118-12 of the ITAA 1997?

Answer

No

Question 3

Are the transferred capital losses available to reduce the Trust's non disregarded capital gains in accordance with section 102-5 of the ITAA 1997?

Answer

Yes

Question 4

Is any part of the transferred capital losses to be included in determining the exempt income of the Trust under section 295-385 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

1 July 2011 to 30 June 2014

Relevant facts and circumstances

Fincorp operates a superannuation business through a number of superannuation funds. During the course of 2010 and 2011, a number of these funds were brought under one umbrella fund, the Trust, to improve the benefits to their members. The merger of these funds into the Trust was achieved by way of successor fund transfers (SFT). One of the funds merged with the Trust was SSSuper.

Both the Trust and SSSuper are complying superannuation funds that have members in accumulation phase and members in pension phase.

Before their merger, the assets of the Trust supporting current pension liabilities were segregated current pensions assets within the meaning set out in section 295-385 of the ITAA 1997. The Trust has applied this method since its inception and income derived from these segregated current pension assets that would otherwise be assessable income is exempt from income tax under section 295-385 of the ITAA 1997. Any capital gains or losses that arise from a CGT event happening in relation to these segregated current pension assets is disregarded under section 118-320 of the ITAA 1997.

However, the assets of SSSuper before its merger with the Trust were not segregated. Instead, in accordance with section 295-390 of the ITAA 1997, a proportion of the ordinary and statutory income of SSSuper is exempt from tax to the extent that it is related to current year pension liabilities. SSSuper had applied section 295-390 to the determination of its exempt income for at least 10 years before the merger.

The merger of SSSuper and the Trust by way of a SFT under a deed of transfer was completed by 30 September 2011. All members of SSSuper were transferred to the Trust. SSSuper, as the transferring entity, was eligible to choose, and did choose under Subdivision 310-B of the ITAA 1997, to transfer losses to the Trust in accordance with section 310-25 of the ITAA 1997. In accordance with section 310-30 of the ITAA 1997, SSSuper chose to transfer its earlier year net capital losses (paragraph 310-30(1)(a) of the ITAA 1997) and transfer year net capital losses (paragraph 310-30(1)(b) of the ITAA 1997)) which together form the transferred capital losses the subject of this private ruling. The quantum of these transferred capital losses has not been verified by the Commissioner and accordingly the private ruling at Question 3 is not meant to provide any assurance that the amount of transferred capital losses is correct.

SSSuper did not seek asset rollover relief under section 310-45 of the ITAA 1997 in respect of the assets transferred under the SFT and therefore, the asset transfers were disposals for CGT purposes.

Before the merger, the Trust was a fully segregated fund which maintained separate assets to fund its accumulation and pension liabilities. One of the requirements for accepting the SFT of SSSuper was that existing members of the Trust were not affected negatively by the merger with SSSuper. When the SFT of SSSuper was accepted, the SSSuper assets were segregated into accumulation and pension assets to maintain consistent treatment and policies across all the plans administered by the Trust. There is also a future intention to allow SSSuper accumulation members and other accumulation members within the Trust to select common investment options and therefore these investment options must remain segregated from any pension assets.

When the Trust and SSSuper were merged, the trustee of the Trust segregated the assets needed to meet the pension obligations that the Trust took over in respect of the relevant SSSuper members. These assets are segregated within the meaning of section 295-385 of the ITAA 1997. Consequently, the income from these assets will be exempt pursuant to subsection 295-385(1) of the ITAA 1997 and capital gains and losses arising from CGT events occurring in relation to these assets will be disregarded pursuant to section 118-320 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 118-12

Income Tax Assessment Act 1997 section 118-320

Income Tax Assessment Act 1997 section 295-385

Income Tax Assessment Act 1997 section 295-390

Reasons for decision

Question 1

Is any part of the earlier year net capital losses and transfer year net capital losses (the transferred capital losses) disregarded by the Trust under section 118-320 of the ITAA 1997?

Section 118-320 of the ITAA 1997 states:

Segregated current pension assets of a complying superannuation entity  

A capital gain or capital loss that a complying superannuation entity makes from a CGT event happening in relation to a segregated current pension asset is disregarded

A capital gain or loss is disregarded where it arises from a CGT event that occurs in relation to a segregated current pension asset. The Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 that introduced section 118-320 to the ITAA 1997 refers to capital gains being derived from segregated assets as being exempt from tax. A capital gain or loss is disregarded if the asset is a segregated current pension asset when a CGT event occurs.

The losses that SSSuper transferred to the Trust arose in relation to assets held by SSSuper. The assets of SSSuper before the transfer were not segregated and SSSuper determined its assessable and exempt income under the proportional method in section 295-390 of the ITAA 1997 and had done so for at least ten years before the SFT. As the assets of SSSuper were not segregated at the relevant time, capital losses arising from CGT events occurring in relation to them are not disregarded under section 118-320 of the ITAA 1997. The fact that part of the remaining assets of SSSuper that have been transferred to the Trust will now be segregated to meet the pension obligations that the Trust took over in respect of the relevant SSSuper members does not change this analysis.

Accordingly, the capital losses that have been transferred from SSSuper to the Trust under the SFT are not subject to section 118-320 of the ITAA 1997 and are not disregarded in whole or in part by the Trust.

Question 2

Is any part of the transferred capital losses disregarded by the Trust under section 118-12 of the ITAA 1997?

Section 118-12 of the ITAA 1997 states:

A capital gain or capital loss you make from a CGT asset that you used solely to produce your exempt income or non-assessable non-exempt income is disregarded.

As noted in Question 1 above, the losses that SSSuper transferred to the Trust arose in relation to assets held by SSSuper. While these assets were held by SSSuper, they were not segregated and therefore, the income derived from them was not exempt under section 295-385 of the ITAA 1997. Rather, SSSuper determined its exempt income using the proportional method prescribed in section 295-390 of the ITAA 1997 and therefore, its assets were used partly to produce assessable income and partly to produce exempt income.

No part of the transferred capital losses was made from assets used solely to produce the exempt income of SSSuper and consequently section 118-12 of the ITAA 1997 will not apply to the transferred capital losses. The fact that part of the remaining assets of SSSuper that have been transferred to the Trust will now be segregated to meet the pension obligations that the Trust took over in respect of the relevant SSSuper members does not change this analysis.

Accordingly, the capital losses that have been transferred from SSSuper to the Trust under the SFT are not subject to section 118-12 of the ITAA 1997 and are not disregarded in whole or in part by the Trust.

Question 3

Are the transferred capital losses available to reduce the Trust's non disregarded capital gains in accordance with section 102-5 of the ITAA 1997?

Section 102-5 of the ITAA 1997 sets out the steps that a taxpayer must follow in calculating its net capital gain for an income year.

Step 1 requires that any capital losses incurred during the income year be used to reduce any capital gains made during the year. The Trust would use the transfer year net capital loss of SSSuper to reduce its capital gains in that year under this step.

Step 2 requires that any previously unapplied net capital losses from earlier income years be used to further reduce any capital gains remaining after Step 1. The Trust will use this step to further reduce its capital gains for an income year by offsetting any unapplied earlier year net capital losses that have been transferred from SSSuper.

The use of this method is supported by the Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No. 7) Bill 2011 that extended to 30 September 2011 the time allowed for loss transfers for certain merging superannuation funds:

Treatment of losses transferred during the extended period

6.14 The three-month extension of the loss relief means that certain transactions of eligible superannuation funds may occur after 30 June 2011. This extension applies only for the purpose of determining eligibility for the loss relief.

6.15 Accordingly, the existing CGT rules will apply for the purposes of determining how transferred losses and assets will be dealt with for the continuing fund. In particular, where asset transfers occur during the extended period, they will be taken into account by the continuing entity in the income year of the transfer.

Example 6.22

Bronze Super (the transferring entity) merges with Gold Super (the continuing entity) on 30 June 2011. Bronze Super ceases to have any members on 30 June 2011. This is the completion time of the merger as defined by the loss relief provisions.

Most of Bronze Super's assets are transferred to Gold Super on 30 June 2011. However, a small number of the transferring entity's assets were subject to legal impediments such that they cannot be transferred until 31 August 2011.

In the hands of Gold Super, the losses transferred before 1 July 2011 will be available for Gold Super to utilise in determining its net capital gain for the 2010-11 income year. Applying the existing CGT rules, capital losses transferred on 31 August 2011 will be available for Gold Super in calculating its net capital gain for the 2011-12 income year.

As the transferred capital losses were transferred on 30 September 2011, they will be available (to the extent that they exist) to the Trust to reduce any of its capital gains that have not been disregarded under another provision of the ITAA 1997.

Question 4

Is any part of the transferred capital losses to be included in determining the exempt income of the Trust under section 295-385 of the ITAA 1997?

Subsection 295-385(1) of the ITAA 1997 provides as follows:

The ordinary income and statutory income of a complying superannuation fund for an income year is exempt from income tax to the extent that:

(a) it would otherwise be assessable income; and

(b) it is from segregated current pension assets.

Statutory income is defined in section 6-10 of the ITAA 1997 as amounts that are not ordinary income but are included as assessable income by provisions about assessable income summarised in section 10-5 of the ITAA 1997. Section 10-5 of the ITAA 1997 includes as statutory income capital gains that are made assessable under section 102-5 of the ITAA 1997.

Section 102-5 of the ITAA 1997 sets out the steps to be followed in determining whether a taxpayer has a net capital gain for a year. However, Note 2 to Step 1 states that some provisions under Division 118 of the ITAA 1997 require certain capital gains or losses to be disregarded in working out the net capital gain. This would include a capital gain under section 118-320 of the ITAA 1997 in relation to segregated current pension assets of a complying superannuation entity. As a result, the transferred losses cannot be applied to the capital gains of segregated current pension assets.

Furthermore, as the transferred capital losses cannot be deducted from any other ordinary or statutory income in relation to the segregated pension assets, no part of the transferred capital losses will be included in determining the exempt income of the Trust under section 295-385 of the ITAA 1997.