Edited version of your written advice

Authorisation Number: 1013016913211

Date of advice: 24 May 2016

Ruling

Subject: Loss transfer, assets roll-over and the consequences of such transfers and roll-overs

Question 1

In the event that all of the members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, transfer to Continuing Fund, does Transferring Fund meet the eligibility requirements to choose the loss transfer relief under Subdivision 310-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

In the event that all of the members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, transfer to Continuing Fund, and Question 1 above is answered in the affirmative, does Transferring Fund meet the eligibility requirements under section 310-45 of the ITAA 1997 to choose the assets roll-over relief?

Answer

Yes.

Question 3

In the event that all members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, transfer to Continuing Fund, will the consequences set out in subsections 310-55(1) and 310-65(1) of the ITAA 1997 apply to Transferring Fund?

Answer

Yes.

This ruling applies for the following period:

An income year

The scheme commences:

During the 20XX income year

Relevant facts and circumstances (the Facts)

1. The Trustee acts as the trustee for two superannuation funds, being Transferring Fund and Continuing Fund.

2. As trustee, the Trustee has a legal obligation to act in members' best interest under the Superannuation Industry (Supervision) Act 1993 (SIS 1993).

3. Transferring Fund and Continuing Fund are each a complying superannuation fund.

4. Transferring Fund and Continuing Fund are not small superannuation funds as defined in section 995-1 of the ITAA 1997.

5. The Trustee will transfer members of Transferring Fund to Continuing Fund and merge Transferring Fund's assets with Continuing Fund by way of a successor fund transfer (SFT).

6. The SFT is expected to occur during the 20XX income year.

7. All transferable members of Transferring Fund will cease be Transferring Fund members, and will become members of Continuing Fund after the merger under the SFT. Assets relating to Transferring Fund's transferable members will become assets of Continuing Fund under the SFT.

8. A number of Transferring Fund's members are non-transferable. Assets relating to Transferring Fund's non-transferable members will not be transferred to Continuing Fund under the SFT.

9. All CGT assets of Transferring Fund transferred to Continuing Fund under the SFT will become assets of Continuing Fund.

10. Transferring Fund holds assets that are not complying superannuation life insurance policy or units in a pooled superannuation trust (PST).

11. The transfer of Transferring Fund's transferable assets to Continuing Fund under the SFT will result in a CGT A1 event (being a disposal of CGT assets). This event is expected to occur by the end of the 20XX income year.

12. For the purposes of Subdivision 310-E of the ITAA 1997, Transferring Fund chooses the global approach for its original assets that are revenue assets and its original assets that are not revenue assets.

Relevant legislative provisions

Section 310-10 of the Income Tax Assessment Act 1997 (ITAA 1997)

Paragraph 310-25(a) of the ITAA 1997

Subsection 310-30(1) of the ITAA 1997

Reasons for decision

For the purposes of this ruling all legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified

Question 1

In the event that all of the members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, transfer to Continuing Fund, does Transferring Fund meet the eligibility requirements to choose the loss transfer relief under Subdivision 310-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes. In the event that all of the members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, transfer to Continuing Fund, Transferring Fund will meet the eligibility requirements to choose the loss transfer relief under Subdivision 310-B of the ITAA 1997.

Detailed reasoning

Division 310

Division 310 sets out the special rules for certain merging superannuation funds, relating to the:

• transfer of losses;

• treatment of CGT events related to the merger; and

• treatment of assets related to the merger.

Subdivision 310-B provides for the choice to transfer losses and Subdivision 310-C explains the consequences of such transfers.

Section 310-10 outlines the conditions that must be satisfied in order for an entity to transfer losses.

Section 310-5 explains the objective of Division 310 as to facilitate the consolidation of the superannuation industry by allowing certain merging superannuation funds to retain the value, for income tax purposes, of certain losses that might otherwise cease to be able to be utilised as a result of the merger.

Subdivision 310-B - Choice to transfer losses

Under subsection 310-10(1) a trustee of a 'complying superannuation fund' (other than a self managed superannuation fund (SMSF)) or a 'complying approved deposit fund' (ADF) (known as the transferring entity or the original fund) can choose to transfer losses if an arrangement is made for which the conditions in section 310-10 are satisfied.

Complying superannuation fund

A 'complying superannuation fund' is defined by section 995-1 as a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993 (SIS 1993).

Transferring Fund is a complying superannuation fund (and is not an SMSF) within the meaning of SIS 1993 and therefore satisfies the definition under section 995-1.

Arrangement

An 'arrangement' is defined broadly in section 995-1 as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

The Explanatory Memorandum for the Tax Laws Amendment (2009 Measures No. 6) Bill 2009 (the EM) makes clear that a merger or amalgamation of superannuation funds is contemplated by the term 'arrangement' in the ITAA 1997, stating at paragraph 2.63 that "the arrangement to merge funds covers the transactions under which the assets and members are transferred between merging funds."

However, it also makes clear at paragraph 2.63 that the relevant 'arrangement' "…does not include the planning stage, negotiations between the trustees of the funds and preparatory work to implement the arrangement."

As stated in the Facts above, Transferring Fund proposes to transfer its transferable members to Continuing Fund and merge Transferring Fund's assets with Continuing Fund by way of an SFT. Accordingly, the 'arrangement' for the purposes of this ruling is constituted by the SFT which will give effect to the transfer of the assets and transferable members from Transferring Fund to Continuing Fund (as envisaged by the EM).

On this basis, the SFT constitutes an 'arrangement' for the purposes of subsection 310-10(1). This arrangement therefore starts upon the implementation of the SFT which is expected to be during the 20XX income year.

Based on the above analysis Transferring Fund can choose to transfer losses provided the following conditions are satisfied.

First condition - Transferring entity's assets include other assets

The first condition as set out in subsection 310-10(2) is satisfied if, just before the arrangement was made, the transferring entity's assets included assets other than:

(a) a complying superannuation life insurance policy; or

(b) units in a pooled superannuation trust (PST).

Transferring Fund's assets do not include a complying superannuation life insurance policy or units in a PST, and these assets will be held by Transferring Fund prior to the SFT to Continuing Fund.

As such the condition in subsection 310-10(2) will be satisfied.

Second condition - Original fund's members transfer to a continuing fund

Subsection 310-10(3) provides that the second condition is satisfied if, under the arrangement:

(a) the transferring entity ceases to have any members (within the meaning of SIS 1993) at a particular time (the completion time); and

(b) the individuals who cease to be members of the transferring entity become members of one or more complying superannuation funds (the continuing funds).

For the purposes of this condition (and the third condition explained below), individuals who remain a member of a complying superannuation fund because of circumstances beyond the control of the trustee of that fund can be ignored.

Paragraph 2.22 of the EM confirms that, for the purposes of the loss relief, the relevant time for this condition is the completion time for the merger arrangement - that is, when the transferring entity ceases to have members.

Transferring Fund has certain members that cannot be transferred under the SFT due to circumstances that are beyond the control of the Trustee for the purposes of subsection 310-10(5).

Based on this analysis and the application of subsection 310-10(5), Transferring Fund's non-transferable members can be ignored and do not prevent the second condition from being satisfied.

Transferring Fund will cease to have members (ignoring non-transferable members) at the completion time (i.e. after the merger with Continuing Fund when Transferring Fund ceases to have members), and members of Transferring Fund will, under the arrangement, become members of Continuing Fund (the continuing fund) which is also a complying superannuation fund.

Accordingly, Transferring Fund will satisfy the condition in subsection 310-10(3).

Third condition - Continuing funds will usually not be able to be small funds

Paragraph 310-10(4)(a) provides that the third condition will be satisfied if none of the continuing funds was a small superannuation fund, and all existed, just before the arrangement was made.

A 'small superannuation fund' means a complying superannuation fund with 4 or fewer members.

Transferring Fund and Continuing Fund are each an established complying superannuation fund with more than 4 members.

As such, the third condition in paragraph 310-10(4)(a) will be satisfied.

Conclusion

Based on the analysis above, in accordance with subsection 310-10(1), Transferring Fund will be eligible to choose to transfer losses.

Accordingly, paragraph 310-25(a) provides that Transferring Fund can choose to transfer any or all of its losses (as set out in 310-30) in whole or in part to a continuing fund (Continuing Fund).

Under subsection 310-30(1) the losses that Transferring Fund will be eligible to transfer (should it have any such losses) are:

(a) any of its net capital losses for income years earlier than Transferring Fund's income year that includes the completion time (an earlier year net capital loss);

(b) any net capital loss Transferring Fund would have made for the transfer year were the transfer year to have ended at the completion time (a transfer year net capital loss);

(c) any of Transferring Fund's tax losses for income years earlier than the transfer year, to the extent that it was not utilised before the completion time (an earlier year tax loss); and

(d) any tax loss Transferring Fund would have incurred for the transfer year were the transfer year to have ended at the completion time (a transfer year tax loss).

Question 2

In the event that all of the members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, transfer to Continuing Fund, and Question 1 above is answered in the affirmative, does Transferring Fund meet the eligibility requirements under section 310-45 of the ITAA 1997 to choose the assets roll-over relief?

Summary

Yes. In the event that all of the members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, transfer to Continuing Fund, and Question 1 above is answered in the affirmative, Transferring Fund will meet the eligibility requirements under section 310-45 of the ITAA 1997 to choose the assets roll-over relief.

Detailed reasoning

As explained in Question 1 above, Division 310 includes (amongst other things) rules for certain merging superannuation funds relating to the treatment of assets related to the merger.

Subdivision 310-D provides for the choice for assets roll-over where a complying superannuation fund merges with another complying superannuation fund, and Subdivision 310-E explains the consequences of choosing assets roll-over.

Specifically, section 310-45 outlines the conditions that must be satisfied in order for an entity to choose assets roll-over.

Subsection 310-45(1) explains that an entity can choose a roll-over under Subdivision 310-D if:

(a) the entity makes or could make a choice under Subdivision 310-B (the losses choice) to transfer the losses of an entity (the transferring entity); and

(b) the conditions in section 310-45 are satisfied for the arrangement to which the losses choice relates.

The Commissioner has determined at Question 1 above that Transferring Fund is eligible to make a losses choice under Subdivision 310-B.

Whether Transferring Fund actually transfers losses or not does not affect the operation of Subdivision 310-D because per paragraph 310-45(1)(a) Transferring Fund could make the choice (given it satisfies the conditions for transfer). This interpretation is supported by paragraph 2.70 of the EM which contemplates a scenario where an entity eligible for the loss transfer (under Subdivision 310-B) chooses not to transfer losses, but still chooses assets roll-over.

The Commissioner has also determined at Question 1 above that the SFT constitutes an 'arrangement' for the purposes of subsection 310-10(1). This is also the relevant arrangement for the purposes of Subdivision 310-D.

As such, Transferring Fund will be eligible to choose a roll-over provided the following conditions are satisfied.

First condition - CGT assets are transferred via a CGT event

In the case of Transferring Fund, paragraph 310-45(2)(a) (pertaining to losses choices under section 310-10 by 'original funds') provides the relevant first condition, requiring that, under the arrangement, one or more CGT events (the transfer events) happen in relation to all of the CGT assets (the original assets) of the transferring entity with the result that it ceases to own those assets.

Subsection 310-45(5) confirms that for the purposes of this condition any CGT assets retained by the transferring entity to pay its existing or expected debts relating to the arrangement, or to meet its liabilities relating to individuals who have remained members due to circumstances beyond the control of the trustee of the original fund, are ignored.

As such, any CGT assets that are retained by Transferring Fund due to circumstances beyond the Trustee's control (as explained above in the Facts and Question 1) are ignored for the purposes of satisfying the condition in paragraph 310-45(2)(a).

Under the SFT all assets of Transferring Fund are to be merged with Continuing Fund. This means that all of those assets of Transferring Fund that constitute CGT assets will be transferred to Continuing Fund and Transferring Fund will cease to own them.

This transfer of assets from Transferring Fund to Continuing Fund via the SFT will result in CGT event A1 (disposal of a CGT asset) happening.

Therefore for the purposes of applying paragraph 310-45(2)(a) a CGT event or events will happen in respect of Transferring Fund's assets that are CGT assets.

Based on this analysis, the first condition will be satisfied.

Second condition - Transferring CGT event happens in the same income year as completion time

Under subsection 310-45(3) the second condition is that the transfer events all happen in the income year (the transfer year) for the transferring entity that includes the completion time for the losses choice.

As explained above in Question 1, for the purposes of the loss relief, the completion time is when the transferring entity ceases to have members. The transfer year for Transferring Fund that includes the completion time for the losses choice is the 20XX income year.

This means that for subsection 310-45(3) to be satisfied, within the 20XX income year, the following events must happen:

• the relevant CGT events in relation to Transferring Fund's CGT assets occur; and

• Transferring Fund ceases to have members after the merger (ignoring non-transferable members) such that the completion time for the losses choice occurs.

The SFT is expected to occur during the 20XX income year, therefore all transfer events will occur prior to the end of the 20XX income year.

Furthermore, Transferring Fund will cease to have members (ignoring the non-transferable members) following its merger with Continuing Fund, therefore the completion time for Transferring Fund's losses choice will also occur prior to the end of the 20XX income year.

As such, the second condition will be satisfied.

Third condition - Transferred CGT asset becomes an asset of the continuing fund

In the case of Transferring Fund, paragraph 310-45(4)(a) (pertaining to a continuing fund for the losses choices) provides the relevant third condition, requiring that for each transfer event, an asset (the received asset) becomes an asset of a continuing fund for the losses choice as a result of that event.

As discussed above at Question 1, Continuing Fund is the 'continuing fund' for the losses choice under Subdivision 310-B.

Under the SFT, the assets for which a transfer event occurs become the assets of Continuing Fund as a result of those transfer events (as described above).

Accordingly, the third condition will be satisfied.

Conclusion

Based on the analysis above, in accordance with subsection 310-45(1), Transferring Fund will be eligible to choose roll-overs under Subdivision 310-D.

Question 3

In the event that all members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, transfer to Continuing Fund, will the consequences set out in subsections 310-55(1) and 310-65(1) of the ITAA 1997 apply to Transferring Fund?

Summary

Yes. In the event that all members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, transfer to Continuing Fund, the consequences set out in subsections 310-55(1) and 310-65(1) of the ITAA 1997 will apply to Transferring Fund.

Detailed reasoning

Division 310 sets out special rules for the treatment of assets relating to a merger. Specifically, Subdivision 310-E, amongst other things, sets out the consequences for a receiving entity of a transferring entity choosing assets roll-over.

Subdivision 310-E - Consequences of choosing assets roll-over

A transferring entity choosing assets roll-over has consequences for that transferring entity as follows:

For CGT assets

• If a global asset approach is chosen:

For each of the original assets, the transferring entity's capital proceeds from the relevant transfer event are taken to be an amount equal to:

• if the event would otherwise result in a capital gain - the asset's cost base just before the event (per paragraph 310-55(1)(a)); and

• if the event would otherwise result in a capital loss - the asset's reduced cost base just before the event (per paragraph 310-55(1)(b)).

For revenue assets

• If a global asset approach is chosen, for each of the original assets, the transferring entity's gross proceeds for the relevant transfer event are taken to be the amount (the deemed proceeds) the transferring entity would need to have received in order to have a nil profit and nil loss for the event (per subsection 310-65(1)).

It is noted however, that this subsection only applies if it is chosen to apply under subsection 310-50(3).

Conclusion

The Commissioner has ruled in Question 2 above that in relation to the transfer of all of the members of Transferring Fund and the funds relating to those members, except for the non-transferable members and their funds, to Continuing Fund, Transferring Fund will satisfy the eligibility conditions to choose assets roll-over under Subdivision 310-D.

It is also established in the Facts that Transferring Fund chooses the global asset approach for the original assets that are revenue assets and the original assets that are not revenue assets (i.e. CGT assets). As such, the consequences as set out in subsections 310-55(1) and 310-65(2) (explained above) will apply to Transferring Fund.