Private ruling: CGT and credit union mergers
Published: August 2014
Date scheme commenced: A specified date

Ruling: Q1: Pursuant to section 104-10(5) of the Income Tax Assessment Act 1997 ("ITAA 1997"), will a capital gain or capital loss made by X on the disposal of the "pre-CGT asset" be disregarded; on the basis that X is treated as having acquired the asset before 20 September 1985? | A1: Yes | Q2: Pursuant to subdivision 110 of the ITAA 1997, in relation to the post-CGT improvements that constitute a separate asset, will X inherit the cost base of Y as at the date of the transfer, for the purposes of calculating the capital gain or capital loss on disposal of the separate assets? | A2: Yes | Q3: Pursuant to subdivision 110 of the ITAA 1997, will X inherit the cost base of Z as at the date of the transfer, for the purposes of calculating the capital gain or capital loss on disposal of the asset? | A3: Yes | Q4: Will the balance of tax losses of Y as at the date of transfer, be deemed to be a tax loss of X as at the date of transfer, such that X will be entitled to an income tax deduction either in the year ended 30 June 2010 or a future year of income; notwithstanding the operation of the ordinary rules of Subdivision 165-A of the ITAA 1997? | A4: Yes | Q5: Will the balance of franking credits of Y and Z as at the date of transfer, be deemed to be franking credits of X as at the date of transfer, for the purposes of Section 200-15 of the ITAA 1997? | A5: Yes

Relevant facts and circumstances: X is a customer-owned financial institution which provides banking products and services. X has been involved in the amalgamation of financial institutions. X is an Authorised Deposit-taking Institution (ADI) supervised by the Australian Prudential Regulation Authority ("APRA") under the Banking Act 1959 (Cth) . X is also supervised by the Australian Securities and Investments Commission ("ASIC") under the Corporations Act 2001 (Cth) and has been granted an Australian Financial Services Licence and an Australian Credit Licence . The amalgamations of the financial institutions have been governed by the provisions of the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth) (" FSBTA ") . Extracted below is the relevant FSBTA section: 22 Time and effect of voluntary transfer (1) When the certificate of transfer comes into force, the receiving body becomes the successor in law of the transferring body, to the extent of the transfer. In particular: (a) if the transfer is a total transfer-all the assets and liabilities of the transferring body, wherever those assets and liabilities are located, become (respectively) assets and liabilities of the receiving body without any transfer, conveyance or assignment; and (b) if the transfer is a partial transfer-all the assets and liabilities of the transferring body that are included in the list of assets and liabilities specified in the statement of detail, wherever those assets and liabilities are located, become (respectively) assets and liabilities of the receiving body without any transfer conveyance or assignment; and (c) to the extent of the transfer, the duties, obligations, immunities, rights and privileges applying to the transferring body apply to the receiving body. (2) If there is an approved section 20 statement in relation to the transfer, then: (a) if the statement specifies that particular things are to happen or are taken to be the case-those things are, by force of this section, taken to happen, or to be the case, in accordance with the statement; and (b) if the statement specifies a mechanism for determining things that are to happen or are taken to be the case-things determined in accordance with that mechanism are, by force of this section, taken to happen, or to be the case, as determined in accordance with that mechanism. (3) Subject to subsection (2), if: (a) the transfer is a total transfer; and (b) immediately before the certificate comes into force, proceedings (including arbitration proceedings) to which the transferring body was a party were pending or existing in any court or tribunal; the receiving body is, on and after the day when the certificate comes into force, substituted for the transferring body as a party to the proceedings and has the same rights in the proceedings as the transferring body had. Note: An alternative way of dealing with substitution of parties (which is available for total or partial transfers) is to deal with the matter in an approved section 20 statement (see subsection (2)). (4) Subject to subsection (2), if: (a) the transfer is a total transfer; and (b) on the day when the certificate comes into force, documentary or other evidence would (disregarding the transfer) have been admissible for or against the interests of the transferring body; that evidence is admissible, on or at any time after that day, for or against the interests of the receiving body. Note: An alternative way of dealing with admissibility of evidence (which is available for total or partial transfers) is to deal with the matter in an approved section 20 statement (see subsection (2)). (5) Subject to subsection (2), if the transfer is a total transfer, on and after the day when the certificate comes into force, each translated instrument continues to have effect, according to its tenor, as if a reference in the instrument to the transferring body were a reference to the receiving body. For this purpose: translated instrument means an instrument (including an Act or other legislative instrument) subsisting immediately before the day when the certificate comes into force: (a) to which the transferring body is a party; or (b) that was given to, by or in favour of, the transferring body; or (c) that refers to the transferring body; or (d) under which money is, or may become, payable, or other property is, or may become, liable to be transferred, to or by the transferring body. Note: An alternative way of dealing with references in instruments (which is available for total or partial transfers) is to deal with the matter in an approved section 20 statement (see subsection (2)). (6) Subject to subsection (2), on and after the day when the certificate comes into force, a place that, immediately before that day, was a place of business for the transferring body in relation to business that was transferred to the receiving body is taken to be a place of business for the receiving body. Note: An alternative way of dealing with places of business is to deal with the matter in an approved section 20 statement (see subsection (2)). Amalgamations: • X-Y merger: X was the surviving institution from a merger with Y. The merger was regulated under the FSBTA. A Section 20 Statement of compliance with the FSBTA was provided for the merger. The merger was approved by Y's members, APRA and ASIC. A Certificate of Transfer was issued by APRA approving the merger. As part of the transfer of business, all assets and liabilities of Y were assumed by X. Y's members did not receive any consideration in compensation for the transfer. • X-Z merger: X was the surviving institution from a merger with Z. The merger was regulated under the FSBTA. A Section 20 Statement of compliance with the FSBTA was provided for the merger. The merger was approved by Z's members, APRA and ASIC. A Certificate of Transfer was issued by APRA approving the merger. As part of the transfer of business, all assets and liabilities of Z were assumed by X. Z's members did not receive any consideration in compensation for the transfer. Property acquisitions As a result of the above mergers, X acquired all the assets and liabilities of Y and Z including, as is relevant for the purposes of this ruling request, various real properties. Some of the properties were originally acquired pre 20 September 1985. Some of the properties were originally acquired post 20 September 1985. Some of the properties were improved/refurbished post 20 September 1985. Upon the mergers of X-Y and X-Z, the transfers of the relevant real properties were deemed to have the same taxation implications as if the asset had been transferred as part of a normal sale. X became the successor in law of Y and Z, and all of the assets of Y and Z became assets of X for nil consideration. Y carry forward tax losses: Y lodged its final tax return (pre-merger) recording an accounting and taxable loss. Y and Z franking credits: Y and Z maintained franking accounts. As at the date of the respective mergers, Y and Z's franking accounts were in credit.

Relevant legislative provisions: Income Tax Assessment Act 1997, Section 102-20 | Income Tax Assessment Act 1997, Subsection 104-10(1) | Income Tax Assessment Act 1997, Subsection 104-10(2) | Income Tax Assessment Act 1997 , Subsection 104-10(5) | Income Tax Assessment Act 1997, Subsection 108-5(1) | Income Tax Assessment Act 1997, Subdivision 110 | Income Tax Assessment Act 1997, Subdivision 165-A | Income Tax Assessment Act 1997, Section 200-15

Reasons for decision: Summary: Pursuant to section 104-10(5) of the Income Tax Assessment Act 1997 ("ITAA 1997"), a capital gain or capital loss made by X on the disposal of the "pre-CGT asset" will be disregarded; on the basis that X is treated as having acquired the asset before 20 September 1985. This is because upon the issue of a Certificate of Transfer, the receiving body becomes the successor in law of the transferring body. | Detailed Reasoning - Detailed reasoning: As per the facts provided, X was the surviving Institution from a merger with Y. The merger was regulated under the FSBTA. The merger was approved by Y's members, APRA and ASIC. A Certificate of Transfer was issued by APRA approving the merger. As part of the transfer of business, all assets and liabilities of Y were assumed by X. Y's members did not receive any consideration in compensation for the transfer. Consequently, X acquired all the assets and liabilities of Y; including real property. The transferor (Y) originally acquired the property before 20 September 1985. Improvements were made to the property consisting of extensive refurbishments after 20 September 1985. A Section 20 Statement of compliance with the FSBTA was provided for the merger. The relevant Articles of the statement address the tax consequences of the transfer; being that the transfer of Y's assets and liabilities is taken to have the same taxation implications for Y and X as if the assets and liabilities are transferred in a normal sale. Section 108-5(1) of the ITAA 1997 states that a CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. Real property is then provided as an example of a CGT asset. As provided factually, the property is held for the purpose of operating a business, and was not originally held with the intention of making a profit from the future sale of the property. Accordingly, post-merger "property 1" is a CGT asset for X. Section 102-20 of the ITAA 1997 provides that you can make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the event. Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens when you dispose of a CGT asset. Subsection 104-10(2) then specifies that such a disposal event will occur when there is a change in ownership from you to another entity. Subsection 104-10(4) then provides that you make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. An exception to this is given at Subsection 104-10(5). This provision states that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985. The "pre-CGT asset" for the purposes of this private ruling encompasses the land and buildings that were originally acquired pre 20 September 1985 by the transferor (Y). As Y acquired this portion of the asset before 20 September 1985, it meets the exception provided for at Subsection 104-10(5). Thus, this portion of the property is a pre-CGT asset. The improvements to the property made after 20 September 1985 do not meet this exception at Subsection 104-10(5) and are not a pre-CGT asset. As detailed above, as a part of the transfer of business upon the merger, all assets and liabilities of Y were assumed by X. A Certificate of Transfer was issued by APRA approving the merger. At this date, X acquired the "pre-CGT asset" (being the land and buildings originally acquired circa 1974 and excluding the improvements made after 20 September 1985). In ATOID 2004/888: Income Tax: Financial Sector (Business Transfer and Group Restructure) Act 1999: transfer of a Capital Gains Tax asset (ATO ID 2004/888), the Commissioner expressed the view that where a business is voluntarily transferred to another eligible business, pursuant to the provisions of the FSBTA; the receiving body is taken to have acquired a CGT asset for an amount equal to its indexed cost base at the effective date of transfer, for the purposes of Part 3-1 of the ITAA 1997. The parties had satisfied all of the relevant procedural and substantive provisions determined by the APRA, including preparation of a section 20 statement under the FSBTA. APRA had approved the transfer of business and issued a certificate of transfer pursuant to section 18 of the FSBTA. As expressed in ATO ID 2004/888, the aim of the FSBTA is to enable APRA to provide certainty that an endorsed transfer is effective at law to ensure that the rights and liabilities of the transferring entity survive in the new entity. This certainty is achieved by APRA issuing a certificate of transfer pursuant to section 18 of the FSBTA stating that the transfer is to take effect on the date specified. Broadly, section 22 of the FSBTA provides that when APRA issues a certificate of transfer, the receiving body becomes the successor in law of the transferring body. In particular, all the assets and liabilities of the transferring body become assets and liabilities of the receiving body without any additional formality. Further, the totality of duties, obligations, immunities, rights and privileges applying to the transferring body apply to the receiving body. Further, ATO ID 2004/888 states that, subject to the relevant circumstances of each case of voluntary total transfer of business sanctioned under the FSBTA; the Commissioner will aim to administer the tax law in such a way that it complements the operation of the FSBTA and promotes the stated objectives of the legislation. In this case, as per the facts provided the relevant section 20 statement has been prepared and APRA has issued a certificate of transfer pursuant to section 18 of the FSBTA. Applying the view expressed in ATO ID 2004/888; X becomes the successor in law of the assets of Y, including the "pre-CGT asset". Further, the totality of duties, obligations, immunities, rights and privileges applying to Y will now apply to X. X will be taken to have acquired the asset for an amount equal to its indexed cost base at the effective date of the transfer. Further, the principle in ATO ID 2004/888 supports the conclusion that the effect of section 22 of the FSBTA would allow X to inherit the tax attributes of the transferor, such as the pre-CGT status of a portion of property 1. Therefore, pursuant to section 104-10(5) of the ITAA 1997 , any capital gain or capital loss made by X on the disposal of the "property 1 pre-CGT asset" will be disregarded on the basis that X is treated as having acquired the asset before 20 September 1985. In applying the principles outlined in ATO ID 2004/888, X effectively inherits the tax attributes of Y, including the pre-CGT status of a portion of the property. | Summary: Pursuant to subdivision 110 of the ITAA 1997, in relation to the post-CGT improvements that constitute a separate asset, X will inherit the cost base of Y as at the date of the transfer, for the purposes of calculating the capital gain or capital loss on disposal of the separate assets. This is because upon the issue of a Certificate of Transfer, the receiving body becomes the successor in law of the transferring body | Detailed Reasoning - Detailed Reasoning: The merger of Y and X was approved by Y's members, APRA and ASIC. A Certificate of Transfer was issued by APRA approving the merger. As part of the transfer of business, all assets and liabilities of Y were assumed by X. Y's members did not receive any consideration in compensation for the transfer. Consequently, X acquired all the assets and liabilities of Y; including real property. The transferor (Y) originally acquired the property pre 20 September 1985. Improvements to the property consist of extensive refurbishments and the renewal of plant and equipment post 20 September 1985. As per the facts, these "post-CGT improvements" constitute a separate asset to that ruled upon in Question 1. A Section 20 Statement of compliance with the FSBTA was provided for the merger. The relevant Articles of the statement address the tax consequences of the transfer; being that the transfer of Y's assets and liabilities is taken to have the same taxation implications for Y and X as if the assets and liabilities are transferred in a normal sale. Division 110 of the ITAA 1997 gives the general rules about cost base and reduced cost base for CGT assets. The cost base and reduced cost base of a CGT asset are used to calculate a capital gain or loss when there is a CGT event. Section 110-25 of the ITAA 1997 provides the five elements that form the cost base and reduced cost base. With regard to the transfer of CGT assets from one entity to another as a result of credit union mergers, the Commissioner expressed a view in ATO ID 2004/888 . Where a business is voluntarily transferred to another eligible business, pursuant to the provisions of the FSBTA; the receiving body is taken to have acquired a CGT asset for an amount equal to its indexed cost base at the effective date of transfer, for the purposes of Part 3-1 of the ITAA 1997. The parties had satisfied all of the relevant procedural and substantive provisions determined by the APRA, including preparation of a section 20 statement under the FSBTA. APRA had approved the transfer of business and issued a certificate of transfer pursuant to section 18 of the FSBTA. As expressed in ATO ID 2004/888, the aim of the FSBTA is to enable APRA to provide certainty that an endorsed transfer is effective at law to ensure that the rights and liabilities of the transferring entity survive in the new entity. This certainty is achieved by APRA issuing a certificate of transfer pursuant to section 18 of the FSBTA stating that the transfer is to take effect on the date specified. Broadly, section 22 of the FSBTA provides that when APRA issues a certificate of transfer, the receiving body becomes the successor in law of the transferring body. In particular, all the assets and liabilities of the transferring body become assets and liabilities of the receiving body without any additional formality. Further, the totality of duties, obligations, immunities, rights and privileges applying to the transferring body apply to the receiving body. Further, ATO ID 2004/888 states that, subject to the relevant circumstances of each case of voluntary total transfer of business sanctioned under the FSBTA; the Commissioner will aim to administer the tax law in such a way that it complements the operation of the FSBTA and promotes the stated objectives of the legislation. In this case, the relevant section 20 statement has been prepared and APRA has issued a certificate of transfer pursuant to section 18 of the FSBTA. In directly applying the view expressed in ATO ID 2004/888; X becomes the successor in law of the assets of Y, including the post-CGT improvements to the property which constitute a separate asset. Further, the totality of duties, obligations, immunities, rights and privileges applying to Y will now apply to X. X will be taken to have acquired the post-CGT improvements to the property (which constitute a separate asset) for an amount equal to its indexed cost base at the effective date of the transfer. | Summary: Pursuant to subdivision 110 of the ITAA 1997, X will inherit the cost base of Z as at the date of the transfer, for the purposes of calculating the capital gain or capital loss on disposal of the asset. This is because upon the issue of a Certificate of Transfer, the receiving body becomes the successor in law of the transferring body. | Detailed Reasoning - Detailed Reasoning: The merger of Z and X was approved by Z's members, APRA and ASIC. A Certificate of Transfer was issued by APRA approving the merger. As part of the transfer of business, all assets and liabilities of Z were assumed by X. Z's members did not receive any consideration in compensation for the transfer. Consequently, X acquired all the assets and liabilities of Z; including real property. The transferor (Z) originally acquired the property after 20 September 1985. No improvements were made to the property. A Section 20 Statement of compliance with the FSBTA was provided for the merger. The relevant Articles of the statement address the tax consequences of the transfer; being that the transfer of Z's assets and liabilities is taken to have the same taxation implications for Z and X as if the assets and liabilities are transferred in a normal sale. Division 110 of the ITAA 1997 gives the general rules about cost base and reduced cost base for CGT assets. The cost base and reduced cost base of a CGT asset are used to calculate a capital gain or loss when there is a CGT event. Section 110-25 of the ITAA 1997 provides the five elements that form the cost base and reduced cost base. With regard to the transfer of CGT assets from one entity to another as a result of credit union mergers, the Commissioner expressed a view in ATOID 2004/888: Income Tax: Financial Sector (Business Transfer and Group Restructure) Act 1999: transfer of a Capital Gains Tax asset. Where a business is voluntarily transferred to another eligible business, pursuant to the provisions of the FSBTA; the receiving body is taken to have acquired a CGT asset for an amount equal to its indexed cost base at the effective date of transfer, for the purposes of Part 3-1 of the ITAA 1997. The parties had satisfied all of the relevant procedural and substantive provisions determined by the APRA, including preparation of a section 20 statement under the FSBTA. APRA had approved the transfer of business and issued a certificate of transfer pursuant to section 18 of the FSBTA. As expressed in ATO ID 2004/888, the aim of the FSBTA is to enable APRA to provide certainty that an endorsed transfer is effective at law to ensure that the rights and liabilities of the transferring entity survive in the new entity. This certainty is achieved by APRA issuing a certificate of transfer pursuant to section 18 of the FSBTA stating that the transfer is to take effect on the date specified. Broadly, section 22 of the FSBTA provides that when APRA issues a certificate of transfer, the receiving body becomes the successor in law of the transferring body. In particular, all the assets and liabilities of the transferring body become assets and liabilities of the receiving body without any additional formality. Further, the totality of duties, obligations, immunities, rights and privileges applying to the transferring body apply to the receiving body. Further, ATO ID 2004/888 states that, subject to the relevant circumstances of each case of voluntary total transfer of business sanctioned under the FSBTA; the Commissioner will aim to administer the tax law in such a way that it complements the operation of the FSBTA and promotes the stated objectives of the legislation. In this case, the relevant section 20 statement has been prepared and APRA has issued a certificate of transfer pursuant to section 18 of the FSBTA. In directly applying the view expressed in ATO ID 2004/888; X becomes the successor in law of the assets of Z. Further, the totality of duties, obligations, immunities, rights and privileges applying to Z will now apply to X. Therefore, for the purposes of calculating the capital gain or capital loss on disposal of the asset, X will be taken to have acquired the asset for an amount equal to its indexed cost base at the effective date of the transfer.. | Summary: The balance of tax losses of Y as at the date of transfer will be deemed to be a tax loss of X as at the date of transfer, such that X will be entitled to an income tax deduction either in the year of the transfer or a future year of income; notwithstanding the operation of the ordinary rules of Subdivision 165-A of the ITAA 1997. This is because upon the issue of a Certificate of Transfer, the receiving body becomes the successor in law of the transferring body. | Detailed Reasoning - Detailed Reasoning: As per the facts, Y lodged its final tax return pre-merger and recorded an accounting loss and a taxable loss. Subdivision 165A of the ITAA 1997 provides the ordinary rules that must be satisfied when deducting tax losses of earlier income years. However, there are no specific provisions dealing with concessions for credit unions transferring carry forward losses upon mergers. As expressed in ATO ID 2004/888, the aim of the FSBTA is to enable APRA to provide certainty that an endorsed transfer is effective at law to ensure that the rights and liabilities of the transferring entity survive in the new entity. This certainty is achieved by APRA issuing a certificate of transfer pursuant to section 18 of the FSBTA stating that the transfer is to take effect on the date specified. Broadly, section 22 of the FSBTA provides that when APRA issues a certificate of transfer, the receiving body becomes the successor in law of the transferring body. In particular, all the assets and liabilities of the transferring body become assets and liabilities of the receiving body without any additional formality. Further, the totality of duties, obligations, immunities, rights and privileges applying to the transferring body apply to the receiving body. Further, ATO ID 2004/888 states that, subject to the relevant circumstances of each case of voluntary total transfer of business sanctioned under the FSBTA; the Commissioner will aim to administer the tax law in such a way that it complements the operation of the FSBTA and promotes the stated objectives of the legislation. In applying the underlying principles of ATO ID 2004/888, being that upon the issue of a Certificate of transfer, all the assets and liabilities of Y are transferred to X; and that the Commissioner will aim to administer the tax law in order to complement the operation of the FSBTA; X will become the successor at law of the transferring body losses without the need to satisfy the ordinary rules found at Subdivision 165-A of the ITAA 1997. Accordingly, the balance of the tax losses of Y at the transfer date will be deemed to be a tax loss of X as at that date, such that X will be entitled to an income tax deduction either in the year of the transfer or a future year of income. | Summary: The balance of franking credits of Y and Z as at the date of transfer will be deemed to be franking credits of X as at the date of transfer, for the purposes of Section 200-15 of the ITAA 1997. This is because upon the issue of a Certificate of Transfer, the receiving body becomes the successor in law of the transferring body. | Detailed Reasoning - Detailed Reasoning:: The rules about franking accounts are provided at Section 200-15 of the ITAA 1997. A franking account is used to keep track of income tax paid by the entity, so that the entity can pass to its members the benefit of having paid that tax when a distribution is made. Each corporate tax entity has a franking account. Typically, a corporate tax entity receives a credit in the account if the entity pays income tax or receives a franked distribution. A credit in the franking account if called a franking credit. Y and Z maintained franking accounts. As at the date of the respective mergers, Y and Z's franking accounts were in credit. As expressed in ATO ID 2004/888, the aim of the FSBTA is to enable APRA to provide certainty that an endorsed transfer is effective at law to ensure that the rights and liabilities of the transferring entity survive in the new entity. This certainty is achieved by APRA issuing a certificate of transfer pursuant to section 18 of the FSBTA stating that the transfer is to take effect on the date specified. Broadly, section 22 of the FSTBA provides that when APRA issues a certificate of transfer, the receiving body becomes the successor in law of the transferring body. In particular, all the assets and liabilities of the transferring body become assets and liabilities of the receiving body without any additional formality. Further, the totality of duties, obligations, immunities, rights and privileges applying to the transferring body apply to the receiving body. Further, ATO ID 2004/888 states that, subject to the relevant circumstances of each case of voluntary total transfer of business sanctioned under the FSBTA; the Commissioner will aim to administer the tax law in such a way that it complements the operation of the FSBTA and promotes the stated objectives of the legislation. In applying the underlying principles of ATO ID 2004/888, being that upon the issue of respective Certificates of transfer, all the assets and liabilities of Y and Z are transferred to X; and that the Commissioner will aim to administer the tax law in order to complement the operation of the FSTBA; X will become the successor at law of the balance of franking credits of Y and Z. Accordingly, the balance of the franking accounts of Y and Z at the respective transfer dates will be deemed to be franking credits of X as at that date, for the purposes of Section 200-15 of the ITAA 1997.