ATO ID 2011/95: Managed investment scheme: restructure and appointment of a replacement Responsible Entity
Date of decision: 10 November 2011
Year of income: Year ending 30 June 2012
Business line: Private Groups and High Wealth Individuals

Issue
Does paragraph 82KZMGA(1A)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) apply where, due to the insolvency of a former Responsible Entity and the appointment of a new Responsible Entity, the taxpayer's interest in a Managed Investment Scheme (MIS) is terminated as a result of the taxpayer and other participants in the MIS jointly approving changes to the MIS structure necessary to facilitate the continuation of the scheme?

Decision
Yes, paragraph 82KZMGA(1A)(a) of the ITAA 1936 applies where, due to the insolvency of a former Responsible Entity and the appointment of a new Responsible Entity, the taxpayer's interest in a MIS is terminated as a result of the taxpayer and other participants in the MIS jointly approving changes to the MIS structure necessary to facilitate the continuation of the scheme.

Facts
The taxpayer is an initial participant in a forestry MIS. As an initial participant, the taxpayer paid an amount under an agreement as part of a MIS in June 2008 and claimed a deduction in that income year pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) and section 82KZMG of the ITAA 1936. In 2011, due to the insolvency of the former Responsible Entity (RE), a new RE was appointed and the taxpayer and other participants jointly approved changes to the MIS structure necessary to facilitate the continuation of the scheme. As a result of the restructure, the land and trees held under the scheme were sold; thus terminating the taxpayer and other participants' interests in the MIS. The termination of the taxpayer's interest in the MIS is a Capital Gains Tax (CGT) event for the purposes of section 82KZMGA of the ITAA 1936. At the time of acquiring their interest in the MIS, the taxpayer could not have reasonably foreseen the disposal of their interest by virtue of the insolvency of the former RE because there were no objective indications at that time of any financial difficulties on the part of the former RE.

Reasons for decision
Summary: Subsection 82KZMGA(1) of the ITAA 1936 operates to disallow a deduction pursuant to section 8-1 of the ITAA 1997 and section 82KZMG of the ITAA 1936 if a CGT event happens in relation to a forestry interest within four years after the end of the income year in which an amount is first paid by the taxpayer under the agreement in which the interest is held. However, subsection 82KZMGA(1A) of the ITAA 1936 provides that where the CGT event happens because of circumstances outside the control of the taxpayer (paragraph 82KZMGA(1A)(a)), the deduction is not disallowed, provided the taxpayer could not have reasonably foreseen the CGT event happening when they acquired their interest (paragraph 82KZMGA(1A)(b)). The termination of a taxpayer's interest as a consequence of the insolvency of a former RE is a CGT event, the happening of which is genuinely outside of the taxpayer's control. The taxpayer had no control over the solvency of the former RE; its failure ultimately leading to the decision, to sell the trees and land, that directly caused the CGT event. There is no objective evidence that, at the time of acquiring their interest in the MIS, the taxpayer could have reasonably foreseen the disposal of their interest by virtue of the insolvency of the former RE. As a result, subsection 82KZMGA(1A) of the ITAA 1936 applies and the taxpayer's previously claimed deductions will not be affected.

Legislative references: Income Tax Assessment Act 1936 section 82KZMG section 82KZMGA subsection 82KZMGA(1) subsection 82KZMGA(1A) paragraph 82KZMGA(1A)(a) paragraph 82KZMGA(1A)(b)
Subject references: Capital Gains Capital Gains Tax CGT Events Deductions and Expenses Forestry