Private ruling: Propagation
Date of advice: 28 May 2020
Published: June 2020
Ruling period: A number of income years.
Date scheme commenced: During an income year.

Ruling: Q1: Is the manner in which the capital gain or capital loss calculated by the Fund by nominating the specific parcel of shares or units in unit trusts disposed of from the Fund's aggregated portfolio using the propagated system (the System) acceptable in 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? | A1: Yes. | Q2: If the answer to Question 1 is yes, will the System satisfy the requirements of subsection 121-20(1) of the ITAA 1997? | A2: Yes. | Q3: Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the System utilised by the Fund? | A3: No.

Relevant facts and circumstances: The 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 is managed by the Trustee. 3. The Fund does not have any sub-funds within the meaning of section 69A of the SISA. 4. The accumulation plan is held under custody by the Master Custodian. 5. Assets within the Fund's accumulation plan include shares and units in unit trusts. The Master Custodian 6. The Fund engages the Master Custodian to hold all shares and units in unit trusts as nominee for the Fund, and to settle all transactions for which it is instructed by the investment managers. 7. When the Master Custodian receives instructions to settle a transaction from an investment manager, its role is to: · be responsible for recording the sale in its records on behalf of the Trustee · select which parcel of shares or units in unit trusts are to be disposed of. This is because the Master Custodian keeps the records relating to the buying and selling of shares and units on behalf of the Trustee · allocate specific share parcels or units in unit trusts to be disposed of in accordance with the methodology determined by the Fund · maintain the Fund's accounting and tax records and calculations, so that it can assist the Trustee in meeting its tax and regulatory obligations. Sub-custodians 8. The Master Custodian utilises multiple sub-custodians across the investment portfolio, but only one sub-custodian is utilised in each international jurisdiction that the Fund invests in. Investment managers 9. The Fund also engages Australian and international investment managers to manage its assets. 10. The investment manager does not buy, hold or sell the shares or units in unit trusts. Nor does it select which parcel of shares or units in unit trusts are to be sold. Instead, the investment manager instructs the broker to sell a certain number of a type of asset from the Master Custodian's account. Capital gains tax (CGT) parcel selection process 11. Currently, details of share or unit acquisitions and disposals are entered into the portfolios established for each investment manager (sub-portfolio) and processed at this level. 12. Where an investment manager sells a parcel of shares or units in a unit trust, the Master Custodian performs parcel selection of these assets at the sub-portfolio level. The propagation system 13. The Fund proposes to adopt the Master Custodian's propagation system (the System) during an income year. 14. This transaction will be a commercial transaction between the Fund and the Master Custodian as two independent parties acting at arm's length. 15. Under the System, capital gains or losses for an asset sector will be calculated by propagating the tax parcels of shares and units of the sub-portfolio before selection of the parcel of assets to be disposed of. The CGT position is recalculated at the legal entity level by consolidating each of the asset sector's capital gains and losses. 16. The System will only apply to shares and units in unit trusts within the Fund's accumulation plan investment pool. 17. The units and shares recognised under the System will be identical in all respects (i.e. fungible assets). 18. Asset identification and selection under the System will be contemporaneous with the actual disposal transaction. 19. Under the System, the Fund will use a particular parcel selection methodology. This parcel selection methodology will be applied consistently for the relevant income years. 20. The method of selecting the nominated parcel of shares or units in unit trusts to be disposed of will be automated within the System. This is likely to result in different parcels of assets being selected at the sub-portfolio level and asset level. 21. The System will only apply to the Fund's accumulation plan investment pool. 22. The System will not apply: · across assets held by the Master Custodian and its sub-custodians or between separate sub-custodians · between different exchanges for dual-listed securities. 23. Once a parcel of shares or units is selected as the nominated parcel for disposal, that selection will be final. 24. Calculations at the sub-portfolio level will continue to be used by the Master Custodian to monitor an investment manager's after-tax performance. Record keeping 25. The Master Custodian's system is designed at the sub-portfolio level to record: · the trade date (contract date) that an investment manager acquired or disposed of a lot of an asset · the asset's name and relevant ID · the asset type (e.g. shares or units) · the number of assets that have been acquired or disposed of · the original cost including any incidental costs · the reduced cost base where a tax deferred distribution has been received · the frozen indexed cost base (if relevant) · the market value per unit of an asset as at reporting date for calculation of unrealised gains or losses · the sales proceeds received for disposal including any incidental costs adjusted for corporate actions · the 'notional lot of an asset' that was subject to the CGT event · the remaining balance of the lot where it has been partially disposed of · a unique record locator for each transaction · transactions that are in a foreign currency. 26. The information contained in paragraph 25 above will be replicated in the aggregated portfolio and the following information is also available: · the specific lot(s) selected that were subject to the CGT event, which determine the net taxable gain or loss · the capital gains discount rate applicable · any capital gains discount applied in calculating net taxable gains for a reporting period. 27. All records and source documentation supporting the System and calculations will be held by the Master Custodian for a period of five years after the relevant CGT event. 28. Records will be kept electronically and will meet the record keeping requirements set out in paragraphs 7 and 8 of Taxation Ruling TR 2018/2 Income Tax: record keeping - electronic records with respect to: · data security and integrity · system documentation · accessibility.

Relevant legislative provisions: Section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) | Section 102-10 of the ITAA 1997 | Section 102-15 of the ITAA 1997Section 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 Income Tax Assessment Act 1936

Reasons for decision: Summary: Yes. The System is acceptable in determining the Fund's net capital gain or loss for the purposes of sections 102-5 and 102-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified. A net capital gain in an income year worked out pursuant to section 102-5 is included in a taxpayer's assessable income. A net capital loss for an income year is worked out pursuant to section 102-10 and is applied in accordance with section 102-15. For CGT purposes, where a disposal of a CGT asset (e.g. a parcel of shares or units in unit trusts) occurs, a capital gain or loss for most events is worked out in accordance with section 100-45. Where the assets disposed of 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 relevant asset. However, where the shares or units disposed of form part of a holding of identical (fungible) shares or units 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 share that have been disposed of. 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 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 sold and this must be used in determining any capital gain or loss. The note to TD 33 confirms that the Determination also applies to the disposal of assets other than shares which form part of a holding of identical assets where the assets are not able to be individually distinguished, for example, units in a unit trust. TD 33 is therefore relevant in the case of the Fund's identification of its shares or units disposed of. 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 will be recorded at both the sub-portfolio level and the aggregated portfolio level. When the Master Custodian receives instructions to settle a transaction from an investment manager, the System will apply the Fund's adopted asset parcel selection methodology to select a parcel of identical shares or units at the time of disposal from the aggregated portfolio. On the basis that the Fund will maintain sufficient records to specifically identify the shares or units that have been disposed of, the Commissioner accepts the Fund's selection of specific assets, that is, a nominated parcel of shares or units in a unit trust, for the CGT event, from the aggregated portfolio under the System in order to determine the Fund's net capital gain or loss for the purposes of sections 102-5 and 102-10. | Detailed Reasoning - Question 2: If the answer to Question 1 is yes, will the System satisfy the requirements of subsection 121-20(1) of the ITAA 1997? | Summary: Yes. The Trustee's use of the System will enable it to specifically identify the relevant shares or units in unit trusts disposed of from the Fund (at the aggregated portfolio level) and therefore satisfies the record keeping requirements under subsection 121-20(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified. 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: · identity the date on which the assets are bought or sold · identify the price at which the assets are purchased and sold · identify each element of the asset's cost base and reduced cost base · show the nature and details of every act, transaction, event or circumstance that is relevant to work out the capital gain or capital loss from a CGT event · are in English, or are readily accessible and convertible into English, or, if are not already in existence, must be reconstructed. Further, section 121-25 provides that a taxpayer must retain such records to substantiate the taxpayer's capital gain or loss. Where business transactions are carried out electronically, TR 2018/2 states that electronic records are subject to the same record keeping requirements as paper records. It also explains how a taxpayer must retain and provide access to electronic records, including encrypted records, records created from e-commerce and records stored in the cloud. [1] Paragraph 5 of TR 2018/2 further provides that: You are required to keep records that explain all electronic business transactions that are relevant for any income tax purpose. The minimum information that must be recorded is: · the date · amount, and · character of the transaction. 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 · 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 your responsibility to ensure that your electronic records are secure, accurate and maintained in accordance with the record keeping requirements. Based on the information provided on the System's record keeping capabilities, it is considered that the Trustee will have sufficient records to enable it to specifically identify the relevant shares or units disposed of from the Fund and to determine the capital gains and losses generated by the Fund in respect of the disposal of the shares or units. Accordingly, the Commissioner confirms that the records the Fund states will be maintained by the System satisfy the requirements of subsection 121-20(1). | Detailed Reasoning - Question 3: Will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the System utilised by the Fund? | Summary: No. Part IVA of the ITAA 1936 will not apply to cancel the tax benefit obtained by the Fund as a result of the use of the System, to calculate its net capital gain or loss for an income year. | Detailed Reasoning - Detailed reasoning: All legislative references are to the Income Tax Assessment Act 1936 unless otherwise specified. 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. In order for Part IVA to apply, the following requirements must be satisfied: · there is a scheme to which Part IVA applies · a tax benefit was or would (but for subsection 177F(1)) have been obtained · the identified tax benefit was or would have been obtained in connection with the identified scheme · the person who entered into or carried out the identified scheme (or any part of the scheme) did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit. | Detailed Reasoning - Scheme: A 'scheme' is broadly defined in subsection 177A(1) and can be a series of steps taken together or a single step (refer to Commissioner of Taxation v Hart [2004] HCA 26). The Fund's implementation and utilisation of the System will constitute a scheme (the Scheme) for the purposes of subsection 177A(1). | Detailed Reasoning - Tax benefit: Having established the existence of a scheme, Part IVA will only apply if it is determined that a tax benefit was or would have been obtained in connection with that scheme. Subsection 177C(1) identifies a number of tax benefits, including but not limited to: · an amount not being included in the taxpayer's assessable income · a deduction being allowable to the taxpayer · a capital loss being incurred by the taxpayer · a foreign tax credit being allowable to the taxpayer. Section 177CB - the basis for identifying tax benefits For schemes entered into on or after 16 November 2012, section 177CB provides the framework for deciding under section 177C whether any tax benefits would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, which is referred to as the tax effects. The 'would have' (annihilation approach) and 'might reasonably be expected to' (reconstruction approach) limbs of subsection 177C(1) are separate and distinct bases upon which the existence of a tax effect can be demonstrated (refer paragraph 1.44 of the Explanatory Memorandum to Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 (the EM). The annihilation approach Subsection 177CB(2) confirms that a decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme) (the annihilation approach). In considering such a postulate, the scheme must be assumed never to have happened. That is, it is annihilated, deleted or extinguished to determine the tax effects based on the remaining events or circumstances. The annihilation approach would typically apply where the scheme in question does not produce any material non-tax results or consequences for the taxpayer (refer paragraph 1.82 of the EM). As a result of the Scheme, the Fund will have an enhanced capability to select parcels of shares or units in unit trusts from the entire aggregated portfolio rather than from individual underlying sub-portfolios which would be the case if the System is not utilised. This may result in a tax benefit to the Fund which may include: · a reduced amount of capital gains included in its assessable income · increased capital losses · increased discount capital gains. However, it is recognised that the Scheme will provide the Fund with access to the enhanced information it needs to allow for parcel selection to occur across the aggregated portfolio, and in doing so, prioritise parcels of shares or units in unit trusts that generate the smallest gain or largest loss on disposal. This will provide greater transparency as to the Fund's data and ensure the tax positions adopted by the Fund meet its stated commercial objectives. It is therefore concluded that based on an alternative postulate that consists of deleting the Scheme (under the annihilation approach as outlined in subsection 177CB(2)), the Fund will achieve material non-tax results, commercial and economic benefits. Therefore, the annihilation approach will not apply. The reconstruction approach Subsection 177CB(3) explains that a decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme (the reconstruction approach). In determining whether such a postulate is a reasonable alternative, particular regard must be had to the substance of the scheme and any result or consequence for the taxpayer that is or would be achieved by the scheme. Any results in relation to the operation of the Act (as defined) that would be achieved by the postulate for any person (whether or not a party to the scheme) must be disregarded. An alternative postulate to the Trustee's utilisation of the System in selecting the parcel(s) of shares or units for disposal is for it to continue to select the nominated parcel of shares or units from the relevant sub-portfolio level rather than at an aggregated portfolio level. Under this alternative postulate, the net capital gain or loss position of the Fund would be determined by aggregating the individual capital gains or losses from each sub-portfolio rather than the aggregated portfolio under the Scheme. As a result, it is likely that the tax outcome under the alternative postulate for an income year would be less favourable than under the Scheme. As a result of the Scheme, the Fund will have an enhanced capability to select parcels of shares or units in unit trusts from the entire aggregated portfolio rather than from individual underlying sub-portfolios. The System also utilises the Fund's adopted asset parcel selection methodology which results in a more favourable tax outcome than that which may have been achieved under the alternative postulate. As such, it is likely that the following tax benefits to the Fund will arise under the Scheme: · a reduced amount of capital gains included in its assessable income · increased capital losses, or · increased discount capital gains. Based on the above analysis, it is concluded that under the reconstruction approach, a tax benefit will be obtained in connection with the Scheme resulting from the use of the System. | Detailed Reasoning - 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 or another taxpayer to obtain a tax benefit. Subsection 177A(5) makes it clear that the 'purpose' includes the dominant purpose where there are two or more purposes - the 'dominant' purpose being the 'ruling, prevailing or most influential purpose' (per The Commissioner of Taxation of the Commonwealth of Australia v Spotless Services Ltd & Anor [1995] FCA 958). In the present case, there is no discrepancy between the Scheme's substance and its form and there is no discernible tax-motivated reasons for the time at which the Scheme will be entered into. In undertaking the Scheme, whilst it is recognised that the after-tax position of the Fund and the financial position of participants to the scheme may improve, these participants' operations are commercially based and conducted at arm's length and the High Court recognised in Commissioner of Taxation v Hart [2004] HCA 26 that the fact that a taxpayer pays less tax as a result of a scheme does not mean, in and of itself, that Part IVA applies. Given that the Scheme will also achieve the stated commercial objectives, it cannot be concluded that the requisite purpose under subsection 177D(1) will exist in relation to the Scheme. | Detailed Reasoning - Conclusion: Having regard to the relevant factors in subsection 177D(2), it is concluded that the Scheme will not be entered into or carried out for the dominant purpose of obtaining a tax benefit in connection with the Scheme. [1] TR 2018/2, paragraph 1.

Is the manner in which the capital gain or capital loss calculated by the Fund by nominating the specific parcel of ordinary or preference shares or units in unit trusts disposed of from the Fund's aggregated portfolio using the propagated system (the System) acceptable in 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?