Edited version of your private ruling

Authorisation Number: 1012536332808

Ruling

Subject: Tax efficacy of the asset selection methodology adopted

Question 1

Will the asset selection methodology adopted by ABC satisfy the requirements for calculating ABC's capital gains and losses for the purposes of the capital gains tax provisions of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Can the asset selection methodology adopted by ABC be used to choose the securities disposed of for the purposes of determining ABC's income or deductions arising from that disposal under the following provisions?

· Division 16E of the Income Tax Assessment Act 1936 (ITAA 1936)

· section 26BB of the ITAA 1936

· section 70B of the ITAA 1936

· section 6-5 of the ITAA 1997

· section 8-1 of the ITAA 1997

· Division 230 of the ITAA 1997

Answer

Yes

Question 3

Will records maintained by ABC satisfy the record keeping obligations for securities in order that particular investments held on revenue/capital account can be appropriated to a particular sale/disposal?

Answer

Yes.

Question 4

Will Part IVA of the ITAA 1936 apply to the asset selection methodology arrangement?

Answer

No

Question 5

Is the asset selection methodology used for investments held by DEF Pty Ltd (DEF) combined with the parcel selection methodology approach adopted for investments held through GHI Pty Ltd (GHI) within the direct investment service an acceptable approach to parcel/lot selection at the fund level (i.e. across investments held by GHI/JKL Pty Ltd (JKL) in the direct investment service and those held by DEF in the direct investment service)?

Answer

Yes.

This ruling applies for the following period:

1 July 2013 to 30 June 2018

The scheme commences on:

1 July 2013

Relevant facts and circumstances

ABC is a 'complying superannuation fund' pursuant to section 995-1 of the ITAA 1997.

ABC engages the services of DEF as its custodian. ABC (through DEF) holds various securities in its investment portfolio, which are segregated in sub-portfolios with each sub-portfolio managed by an individual investment manager. These sub-portfolios are not separate legal entities from ABC and together form ABC's overall investment portfolio.

It is common for each individual investment manager to hold identical securities.

Each security held by DEF as custodian is held for the absolute benefit of ABC as a regulated superannuation fund. Each security is held in the same name and identifier. DEF's systems also record various information necessary to identify separate tax parcels and to calculate the capital or revenue gain or loss.

Historically, for accounting and tax purposes, DEF has calculated the capital/revenue gains/losses on the disposal of securities on a sub-portfolio basis.

However, in calculating the net capital gain or loss for ABC, DEF allocates capital losses in accordance with section 102-5 of the ITAA 1997. The allocation of the capital losses in this respect would in many instances be made between sub-portfolios.

DEF (in its capacity as Custodian) offers an asset selection methodology, which allows a client of DEF to identify securities from within all sub-portfolios instead of only the sub-portfolio of the investment manager initiating the sale.

Specifically, where an investment manager initiates a sale of a security on behalf of a client, DEF (in accordance with the client's instruction pursuant to the asset selection methodology), identifies any security using a nominated parcel selection methodology within the client's total investment portfolio as the security sold for tax calculation purposes. The parcel selection methodology identifies a particular parcel by reference to its specific attributes including date of acquisition and tax cost base.

For the purposes of calculating capital gains and losses, the selection is effected at the time of the CGT event and the consequent gain or loss recorded at this time will be used to calculate the net capital gain (or loss) for the year for tax return filing purposes. For the purposes of calculating revenue gains and losses, the selection is effected and recorded at the time of disposal and the consequent income or deduction recorded at this time will be used to calculate the taxable income for the year for tax return filing purposes.

Under the asset selection system, DEF will record the same information as the current DEF system used for ABC's investments, including:

· Date of the contract to buy or dispose of a parcel of securities;

· Name and security identifier;

· Type and class of asset;

· Number of assets that have been acquired or disposed;

· Cost elements of the parcel of assets including any cost base adjustments;

· Reduced cost base (including any cost base adjustments); and

· Proceeds received for the sale (including any sale costs).

The asset selection methodology operates by creating a "propagated portfolio" which encompasses the tax information of all securities from all sub-portfolios and allows a parcel within this folio (i.e. the propagated portfolio) to be specifically selected for sale. The asset selection methodology will only apply to securities that are identical and have the same identifier.

The asset selection system will retain records electronically.

ABC also offers its members the ability to self manage some or all of their superannuation or pensions investments through a direct investment service. The direct investment service enables members to choose which assets they wish ABC to invest their member balance in.

Assets held by ABC referable to the direct investment service will be held by GHI as sub custodian to JKL as ABC's custodian.

Within the administrative systems that support the direct investment service these is a clear and continuous segregation between assets as they relate to individual member accounts.

When a share or unit acquisition is undertaken by a member under the direct investment service (which will occur via instruction through a secure website), GHI will receive instructions to settle the transaction from funds in the Member Cash Account referable to the member acquiring the share or unit and will register ownership of the securities in a custodial account with ABC designated as the beneficial owner and a sub-account that identifies the underlying member within the fund. GHI will maintain the holding under a HIN (holding identification number) that is unique to ABC and the member. Similarly when an asset is sold via the secure website, GHI will receive the appropriate settlement instructions and pay the disposal proceedings into the particular member's Member Cash Account.

Within the administrative systems that support the direct investment service, GHI will be able to specifically identify the share or unit being sold when that particular investment is sold by a member. This is the case even if it is "identical" (for example, in terms of class and company) to other shares held within the direct investment service by other members. Assets are however set up within the direct investment service to be realised on a FIFO basis within a particular member's account. This means that the capital gain or loss on the sale of an investment for tax purposes will be calculated by reference to the actual cost base and date of acquisition for that specific investment where that particular member disposes of its entire holding of identical shares or units. Where a member disposes of only part of his/her holding in identical securities, a FIFO basis within that particular member's account will be used when calculating the cost base and determining the date of acquisition for capital gains tax purposes.

GHI's systems record various information necessary to identify separate tax parcels and to calculate the capital gain or loss on disposal of shares or units under the direct investment service (e.g. acquisition date, number of securities in the parcel, transaction ID number, cost base etc).

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1).

Income Tax Assessment Act 1936 Division 16E.

Income Tax Assessment Act 1936 section 25A.

Income Tax Assessment Act 1936 section 26BB.

Income Tax Assessment Act 1936 section 52.

Income Tax Assessment Act 1936 section 70B.

Income Tax Assessment Act 1936 section 177A.

Income Tax Assessment Act 1936 section 177C.

Income Tax Assessment Act 1936 section 177D.

Income Tax Assessment Act 1936 section 262A.

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 section 15-15.

Income Tax Assessment Act 1997 section 25-40.

Income Tax Assessment Act 1997 section 102-5.

Income Tax Assessment Act 1997 section 106-50.

Income Tax Assessment Act 1997 section 108-5.

Income Tax Assessment Act 1997 section 121-20.

Income Tax Assessment Act 1997 section 230-15.

Income Tax Assessment Act 1997 section 295-85.

Reasons for decision

Question 1

Summary

The asset selection methodology adopted by ABC will satisfy the requirements for calculating ABC's capital gains and losses for the purposes of the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Governing provisions

1. It is noted that section 295-85 of the ITAA 1997 applies in most instances to render CGT the primary code for calculating gains or losses by certain entities. Paragraph 295-85(1)(a) of the ITAA 1997 explicitly lists a complying superannuation fund as an entity to which the modifications apply. ABC is a complying superannuation fund pursuant to section 995-1 of the ITAA 1997.

2. Consequently, section 102-5 of the ITAA 1997, which applies to include a net capital gain in an entity's assessable income, will be relevant.

3. Pursuant to section 108-5 of the ITAA 1997, which defines a "CGT asset", each share (or other security) held by a taxpayer is a separate CGT asset for the purposes of the CGT regime. Consequently, each share (or security) held by DEF as custodian for ABC represents a discrete CGT asset and any disposal thereof (following an instruction to AS by an investment manager in accordance with the manager's mandate) will trigger the occurrence of CGT event A1 (section 104-10 of the ITAA 1997).

4. Section 106-50 of the ITAA 1997, which operates to attribute ownership of an asset to absolutely entitled beneficiaries for the purposes of Parts 3-1 and 3-3 (as well as Subdivision 328-C) of the ITAA 1997, will render ABC the relevant taxpayer for CGT purposes in relation to each CGT asset (i.e. share or security) held by DEF on behalf of ABC. This is because ABC's interest therein is vested and indefeasible.

Share identification quandary

5. Under the Asset selection methodology, ABC's shareholders are registered electronically on the Clearing House Electronic Subregister System ("CHESS") register, with DEF (as custodian) reflected as the shareholder. For every shareholding held by DEF for ABC, CHESS records a total number of shares in that entity notwithstanding that shares in that entity might be managed by a number of different investment managers.

6. These circumstances give rise to the question as to which shares have been disposed of especially when the shares within the holding may have different cost bases and acquisition dates.

Commissioner's View

7. It is acknowledged that no specific legislative provision exists regarding the correct methodology to use in selecting which asset has been disposed of from a group of identical assets (for example, using FIFO, highest cost selection, etc). This is problematic in circumstances such as the above (i.e. determining which shares have been disposed of especially when the shares within the holding may have different cost bases and acquisition dates).

8. It is accepted that in these circumstances, the identity of the shares sold will be a question of fact and that from a factual standpoint the question should be determined by the tax accounting and record keeping processes adopted at the time of the particular CGT event.

9. Accordingly, where the tax accounting process adopted identifies and records the acquisition date and cost of a specific share or parcel of shares in a manner that enables its selection at the time of sale then for tax purposes the selection of a specific share or parcel of shares at the time of sale will be effective for the purposes of calculating the capital gain or loss on sale and will not infringe the CGT provisions of the ITAA 1997. The adoption of a propagated basis of calculation will not militate against this effectiveness.

10. Support for this position is found in paragraphs 2 to 3 CGT Determination TD 33 Capital Gains: How do you identify individual shares within a holding of identical shares?, which explicitly provide for taxpayers to select the particular shares being disposed of in such circumstances, provided that selection is supported by adequate records:

2. However, on the disposal of shares which form part of a holding of identical shares i.e. of the same class and in the same company, which are acquired over a period of time, it may not always be possible for a taxpayer to distinguish or identify the particular shares that have been disposed of.

3. In these circumstances, the taxpayer will need to decide which particular shares are being disposed of. Taxpayers in this situation will need to keep adequate records of the transaction so that the decision can be supported should the income tax return be subject to Tax Office scrutiny at a later date.

11. Further support is also found in paragraph 44 of Taxation Ruling TR 96/4 Income tax: valuing shares acquired as revenue assets:

Accordingly, where shares cannot be specifically identified by references to individual numbers, nevertheless, if a taxpayer maintains appropriate accounting records of the acquisition and disposal of shares, it will be possible for the taxpayer to identify the shares that are to be appropriated to a particular sale.

12. While paragraph 3 of TR 96/4 expressly excludes complying superannuation funds and other similar entities from the purview of the Ruling, there is no cogent reason as to why the principle enunciated at paragraph 44 would not apply to complying superannuation funds, especially given that it mirrors the position explicated by the Commissioner in CGT Determination TD 33.

13. It is noted that under the asset selection system, DEF will record the same information as the current DEF system used for ABC's investments, including:

· Date of the contract to buy or dispose of a parcel of securities;

· Name and security identifier;

· Type and class of asset;

· Number of assets that have been acquired of disposed;

· Cost elements of the parcel of assets including any cost base adjustments;

· Reduced cost base (including any cost base adjustments); and

· Proceeds received for the sale (including any sale costs).

14. Consequently, the Asset selection methodology adopted by ABC will satisfy the requirements for calculating ABC's capital gains and losses for the purposes of the CGT provisions of the ITAA 1997.

Question 2

Summary

The Asset selection methodology adopted by ABC can be used to choose the securities disposed of for the purposes of determining ABC's income or deductions under the revenue gain/loss provisions enumerated in the ruling application.

Detailed reasoning

Governing provisions

15. At paragraph 1 of this ruling it was noted that section 295-85 of the ITAA 1997 provides that CGT will be the primary code for calculating gains or losses by a complying superannuation fund. This is to the exclusion of sections 6-5, 8-1, 15-15, 25-40 and 230-15 of the ITAA 1997 as well as sections 25A and 52 of the ITAA 1936, as explicitly stated in subsection 295-85(2) of the ITAA 1997.

16. There are, however, a number of exceptions under subsection 295-85(3) of the ITAA 1997:

The provisions referred to in subsection (2) can apply to the *CGT event if:

(a) any *capital gain or *capital loss from the event is attributable to currency exchange rate fluctuations; or

(b) the *CGT asset is one of these:

(i) debenture stock, a bond, *debenture, certificate of entitlement, bill of exchange, promissory note or other security;

(ii) a deposit with a bank, building society or other financial institution;

(iii) a loan (secured or not);

(iv) some other contract under which an entity is liable to pay an amount (whether the liability is secured or not).

17. It is therefore possible that income or deductions from the disposal of securities to third parties would be determined in accordance with section 6-5 or 8-1 or Division 230 of the ITAA 1997 or sections 26BB or 70B or Division 16E of the ITAA 1936 ("revenue gains/loss provisions").

18. Each security held by DEF (as custodian for ABC) would represent either traditional securities for the purposes of sections 26BB or 70B of the ITAA 1936, qualifying securities for the purposes of Division 16E of the ITAA 1936, financial arrangements for the purposes of Division 230 of the ITAA 1997 and/or assets held on revenue account for the purposes of sections 6-5 or 8-1 of the ITAA 1997.

19. Consistent with paragraph 3 of this ruling, each security held by the taxpayer will be a separate asset for the purposes of the provisions referred to above. Consequently each security held by DEF (as custodian for ABC) represents a discrete asset for the purposes of the relevant sections above.

20. Furthermore, consistent with paragraph 4 of this ruling, the relevant taxpayer for the purposes of the revenue gains/loss provisions described at paragraphs 17 and 18 would be ABC notwithstanding that DEF holds legal title to the assets as custodian. This is because ABC is absolutely entitled to each security held by DEF on ABC's behalf because ABC's interest therein is vested and indefeasible. This position is consistent with the doctrine of constructive receipt.

21. When a security is disposed of by DEF, following an instruction by an investment manager in accordance with the manager's investment mandate, depending on the type of security disposed of, an assessable/deductible balancing adjustment will arise for the purposes of Division 16E of the ITAA 1936 or Division 230 of the ITAA 1997, or an assessable gain or deductible loss will arise under sections 26BB or 70B of the ITAA 1936 or sections 6-5 or 8-1 of the ITAA 1997.

Share identification quandary

22. As was the case under the CGT provisions considered in question 1, identifying cost of each asset disposed of under the relevant revenue gains/loss provisions will be critical.

23. Precisely the same issues as those detailed at paragraphs 5 to 6 of this ruling will arise in seeking to separately identify each individual security within a parcel containing identical securities and the question will therefore arise as to which securities have been disposed of when the securities are identical except that they may have different tax cost, different accrual amounts and different acquisition dates.

Commissioner's View

24. It is acknowledged that no specific legislative provision exists regarding the correct methodology to use in selecting which asset has been disposed of from a group of identical assets (for example, using FIFO, highest cost selection, etc).

25. It will therefore be appropriate in such circumstances that the identity of the shares sold be determined by reference to the tax accounting and record keeping processes adopted at the time of the particular CGT event.

26. It is clear from the discussion at paragraph 13 that DEF's tax accounting processes operate to record the acquisition date and cost of each debt security and parcel of debt securities acquired so that on disposal specific identification is possible from within each sub-portfolio.

27. The adoption of the propagated portfolio under the asset selection methodology will allow ABC to apply a parcel selection methodology in identifying securities or parcels of securities to dispose from ABC's entire holding of the identical securities across all sub-portfolios.

28. The adoption of the propagated portfolio to select specific securities as having been disposed of from across ABC's sub-portfolios is consistent with the Commissioner's view as enunciated in TR 96/4 and TD 33. There is also no legislative provision prohibiting this approach.

43. Consistent with our decision at question 1, it is considered that the asset selection methodology adopted by ABC can be used to choose the securities disposed of for the purposes of determining ABC's income or deductions under the revenue gains/loss provisions enumerated in the ruling application.

Question 3

Summary

Records maintained by ABC will satisfy the record keeping obligations for securities that particular investments held on revenue/capital account can be appropriated to a particular sale/disposal.

Detailed reasoning

Governing provisions

44. Relevantly, subsection 262A(1D) of the ITAA 1936 provides:

A taxpayer who is a full self-assessment taxpayer must:

(a) keep a record containing particulars of the basis of the calculation of the amounts that the taxpayer specified under section 161AA in a return for a year of income; and

(b) produce to the Commissioner, when and as required by the Commissioner under this Act, a document containing those particulars.

45. It is noted that the trustee of a complying superannuation fund is a full self-assessment taxpayer under the definition contained in subsection 6(1) of the ITAA 1936.

46. Section 121-20 of the ITAA 1997 contains similar record keeping requirements with respect to CGT events and the CGT assets underlying them. Subsection 121-20(1) of the ITAA 1997 provides:

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.)

47. Subsection 121-20(1) of the ITAA 1997 also provides examples of such record-keeping requirements. Example 1 covers a routine disposal of a CGT asset:

You dispose of a CGT asset. The records that are relevant to working out your capital gain or loss are records of:

· the date you acquired the asset;

· the date you disposed of it;

· each element of its cost base and reduced cost base and the effect of indexation on those elements;

· what you sold it for (the capital proceeds).

Application of governing provisions to ABC's circumstances

48. DEF records a host of information regarding the investments it holds on behalf of ABC, including:

· Date of the contract to buy or dispose of a parcel of securities;

· Name and security identifier;

· Type and class of asset;

· Number of assets that have been acquired of disposed;

· Cost elements of the parcel of assets including any cost base adjustments;

· Reduced cost base (including any cost base adjustments); and

· Proceeds received for the sale (including any sale costs).

49. It is clear that such records will satisfy the requirements of both subsection 262A(1D) of the ITAA 1936 and section 121-20 of the ITAA 1997 in that they will facilitate the correct calculation of the relevant gain or loss, whether on revenue or capital account.

50. You have averred that the adoption of the asset selection system will not change the reporting capabilities of DEF and DEF will continue to record the same information as under the current system.

51. You have also averred, and we agree, that the DEF systems conform to the record keeping requirements of Taxation Ruling TR 2005/9 Income tax: record keeping - electronic records with respect to:

· record retention

· data security and integrity;

· system documentation;

· retaining archival copies; and

· accessibility.

52. It is therefore considered that the records maintained by ABC (or DEF on behalf of ABC) will clearly satisfy the record keeping obligations for securities that particular investments held on revenue/capital account can be appropriated to a particular sale/disposal

Question 4

Summary

Part IVA of the ITAA 1936 will not apply to the asset selection arrangement adopted by ABC.

Detailed reasoning

The operation of Part IVA of the ITAA 1936

53. Part IVA of the ITAA 1936 is a general anti-avoidance provision which affords the Commissioner discretion to cancel a tax benefit derived by a taxpayer who entered into or carried out a scheme for the dominant purpose of obtaining that tax benefit.

54. The requirements in order for the Commissioner to exercise the discretion are outlined in paragraph 47 of Law Administration Practice Statement PSLA 2005/24 Application of General Anti-Avoidance Rules:

Before the Commissioner can exercise the discretion in subsection 177F(1), the requirements of Part IVA must be satisfied. These requirements are that:

(i)  a 'tax benefit', as identified in section 177C, was or would, but for subsection 177F(1), have been obtained;

(ii)  the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and

(iii) having regard to section 177D, the scheme is one to which Part IVA applies.

55. A 'scheme' for the purposes of Part IVA of the ITAA 1936 is defined in subsection 177A(1) of the ITAA 1936 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.

56. The breadth of this definition was noted by Gummow and Hayne JJ in Federal Commissioner of Taxation v Hart [2004] HCA 26; 55 ATR 712 at 43:

This definition is very broad. It encompasses not only a series of steps which together can be said to constitute a "scheme" or a "plan" but also (by its reference to "action" in the singular) the taking of but one step.

57. It clear that the adoption of the asset selection system as described in the facts of this ruling application will fall within this broad definition of the word 'scheme', as it represents an arrangement whereby capital and revenue gains and losses are calculated at the propagated level to determine ABC's overall gain or loss position under the relevant assessing and deducting provisions.

58. The scope of the definition of 'tax benefit' for the purposes of Part IVA of the ITAA 1936 is evident in section 177C of the ITAA 1936, which provides:

Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

(a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or

(ba) a capital loss being incurred by the taxpayer during a year of income where the whole or a part of that capital loss would not have been, or might reasonably be expected not to have been, incurred by the taxpayer during the year of income if the scheme had not been entered into or carried out; or

(baa) a loss carry back tax offset being allowable to the taxpayer where the whole or a part of that loss carry back tax offset would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into or carried out; or

(bb) a foreign income tax offset being allowable to the taxpayer where the whole or a part of that foreign income tax offset would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into or carried out; or

(bc) the taxpayer not being liable to pay withholding tax on an amount where the taxpayer either would have, or might reasonably be expected to have, been liable to pay withholding tax on the amount if the scheme had not been entered into or carried out;

59. Subsection 177C(4) of the ITAA 1936 further provides:

To avoid doubt, paragraph (1)(a) applies to a scheme if:

(a) an amount of income is not included in the assessable income of the taxpayer of a year of income; and

(b) an amount would have been included, or might reasonably be expected to have been included, in the assessable income if the scheme had not been entered into or carried out; and

(c) instead, the taxpayer or any other taxpayer makes a discount capital gain (within the meaning of the Income Tax Assessment Act 1997) for that or any other year of income.

Application of sections 177A and 177C of the ITAA 1936 to the facts presented

60. In seeking to ascertain whether there has been a tax benefit, regard must be had to what 'might reasonably be expected' to have occurred 'if the scheme had not been entered into or carried out' ("the alternative postulate").

61. It is accepted that the alternative postulate in this case would be ABC continuing to select the parcel of investments (e.g. debt securities or shares) for disposal from the sub-portfolio of the investment manager initiating the disposal, with the gain or loss position for ABC determined by aggregating all the individuals' gains or losses calculated within each sub-portfolio.

62. The adoption of the asset selection system will afford DEF an enhanced capacity to select the parcels from across the entire propagated portfolio of ABC rather than from within individual sub-portfolios. It is reasonably expected that this scheme will increase the after tax returns and cash flows of the members and pensions of ABC by obtaining tax benefits in the form of:

· Reduced amount of gains or increased amount of losses included in taxable income for a year of income; or

· Losses being incurred rather than gains being derived for a year of income.

63. Therefore, a tax benefit will likely arise in the form of a lower capital or revenue gain on the disposal of a security under the asset selection system.

64. It is, however, noted that in order for Part IVA of the 1TAA 1936 to apply to a scheme from which a tax benefit has been derived by a taxpayer, it must have been entered into for the dominant purpose of obtaining that tax benefit. This is due to the operation of subsection 177A(5) of the ITAA 1936, which provides:

A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.

Application of section 177D of the ITAA 1936 to the facts presented

65. Section 177D of the ITAA 1936 mandates that regard must be had to eight factors in determining whether a taxpayer entered into the scheme with the dominant purpose of obtaining a tax benefit:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

66. Each factor is considered below in relation to the asset selection system to be adopted by ABC:

(a) The manner in which the scheme was entered into or carried out;

It is accepted that the Asset selection methodology is a legitimate service offered through a system upgrade that enables the selection of specific parcels of securities for disposal and that ABC' purpose in adopting the TPO system is to achieve its commercial objective of enhancing the after tax returns and cash flows of the fund's members and pensioners.

(b) The form and substance of the scheme

It is accepted that the form and substance of the scheme are the same. There is no air of artifice or contrivance to the manner in which the scheme is carried out that would separate the form from the substance.

(c) The time at which the scheme was entered into and the length of the period during which the scheme was carried out

It is noted that ABC intends to enter into the scheme as soon as practically possible after an affirmative ruling is received from the Commissioner on an ongoing basis. There are no discernible tax-motivated reasons for the proposed time at which the scheme will be entered into or the length of the period during which the scheme will be carried out.

(d) The result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme

The result sought by the scheme would be the selection of parcels to give the best gain/loss outcome for ABC, mainly by deferring the recognition of a net gain or reducing that net gain, or increasing a net loss.

(e) Any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme

The financial position of ABC is not expected to change materially. It is possible that the arrangement could result in reduced tax payable by ABC, which would improve its overall financial position.

(f) Any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

It is expected that members and pensions of the fund will have increased after-tax returns as a result of the implementation of the TPO system.

(g) Any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

No other consequences have been identified by the Trustee

(h) The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

The Trustee has a fiduciary obligation to act in the best interest of ABC's members and pensions.

67. While paragraph 108 of PSLA 2005/24 indicates that the absence of any practical change in the overall financial, legal or economic position of the taxpayer and connected parties that are affected by the scheme is likely to add weight to the dominance of the tax purpose, this criterion is not determinative.

68. Having regard to all of the abovementioned factors and with specific reference to the commercial efficacy and legitimacy of the asset selection system, it is not considered that the scheme will be entered into for the dominant purpose of obtaining a tax benefit in connection with the scheme.

Conclusion

69. Consequent to the foregoing analysis, it is concluded that any tax benefit arising from the scheme will not be one to which Part IVA of the ITAA 1936 will apply.

Question 5

Summary

The Asset selection methodology used for investments held by DEF combined with the parcel selection methodology approach adopted for investments held through GHI within the direct investment service constitutes an acceptable approach to parcel/lot selection at the fund level (i.e. across investments held by GHI/JKL in the direct investment service and those held by DEF in the direct investment service).

Detailed reasoning

70. In addition to adopting the asset selection service offered by DEF when identifying investments or parcels of investments to dispose of within the propagated portfolio, ABC also intends to adopt the asset selection service in relation to the treatment of CGT assets within the direct investment service it offers to its super and pension members.

71. It is proposed that where a particular member disposes of its entire holding of identical shares or units within the direct investment service, the capital gain or loss on the sale will be calculated by reference to the actual cost base and date of acquisition for that specific investment.

72. It is again noted that section 295-85 of the ITAA 1997 applies in most instances to render CGT the primary code for calculating gains or losses by a superannuation entity.

73. Analogous to the circumstances discussed at question 1, each share or unit held by GHI as sub custodian to JKL as ABC's custodian under the direct investment service will represent a separate CGT asset under section 108-5 of the ITAA 1997. Additionally, the relevant taxpayer for CGT purposes will be ABC, notwithstanding the fact that GHI/JKL hold legal title to the assets as custodian. This is owing to the operation of section 106-50 of the ITAA 1997.

74. You have stated that where a member disposes of their entire holding of identical shares or units within the direct investment service, the capital gain or loss on the sale for tax purposes will be calculated by reference to the actual cost base and date of acquisition for that specific investment. Alternatively, where a member disposes of only part of their holding in identical securities, a FIFO basis within that particular member's account will be used when calculating the cost base (and reduced cost base) and date of acquisition for CGT purposes.

75. There is no specific legislative provision regarding the correct methodology to use in selecting which asset has been disposed of from a group of identical assets (for example, FIFO, highest cost selection, etc).

76. However, paragraph 4 of TD 33 clearly expresses the Commissioner's view that either a FIFO basis or the taxpayer's own selection of the identity of shares disposed of are acceptable approaches to determining the identity of otherwise unidentifiable shares that have been disposed of.

77. Support for the use of the FIFO method where a taxpayer cannot identify the specific shares disposed of is also found throughout TR 96/4. For example, paragraph 22 provides:

…where a taxpayer is unable to specifically identify the shares appropriated to a particular sale, the taxpayer will be required to use either the FIFO method or the average cost method (where average cost is an acceptable method) to ascertain the cost of those shares…

78. It is therefore clear that the asset selection methodology used for investments held by DEF combined with the parcel selection methodology approach adopted for investments held through GHI within direct investment service constitutes an acceptable approach to parcel/lot selection at the fund level.