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Do the changes to the operation of the taxpayer superannuation fund result in the creation of a new eligible entity, for the purposes of Part IX of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The execution of the specified changes to the operation of the taxpayer superannuation fund, by the taxpayer, do not result in the creation of a new eligible entity for the purposes of Part IX of the ITAA 1936.

The taxpayer superannuation fund (fund 1) is a complying superannuation fund established by an Act of Parliament (Fund 1 Act). Fund 2 is another complying superannuation fund established by another Act of the same Parliament (Fund 2 Act). The rules of both funds are contained in the respective Acts.

Amending legislation has been passed with the effect that: • all members and property comprising fund 1 are transferred to the trustee of fund 2, to be administered as a sub-fund within fund 2 • the rules of fund 1, originally found in the Fund 1 Act, are inserted into the Fund 2 Act, unaltered, and • the Fund 1 Act is repealed.

The existing rights and entitlements of the members of fund 1 have not changed, the rules from the Fund 1 Act having been inserted, unaltered, into the Fund 2 Act.

The property and members of fund 1 have been incorporated into fund 2 as a separately identified sub-fund. The sub-fund assets and beneficiaries are separately identifiable from the assets and beneficiaries of fund 2. The beneficiaries of fund 1 have an interest solely in the assets relating to fund 1 and not those relating to fund 2. Administration costs levied on fund 1 will be attributable only to fund 1.

As an 'eligible entity' for the purposes of section 267 of the ITAA 1936, the income tax liability of the fund is determined according to Part IX of the ITAA 1936.

The Tax Office publication 'Creation of a new trust - Statement of Principles August 2001' sets out the ATO view on the decision of the High Court of Australia in Commissioner of Taxation v. Commercial Nominees of Australia Ltd 2001 ATC 4336; (2001) 47 ATR 220 ( Commercial Nominees ), and the question of whether changes to a Part IX superannuation fund will or will not result in the creation of a new eligible entity.

In Commercial Nominees , the trustee of a superannuation fund sought to claim tax losses from previous years as allowable deductions. The Commissioner argued that, because of amendments made to the trust deed, there was a fundamental alteration in the trust relationship established by the original deed, such that it destroyed the necessary continuity of the taxpayer for the purposes of the carry forward loss provisions in the income tax law. The original trust deed contained wide powers of amendment. The amendments made to the trust deed allowed the fund to accept new members from outside the companies for which the fund was originally established. A new trustee was appointed and a professional management company was appointed administrator. There was also a change in the nature of the benefits, from defined benefits to accumulations.

In Commercial Nominees , the court recognised that a superannuation fund must maintain its continuity in order to be able to claim its tax losses, and referred to three main indicia of continuity for the purposes of Part IX of the ITAA 1936. These indicia are: • the constitution of the trust under which the fund operates • the trust property, and • membership.

The court held that no new Part IX eligible entity was created, because: • the trusts under which the fund operated (after the amendments in question) were constituted by the original trust deed as varied by the exercise of a power of amendment available under that deed • the members before the amendments remained members after the amendments, and • the property that was the subject of the trust did not alter when the amendments took effect.

In Commercial Nominees the amendments to the deed were made in accordance with a power in the original trust deed. In the present case the fund, and the rights arising to the beneficiaries in respect of that fund, were established by an Act of Parliament. The Parliament can amend legislation at any time, that is, in the present context, it has a power of amendment to affect the rights of beneficiaries that is analogous to the power of amendment that the trustee had in Commercial Nominees. The present changes are effected by amending legislation and are thus made within the power of amendment inherently available under the Act that established the fund.

As part of the amendments in the present case, the assets and liabilities of fund 1 have been transferred, in their entirety, to the trustee of fund 2 as the new trustee. The manner in which the transfer has been carried out has the result that, in respect of the sub-fund: • there are separately identifiable assets and beneficiaries, and • each beneficiary of the sub-fund has an interest only in the assets of that sub-fund and not in the assets of fund 2, and • there is no transfer of assets, benefits or money between the sub-fund and another sub-fund unless there is a transfer of a corresponding beneficial interest, and • the insurance and administration costs levied on the sub-fund are attributable only to that sub-fund.

Under these arrangements the property, which was subject to the trusts for the benefit of the Fund 1 members under the Fund 1 Act, remains subject to those same trusts, for the benefit of the same members, upon its transfer to fund 2. Accordingly, the property that was the subject of the trusts established by the Fund 1 Act did not alter as a result of the amendments or at the time the amendments took effect.

With regard to membership, the transfer has been carried out by means of establishing a separate sub-fund within fund 2 that effectively corresponds to fund 1, and the entire membership of fund 1 has been transferred into that sub-fund. The terms of the fund 1 trusts, previously contained in the Fund 1 Act, have been inserted into the Fund 2 Act so that the member rights established under the Fund 1 Act remain unchanged; that is, the same persons who were members of fund 1 prior to the amendments in question retain the same rights, in respect of the same property, after those amendments. The members of the fund before the proposed amendments - in the sense of the persons on behalf of whom the fund property is held on the terms established by the Fund 1 Act - continue as members after the amendments. Furthermore, unlike Commercial Nominees , the proposed amendments in the present case do not open the membership of the fund to potentially admit employees of any employer; in the present case, the membership remains fixed.

Finally, it is clear that the amendments in question result in a change of trustee. Replacement of the trustee was also a feature of the arrangements considered by the High Court in Commercial Nominees. In Commercial Nominees the court concluded that a change of trustee (amongst other changes) will not bring an eligible entity to an end where the three indicia of fund continuity are satisfied. It is therefore concluded that the change of trustee in the present case will likewise be immaterial to the question of whether a new eligible entity has been created, where the three indicia of fund continuity are satisfied.

On examination of the circumstances of the present case it appears that the three main indicia of continuity for the purposes Part IX of the ITAA 1936, as identified by the High court, are satisfied. It is therefore concluded that the relevant eligible entity does not come to an end as a result of the proposed changes. fund 1 continues with no new fund or eligible entity having been created; albeit subsumed into a sub-fund within fund 2.