1 Is the manner in which the capital gain or capital loss calculated by the Trustee for the Fund, by nominating the specific parcel of listed Australian shares and units disposed of from the Fund's tax propagated portfolio using the System, acceptable for determining the net capital gains or losses of the Fund for the purposes of sections 102-5 and 102-10 of the Income Tax Assessment Act 1997 (ITAA 1997) for an income year?
Yes. Question 2 If the answer to Question 1 is yes, will the System satisfy the record keeping requirements of subsection 121-20(1) of the ITAA 1997? Answer Yes. Question 3 Will the Commissioner make a determination under paragraphs 177F(1)(a) and (c) of the Income Tax Assessment Act 1936 (ITAA 1936) that Part IVA applies to cancel a tax benefit obtained in relation to the System adopted by the Fund? Answer No. This ruling applies for the following periods: 1 July 20XX to 30 June 20XX The scheme commences: In a particular income year
Fund 1. The Fund is a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993 (SISA). 2. The Fund does not have any sub-funds within the meaning of section 69A of the SISA. 3. For the purposes of this Ruling, only unsegregated assets, specifically listed Australian shares and units held beneficially for the Fund, are considered for propagation. The Trustee 4. The Fund is managed by the Trustee. 5. The Trustee is directed by the trustee board. Master Custodian 6. The Trustee engages the Master Custodian, or its sub-custodians, to hold legal title for all Fund assets, including the Australian shares and units, as nominee for the Fund. The assets are held in the name of the Master Custodian, or its sub-custodian's name, on behalf of the Fund.
7. The Master Custodian is also engaged to provide investment administration services in respect of the Fund and its underlying portfolios. In this capacity, the Master Custodian is responsible for the settlement and recording of all trades as instructed by an authorised representative of the Fund (i.e., fund manager). The Master Custodian selects which parcel of Australian shares and units are sold on behalf of the Fund using the parcel selection methodology determined by the Fund. 8. The Master Custodian is also responsible for the collection of all income entitlements in respect of the investments of the Fund and provides accounting and taxation reports to assist the Trustee in meeting its regulatory obligations. Sub-Custodians 9. The Master Custodian utilises a Master Sub-Custodian for the holding of the Fund's assets. 10. The Master Sub-Custodian appoints a sub-custodian in Australia for the Australian shares and units. Investment managers 11. The Fund uses a multi-manager approach to investments. Each investment manager is allocated a portfolio of Fund assets to manage.
12. The investment managers do not buy, hold or sell the Australian shares or units, nor do they select which parcels of Australian shares and units are to be sold. The investment manager instructs the broker to sell a certain number of Australian shares or units from the Master Custodian's account. 13. The Master Custodian maintains separate accounting and tax records for the investments of each of the managers through individual portfolio accounts (manager portfolio). Capital gains tax parcel selection process adopted by the System 14. Prior to the adoption of the System, when an investment manager sold a parcel of Australian shares or units, the Master Custodian performed parcel selection of Australian shares or units within that manager's portfolio only. Details of share or unit acquisitions and disposals were derived from the portfolios established for each investment manager and processed at that level. 15. The Fund implemented propagation for tax purposes from 1 July 20XX in relation to the unsegregated listed Australian shares and units held beneficially for the Fund.
16. There are no changes to the Master Custodian's accounting system upon propagation. This is the same accounting system at both the investment manager portfolio level and fund propagated level. 17. There are also no changes to the Master Custodian's tax system (being the System) upon propagation. This is the same System at both the investment manager portfolio level and fund propagated level. The System sufficiently maintains records of relevant listed Australian shares and units acquired and disposed. 18. The System provided by the Master Custodian is described as follows: a. Capital gains or losses for an asset sector(s) is calculated by propagating the tax parcels of Australian shares and units of the individual portfolios into a propagated portfolio, before applying the parcel selection methodology to select the parcel of assets to be disposed of. b. The trade details of a transaction are either instructed by external investment managers or by the Fund. c. After the message is received, the Master Custodian will post the trade in the accounting system in the manager portfolio.
d. The transactions posted in the accounting system are automatically loaded into the System in the manager portfolio and then automatically copied into the propagated portfolio. e. The information contained in the underlying manager portfolios is replicated in the propagated portfolio. f. The Australian shares and units propagated under the System are identical in all respects (i.e. fungible assets). g. Asset identification and selection under the System are contemporaneous with the actual disposal transaction. The transaction data is loaded into the propagated portfolio by the transaction date (for example, the date of the buy or sell transaction) in the order each transaction occurs and as the data is also loaded into the accounting system. h. Once a parcel of shares or units is selected as the nominated parcel for disposal, that selection is final, that is, that parcel is no longer active for future selection.
i. The method of selecting the nominated parcel of Australian shares and units to be disposed of is automated within the propagation system. This is likely to result in different parcels of assets being selected at the portfolio level and propagated portfolio level. 19. The propagation system does not apply across assets held by the Master Custodian and its sub-custodians or between separate sub-custodians. 20. The Master Custodian only applies the System to all unsegregated listed Australian shares and units held beneficially for the Fund. 21. Calculations at the portfolio level continues to be performed by the Master Custodian. Accounting 22. Assets identified for disposal under the System are also the assets identified for non-regulatory or accounting purposes by the Fund, i.e. assets identified as disposed of for tax purposes are the same assets identified as being disposed of for accounting purposes regardless of variance in tax and accounting cost bases. 23. The Master Custodian maintains an accounting book of records and a tax book of records separately in two systems.
24. The Master Custodian posts trades into the accounting system in the manager portfolio based on trade instructions provided by the investment managers or by the Fund. 25. In the System, the Master Custodian maintains records for the manager portfolios and the propagated portfolio separately. 26. As discussed above, the transactions posted in the accounting system are automatically loaded into the System in the manager portfolio and then automatically copied into the propagated portfolio, hence the assets identified for disposal under the accounting system are also the assets identified for tax purposes. Record keeping 27. The Master Custodian's propagation system is designed at both the portfolio level and propagated level (including all propagated portfolios) to record the following information: a. the trade date (contract date) that an investment manager acquired or disposed of a lot of an asset b. the asset's name and relevant identifier c. the asset type (e.g., shares) d. the number of assets that have been acquired or disposed of e. the original cost base including any incidental costs
f. the reduced cost base where a capital return has been received g. the frozen indexed cost base (if relevant) h. the market value per unit of an asset as at reporting date for calculation of unrealised gains or losses i. the sales proceeds received for disposal including any incidental costs adjusted for corporate actions j. the 'notional lot of an asset' that was subject to the CGT event k. the remaining balance of the lot where it has been partially disposed of, and l. a unique record locator for each transaction. 28. The information is replicated in the propagated portfolio and the following information is also available: a. the specific lot(s) selected that were subject to the CGT event, which determine the net taxable gain or loss b. the capital gains discount rate applicable (i.e., 33.33% for the Fund), and c. any capital gains discount applied in calculating net taxable gains for a reporting period. 29. Records are kept electronically and the Master Custodian's System meets the record keeping requirements set out in paragraphs 7 and 8 of Taxation Ruling TR 2018/2 Income tax: record keeping and access - electronic records
with respect to: a. record retention b. data security and integrity c. system documentation, and d. accessibility. Rationale for utilising the System 30. The System allows the Fund to meet its commercial objectives.
Section 100-45 of the ITAA 1997 Section 102-5 of the ITAA 1997 Section 102-10 of the ITAA 1997 Section 121-20 of the ITAA 1997 Subsection 121-20(1) of the ITAA 1997 Section 121-25 of the ITAA 1997 Part IVA of the ITAA 1936 Subsection 177A(5) of the ITAA 1936 Subsection 177D(1) of the ITAA 1936 Subsection 177D(2) of the ITAA 1936 Section 177F of the ITAA 1936 Subsection 177F(1) of the ITAA 1936 Paragraph 177F(1)(a) of the ITAA 1936 Paragraph 177F(1)(c) of the ITAA 1936
Question 1 All legislative references are to the ITAA 1997 unless otherwise indicated. The taxpayer's assessable income includes any net capital gain made by the taxpayer in the income year pursuant to section 102-5. For CGT purposes, where a disposal of a CGT asset (e.g., a parcel of shares or units) occurs, a capital gain or loss for most CGT events is worked out in accordance with section 100-45. Where the asset disposed can be individually distinguished, a capital gain or loss can be determined by reference to the capital proceeds, cost base and the acquisition date of the asset. Where the disposal of assets form part of a holding of identical shares or units which are acquired over time, it may not always be possible to distinguish or identify the particular shares or units that have been disposed of. In these situations, the taxpayer will need to decide which particular shares or units are being disposed of. For CGT purposes, the Commissioner will accept the taxpayer's selection of the identity of shares that have been disposed of. In CGT Determination TD 33 Capital Gains: How do you identify individual shares within a holding of identical shares?
, paragraphs 3 and 4 provide: 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. 4. In the past, where unidentifiable shares have been disposed of, the Commissioner has accepted 'first-in first-out' as a reasonable basis of identification. For CGT purposes, the Commissioner will also accept the taxpayer's selection of the identity of shares disposed of. Under the 'taxpayer's selection of the identity of shares' method, a taxpayer must keep detailed records of the shares (or units) sold and this must be used in determining any capital gain or loss. The Master Custodian maintains the accounting and tax records to enable the Fund to determine its capital gain or loss. Under the System, all relevant information is recorded at both the investment manager portfolio level and at the fund propagated level.
When the Master Custodian receives instructions to settle a transaction from an investment manager, the System will apply the Fund's parcel selection methodology to select parcels of identical (fungible) Australian shares and units at the time of disposal from the tax propagated portfolio. On the basis that the Fund maintains sufficient records to specifically identify the Australian shares and unitsthat have been disposed of, the Commissioner accepts the Fund's selection of specific shares or units, that is, a nominated parcel of shares or units, for the CGT event, from the tax propagated portfolio under the System in order to determine the Fund's net capital gain or loss for the purposes of sections 102-5 or 102-10 for an income year. Question 2 All legislative references are to the ITAA 1997 unless otherwise indicated. Section 121-20 provides that records that must be kept to determine the capital gain or a capital loss from a CGT event. Subsection 121-20(1) provides that:
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.) Section 121-20 also specifies that records that are relevant to determine the taxpayer's capital gain or loss are records that: identify the date on which the assets are bought or sold identify the price at which the assets are purchased and sold record the details of every act, transaction, event or circumstance that is relevant to work out the capital gain or capital loss from a CGT event, and are in English or readily accessible and convertible into English. Further, section 121-25 provides that a taxpayer must retain such records to substantiate the taxpayer's capital gain or loss. Where electronic records are kept, Taxation Ruling TR 2018/2 Income tax: record keeping and access - electronic records
at paragraphs 1 and 7 provide that electronic records are subject to the same record keeping requirements as paper records. This includes encrypted records, e-commerce records and records stored in the cloud. Under the requirements of paragraph 8 of TR 2018/2, electronic records: must not be altered or manipulated, and must be stored in a way that restricts the information from being altered or manipulated generally, must be retained for five years after the records are prepared or obtained, or the transactions are completed, whichever occurs later must be capable of being retrieved and read by us when required, and must be in English, or in a form that we can access and easily convert to English. Furthermore, paragraph 11 of TR 2018/2 confirms that it is a taxpayer's responsibility to ensure that their electronic records are secure, accurate and maintained in accordance with the record keeping requirements.
Based on the information provided of the System's record keeping capabilities, it is considered that the Master Custodian will have sufficient records to enable it to specifically identify the relevant Australian shares and units disposed of (at the propagated portfolio level). The Master Custodian will collect and retain the information in accordance with the requirements of sections 121-20 and 121-25 of the ITAA 1997, and also TR 2018/2 and TD 33, for the Fund to determine the capital gains and losses generated in respect of the disposal of the shares. On this basis, the propagation system will satisfy the record keeping requirements under subsection 121-20(1) of the ITAA 1997. Accordingly, the Commissioner confirms that the records the Fund states are maintained by the System, as described in the Facts, satisfy the requirements of subsection 121-20(1). Question 3 All legislative references are to the ITAA 1936 unless otherwise indicated.
Part IVA is the general anti-avoidance provision which allows the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained by a taxpayer in connection with a scheme to which Part IVA applies. Schemes to which Part IVA applies Subsection 177D(1) provides that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, having regard to the matters in subsection 177D(2), it would be concluded that a person (who need not be the taxpayer) who entered into or carried out the scheme (or any part of it), did so for the purpose of enabling the taxpayer to obtain a tax benefit (paragraph 117 of Law Administration Practice Statement PS LA 2005/24 Application of the General Anti-Avoidance Rules ). Subsection 177A(5) makes it clear that the 'purpose' includes the dominant purposes where there are two or more purposes - the 'dominant' purposes being the 'ruling, prevailing or most influential purpose' ( per Commissioner of Taxation (Cth) v Spotless Services Ltd [1996] HCA 34).
Having regard to the relevant factors in subsection 177D(2), it is concluded that the System (the scheme) was not entered into for the dominant purpose of obtaining a tax benefit in connection with the scheme. Accordingly, the Commissioner will not make a determination under paragraphs 177F(1)(a) and (c) of the ITAA 1996 that Part IVA applies to cancel a tax benefit obtained in relation to the System adopted by the Fund.