Private ruling: Calculation Methodology for CGT
Ruling period: Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner confirm that the manner in which the capital gain or capital loss is calculated by the taxpayer for the purposes of section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) by nominating the specific shares (that is, the parcel of shares) from the taxpayer's aggregated portfolio is allowable in determining the taxpayer's overall net capital gain or loss for a particular income year and satisfies the requirements of section 121-20(1) of the ITAA 1997? | A1: Yes | Q2: Will the Commissioner confirm that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) does not apply to the application of the proposed arrangement. | A2: Yes

Relevant facts and circumstances: The taxpayer is a complying superannuation fund (the Fund). The Fund is managed by a trustee company. The Fund engages a large number of fund managers to invest the funds it holds. Fund managers are appointed to manage a discrete portfolio within a particular mandate. Each fund manager is allocated an amount of funds for which it makes all the investment decisions The Fund engages a Custodian to settle all trades instructed by the fund managers, and to hold on trust all the assets of the Fund. Where a fund manager sells shares, the Custodian allocates the specific share parcels to be disposed of in accordance with the methodology determined by the Fund. The Custodian also maintains the accounting and tax records to assist the trustee in meeting its regulatory obligations. The Custodian's system The Custodian is offering an upgraded system. It is proposed that the records for all fund managers in a particular asset class will be linked to an 'aggregated portfolio'. Data will continue to be entered into the portfolios established for each fund manager (sub-portfolio), but this information will automatically be replicated in the aggregated portfolio. However, the information in the aggregated portfolio will not be distinguished by sub-portfolio. Where a fund manager sells a parcel of shares, the Custodian would perform parcel selection at the sub-portfolio and also at the aggregated portfolio level. The Fund utilises the 'maximise loss routine'. This selects the parcels from those available in the aggregated portfolio which results in the smallest capital gain for the Fund. The method of selecting the 'nominated parcel of shares' subject to the CGT event is automated within the system. This is likely to result in different parcels being selected at the sub-portfolio and aggregated portfolio levels. Calculations at the aggregated portfolio level will be used for calculating the Fund's tax position. Once a parcel of shares has been selected as the nominated parcel of shares, that selection is final. The calculation of accounting gains and losses on disposal of shares in the financial statements will be done at the same aggregated portfolio level as would be done for tax purposes. The Custodian's system is designed at the individual manager level to: Record the date that a fund manager entered into a contact to buy or dispose of a parcel of assets (i.e. a parcel of identical shares). Record the name and security identifier (e.g. SEDOL or ISIN) of the assets acquired. Record the type and class of asset (e.g. ordinary shares). Record the number of assets (e.g. the number of shares in the parcel) that have been acquired or disposed. Record the cost elements of the parcel of shares including any incidental costs (e.g. brokerage), in the case of an acquisition. Record the reduced cost base when a tax deferred distribution is received. Record the frozen indexed cost base where relevant. Record the impact of corporate actions including bonus issues, return of capital, share splits, takeovers etc. Record the proceeds received and any incidental costs incurred (e.g. brokerage) in the case of a disposal. Record the notional nominated parcel of assets that was subject to the CGT event. Record the remaining balance of the parcel where it has been partially disposed. Each transaction is allocated a system generated unique transaction ID number. Transactions in a foreign currency are converted to Australian Dollars at the exchange rate on the contract date. The same information is replicated in the aggregated portfolio. The Custodian also performs the following reconciliations: The closing balance of assets recorded in its custody system to its accounting and tax system at the individual manager level. The closing balance of assets recorded in the aggregated portfolio to the sum of the individual manager portfolios. Records are kept electronically and the system meets the record keeping requirements set out in paragraph 37 of Tax Ruling TR 2005/9, with respect to: · record retention; · data security and integrity; · system documentation; · retaining archival copies; and · accessibility.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 100-45, | Income Tax Assessment Act 1997 Section 102-5, | Income Tax Assessment Act 1997 Subsection 121-20(1) | Income Tax Assessment Act 1997 Section 121-25 | Income Tax Assessment Act 1936 Part IVA. | Income Tax Assessment Act 1936 Subsection 177A(1) | Income Tax Assessment Act 1936 Subsection 177C(1) | Income Tax Assessment Act 1936 Subsection 177C(4) | Income Tax Assessment Act 1936 Paragraph 177C(4)(a) | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Section 177F

Reasons for decision: Detailed Reasoning - The method of nominating parcel of shares: For CGT purposes, where a disposal of a CGT asset (e.g. a parcel of shares) occurs, a capital gain or loss for most capital gains events is worked out in accordance with section 100-45 of the ITAA 1997. CGT Determination TD 33 Capital Gains: How do you identify individual shares within a holding of identical shares? (TD 33) provides that the Commissioner will accept the taxpayer's selection of the identity of shares disposed of In the present case, the Custodian maintains the accounting and tax records to enable the Fund to determine its capital gain or loss. The tax records are currently kept separately on the sub-portfolio basis. The information is also replicated in the aggregated portfolio which reflects the actual ownership level of all the parcels of shares held by the Fund. The Custodian performs the parcel selection at the sub-portfolio level and also at the aggregated portfolio level and decides which particular parcel of shares from the aggregated portfolio that have been disposed of for CGT purposes. Gains or losses at the aggregated portfolio level will be used to determine the Fund's CGT tax position. Where the taxpayer maintains sufficient records to specifically identify the shares and its cost base, TD 33 allows the taxpayer to select the identity of shares they wish to nominate as having disposed of. However, the average cost is not an acceptable method unless certain requirements are met (paragraph 5 of TD 33). The Fund has asserted that the Custodian's system is capable of maintaining appropriate accounting records of the acquisition and disposal of the relevant shares which will enable the Fund to identify the shares sold and their actual costs. On this basis, the Commissioner will accept the selection of specific assets, that is a nominated parcel of shares, for the CGT event, from the Fund's aggregated portfolio in order to determine the Fund's overall capital gain or loss for the income year. | Detailed Reasoning - Record keeping requirements: Section 121-20 of the ITAA 1997 deals with the records that must be kept to determine the capital gain or a capital loss from a CGT event. Section 121-25 of the ITAA 1997 deals with the retention of such records to substantiate the taxpayer's CGT liabilities. Based on the information provided, it is considered that the Fund has sufficient records to enable it to specifically identify the shares that have been disposed (at the aggregated portfolio level), and calculate the gain or loss in respect of the disposal of the shares. Accordingly, the Commissioner confirms that the records maintained by the Custodian satisfy the requirements of subsection 121-20(1) of the ITAA 1997. | Detailed Reasoning - Question 2: Part IVA of the ITAA 1936 (Part IVA) is the general anti-avoidance provision which gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained by a taxpayer in connection with a scheme to which Part IVA applies. The scheme Subsection 177A (1) of the ITAA 1936 widely defines a scheme as: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. In the present case, the broad definition of 'scheme' would encompass the arrangement proposed. The tax benefit Subsection 177C(1) of the ITAA 1936 defines a tax benefit that may be obtained by a taxpayer in connection with a scheme. In the arrangement, the likely benefit would be the enhanced capacity to select the parcels from the entire aggregated portfolio rather than from the individual sub-portfolios. The applicant also stated that it is likely that the following tax benefits would arise: § reduction of capital gains for a year of income; or § capital losses rather than capital gains for a year of income; or § discount capital gains rather than non-discount capital gains for a year of income. It is considered that there is a reasonable expectation that the Fund will obtain a tax benefit as defined in connection with the scheme. Dominant purpose of the scheme For Part IVA to apply to the scheme, it must have been entered into for the dominant purpose of obtaining the tax benefit. To determine whether a taxpayer entered into the scheme with the sole or dominant purpose of obtaining a tax benefit, it is necessary to consider the eight factors in section 177D of the ITAA 1936. Having regard to the relevant factors specified in section 177D of the ITAA 1936, it is concluded that the scheme will not be entered into for the sole or dominant purpose of obtaining a tax benefit in connection with the scheme. This leads to the conclusion that the tax benefit arising from the scheme will not be one to which Part IVA applies. Accordingly, the Commissioner confirms that Part IVA will not apply to the proposed arrangement.

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