Private ruling: Segregated Current Pension Assets
Published: March 2014
Ruling period: 2014 income year to 2018 income year
Date scheme commenced: In the 2014 income year

Ruling: Q1: Will the Account-based Pension (AP) investment portfolios be considered segregated current pension assets for the purposes of subsection 295-385(3) of the Income Tax Assessment Act 1997 (ITAA 1997) following the proposed changes to the Fund's investment process? | A1: Yes. | Q2: If the answer to question 1 is yes, is the ordinary and statutory income from those AP investment portfolios exempt from income tax under subsection 295-385(1) of the ITAA 1997? | A2: Yes. | Q3: If the answer to question 1 is yes, are the capital gains and losses from CGT events happening to assets in those AP investment portfolios disregarded under section 118-320 of the ITAA 1997? | A3: Yes. | Q4: If the answer to question 1 is yes, can the Fund use the 'specific identification' method (as described in Taxation Determination TD 33 Capital Gains: How do you identify individual shares within a holding of identical shares? ) to identify which CGT assets (where they form part of a holding of identical assets) are held in each investment portfolio for the purposes of calculating the capital gains and losses in accordance with sections 104-10, 104-25, 104-70 and 104-135 of the ITAA 1997 (arising as a result of CGT events A1, C2, E4 and G1 respectively) happening to assets held in those portfolios? | A4: Yes. | Q5: If the answer to question 1 is yes, is a loss made from a financial arrangement that is a segregated current pension asset not allowable as a deduction under subsection 230-30(3) of the ITAA 1997? | A5: Yes. | Q6: If the answer to question 1 is yes, is a forex realisation loss from a segregated current pension asset disregarded pursuant to section 775-35 of the ITAA 1997? | A6: Yes. | Q7: If the answer to question 1 is yes, is a loss on the disposal or redemption of a traditional security which is a segregated current pension asset not allowable as a deduction pursuant to subsection 70B(2A) of the Income Tax Assessment Act 1936 (ITAA1936)? | A7: Yes.

Relevant facts and circumstances: 1. The Fund has a Registrable Superannuation Entity (RSE) Licence and is an APRA regulated fund, and is subject to the Commonwealth legislation governing most Australian superannuation funds. 2. The Fund has members and funds under management. 3. The Fund's assets are administered by a Custodian with the exception of certain interests that it holds in 100% owned subsidiaries and a bank account that is used to receive all contributions/roll-overs in respect of members and to make payments of benefits and transfers out. 4. The Fund operates three different types of superannuation plans - Accumulation (Accum), Defined Benefit (DB) and Account-based Pension (AP). These are: • Accum Plan - the member's benefit is equal to the account balance. Contributions, transfers in and positive investment returns increase the account balance and benefit payments, transfers out, expenses and negative investment returns reduce the account balance. • AP Plan - the member's benefit is equal to the account balance and this balance represents a current liability of the Fund to provide superannuation income stream benefits to the member (i.e. the member has satisfied a relevant condition of release and has applied for and been granted a superannuation income stream). Positive investment returns increase the account balance and benefit payments and negative investment returns reduce the account balance. • DB Plan - the member's benefit is a defined amount calculated by reference to the number of years of service and the member's final salary. 5. The assets supporting Accum and AP are currently invested and managed together in separate asset class pools. These assets are held by a custodian and separated into separate investment portfolios. 6. The assets supporting the DB accounts are invested and managed separately from all other assets and it is considered that these assets do not satisfy the definition of segregated current pension assets. As such, they are excluded from the scope of this ruling request. Creation of Separate Investment Portfolios for Accum/AP 7. There is a proposed date to segregate current pension assets. 8. The Fund will separate assets supporting the Accum and AP plans. Separate investment portfolios will be established within each asset class for the Accum and AP assets (effectively double the existing number of investment portfolios). 9. Each portfolio is identified by a unique identification code. Each investment portfolio will be unique to either Accum or AP investment options within the Custodian's accounting system. 10. The change to managing two separate portfolios will be reflected in Investment Management Agreements with each manager as well as in the custodian's accounting records. Allocation of Assets to Accum and AP Portfolios 11. Assets within the existing portfolios will be reviewed and allocated to either the Accum or AP portfolios. Each asset will be allocated to a specific portfolio by coding the asset to that portfolio in the Custodian's system. Once an asset is allocated to a specific portfolio all transactions relating to that asset will be reported as relating to that particular portfolio. 12. The Fund does not directly hold any property or infrastructure assets on its balance sheet. Exposure to these assets is via unit trusts. 13. The allocation of assets will occur by allocating assets to newly created Accum portfolios (i.e. the existing portfolios will become categorised as AP portfolios). No single asset will be 'shared' between portfolios. Separate cash accounts will be established for the Accum and AP investment options. 14. Most categories of assets will initially be proportionately split between the respective Accum and AP portfolios based on the appropriate weighting as at the date of segregation. A number of low value assets will also be allocated to Accum to minimise the operational complexities associated with the transfer. 15. Following the initial allocation of assets between the Accum and AP investment portfolios the only movement of assets between these groups of portfolios will be where there is a related 'member transaction' between the Accum and AP plans. For example, if a member moves from Accum to AP plans, that will result in a transfer of assets from the Accum investment portfolios to the AP investment portfolios. 16. The creation of separate portfolios for the Accum and AP investment options means that separate tax calculations will be prepared for the Accum and AP investment options. That is, the separate portfolios for Accum and AP asset class tax calculations and separate Accum and AP investment option tax calculations. Capital Gains Tax (CGT) Parcel Selection 21. The separation of assets in the existing investment portfolios into two separate portfolios will require a separation of the assets within Custodian's CGT records. That is, the CGT cost base and reduced cost base of the assets allocated to the separate Accum and AP portfolios will be determined. Where identifiable assets are allocated wholly to either the Accum or AP portfolios, the existing CGT cost base records will transfer with that asset. 22. However, the Fund holds a large number of 'homogenous' assets which will be required to be allocated into the separate portfolios (e.g. shares in listed companies, units in unit trusts, bonds etc.). 23. The Custodian maintains detailed records in relation to all of these assets, including: • The name of the assets (e.g. company shares, Property Trust units etc.); • The date the asset or parcel of assets was purchased; and • The price at which asset was purchased. 24. All assets within a single parcel have the same cost base and unique identifying characteristics (i.e. price at which the asset was purchased and date of purchase). Each parcel of assets is assigned a unique identifier within the Custodian accounting and CGT system. This is referred to as a "Locator Code" and is assigned to each trade (buy/sell) that takes place. 25. When assets are sold by the Fund currently, the CGT 'specific identification' methodology, as described in TD 33 where adequate records are kept, is used to identify the parcel of assets from which the asset was sold. As different parcels of the same type of assets (e.g. company shares) can be identified within the CGT system, when a fund manager sells some but not all of that type of asset, a specific parcel is selected for CGT purposes (i.e. rather than applying a FIFO/LIFO/average cost methodology). Only parcels within a particular portfolio can be chosen (i.e. the Fund's custodian does not currently use any form of 'propagation' between portfolios). 26. The same 'specific identification' methodology will be used to identify for CGT purposes the assets transferred from the current investment portfolios to the new investment portfolios. The Fund's Asset Classes 27. The rulee provided a table showing each class of asset held by the Fund and their proposed methodology to be applied in the selection of assets to be transferred to the newly created Accum portfolios. Assumptions 28. The trustee of the Fund obtains an actuary's certificate in accordance with paragraph 295-385(3)(b) of the ITAA 1997. 29. In accordance with subsection 295-385(6) of the ITAA 1997, the market value of the assets within the AP portfolios does not exceed the account balance of the benefits it supports. 30. References to income does not include, in accordance with subsection 295-385(2) of the ITAA 1997, non-arm's length income nor amounts included in assessable income under Subdivision 295-C.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 295-385. | Income Tax Assessment Act 1997 section 118-320. | Income Tax Assessment Act 1997 section 104-10. | Income Tax Assessment Act 1997 section 104-25. | Income Tax Assessment Act 1997 section 104-70. | Income Tax Assessment Act 1997 section 104-135. | Income Tax Assessment Act 1997 subsection 230-30(3). | Income Tax Assessment Act 1997 section 775-35. | Income Tax Assessment Act 1936 subsection 70B(2A).

Reasons for decision: Summary: The AP investment portfolios are considered to be segregated current pension assets for the purposes of subsection 295-385(3). | Detailed Reasoning - Detailed reasoning: 1. The meaning of segregated current pension assets is provided for in subsections 295-385(3) to 295-385(6). 2. Subsection 295-385(3) states: Assets of a complying superannuation fund are segregated current pension assets at a time if: (a) the assets are invested, held in reserve or otherwise dealt with at that time solely to enable the fund to discharge all or part of its liabilities (contingent or not) in respect of *superannuation income stream benefits that are payable by the fund at that time; and (b) the trustee of the fund obtains an *actuary certificate before the date for lodgment of the fund's *income tax return for the income year to the effect that the assets and the earnings that the actuary expects will be made from them would provide the amount required to discharge in full those liabilities, or that part of those liabilities, as they fall due. *denotes a term defined in section 995-1. 3. Under subsection 295-385(3) assets are segregated current pension assets when the asset is clearly defined as being held solely or exclusively to enable the fund to pay current superannuation income stream benefits. The subsection also requires the trustee to obtain an actuary's certificate (in accordance with paragraph 295-385(3)(b)). As the arrangement is prospective the Fund has not yet met the requirements in paragraph 295-385(b) to obtain an actuary's certificate. The applicant has confirmed that it will take action to meet this requirement and the ruling is given on the basis that this assumption will be met. 4. A requirement of a segregated current pension asset under paragraph 295-385(3)(a) is that the asset is invested, held in reserve or otherwise dealt with solely to enable the fund to discharge all or part of its liabilities in respect of superannuation income stream payments. Whether an asset is held for this purpose is a question of fact to be determined with regard to the relevant circumstances. The assets must be clearly defined as being held solely or exclusively to enable the fund to pay current superannuation income stream benefits. There is, in particular, a requirement to identify the asset and ascertain that its sole purpose is to fund superannuation pensions. This purpose will be evidenced by the records held by the trustee. 5. The Fund has physically separated assets according to their name, date of purchase, and purchase price by giving each asset a locator code. This code identifies the asset, including parcels of shares. Any asset or parcel of shares with a locator code can be separately identified as being dedicated to funding either superannuation pension benefits or Accum plans. No asset or parcel of shares are partly invested, held or dealt with. The locator code identifies and deals with only whole assets. 6. We have therefore concluded that the description of the locator codes, which the Fund has provided in this ruling application, allows the Fund to identify the assets supporting the AP investment portfolio which is to be kept separate from all other assets by investment portfolios and will meet the requirements of paragraph 295-385(3)(a). 7. There is a further requirement in subsection 295-385(6) which requires that assets supporting superannuation income stream benefits prescribed by the regulations are not segregated current pension assets to the extent that the market value of the assets exceeds the account balance supporting the pension. This ruling assumes, in accordance with subsection 295-385(6), that the market value of the assets within the AP portfolios does not exceed the account balance of the benefits it supports. 8. On the basis that The Fund obtains an actuarial certificate and paragraph 295-385(3)(b) is satisfied, the AP investment portfolios will be considered segregated current pension assets for the purposes of subsection 295-385(3). | Detailed Reasoning - Question 2: If the answer to question 1 is yes, is the ordinary and statutory income from those AP investment portfolios exempt from income tax under subsection 295-385(1)? | Summary: On the basis that the answer to question 1 is yes, ordinary and statutory income from AP investment portfolios is exempt from income tax under subsection 295-385(1). | Detailed Reasoning - Detailed reasoning: 9. Subsection 295-385(1) states: The *ordinary income and *statutory income of a *complying superannuation fund for an income year is exempt from income tax to the extent that: (a) it would otherwise be assessable income; and (b) it is from *segregated current pension assets. *denotes a term defined in section 995-1. 10. However, an exception to subsection 295-385(1) is provided for in subsection 295-385(2). Subsection 295-385(2) states: Subsection (1) does not apply to: (a) *non-arm's length income; or (b) amounts included in assessable income under Subdivision 295-C. *denotes a term defined in section 995-1. 11. This ruling is provided on the basis that the applicant's references to income does not include income falling within the exception in paragraphs 295-385(2)(a) nor 295-385(2)(b). 12. The Fund is a complying superannuation fund for the income year. Its AP investment portfolios meet the requirements for being segregated current pension assets. To the extent that AP investment portfolios are segregated current pension assets, the ordinary and statutory income from such assets will be exempt from income tax under subsection 295-385(1). | Detailed Reasoning - Question 3: If the answer to question 1 is yes, are the capital gains and losses from CGT events happening to assets in those AP investment portfolios disregarded under section 118-320? | Summary: On the basis that the answer to question 1 is yes, capital gains and capital losses from CGT events happening to assets in the AP investment portfolios are disregarded under section 118-320. | Detailed Reasoning - Detailed reasoning: 13. Section 118-320 states: A *capital gain or *capital loss that a *complying superannuation entity makes from a *CGT event happening in relation to a *segregated current pension asset is disregarded. *denotes a term defined in section 995-1. 14. AP investment portfolios are segregated current pension assets. Therefore, any capital gain or capital loss from the AP investment portfolios is disregarded under section 118-320. | Detailed Reasoning - Question 4: If the answer to question 1 is yes, can the Fund use the 'specific identification' method (as described in Taxation Determination TD 33 Capital Gains: How do you identify individual shares within a holding of identical shares? ) to identify which CGT assets (where they form part of a holding of identical assets) are held in each investment portfolio for the purposes of calculating the capital gains and losses in accordance with sections 104-10, 104-25, 104-70 and 104-135 (arising as a result of CGT events A1, C2, E4 and G1 respectively) happening to assets held in those portfolios? | Summary: The Fund can use the 'specific identification' method in TD 33 to identify which CGT assets are to be held in each investment portfolio for the purposes of calculating the capital gains and losses in accordance with sections 104-10, 104-25, 104-70 and 104-135 (arising as a result of CGT events A1, C2, E4 and G1 respectively) happening to assets held in those portfolios. | Detailed Reasoning - Detailed reasoning: 15. Section 995-1(1) defines capital gain and capital loss and states: capital gain: for each *CGT event capital gain is worked out in the way described in that event. Note 1: There are some CGT events for which there is no capital gain. capital loss: for each *CGT event a capital loss is worked out in the way described in that event. Note 1: There are some CGT events for which there is no capital loss. *denotes a term defined in section 995-1. 16. A CGT event may happen under sections 104-10, 104-25, 104-70 and 104-135 in relation to an asset in a particular portfolio. 17. Under section 104-10 CGT event A1 happens if you dispose of a CGT asset. 18. Under section 104-25 CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the assets is an option - being exercised; or (f) if the asset is a convertible interest - being converted. 19. According to section 104-70 CGT event E4 happens if: (a) the trustee of a trust makes a payment to you in respect of your unit or your interest in the trust (except for CGT event A1, C2, E1, E2, E6 or E7 happening in relation to it); and (b) some or all of the payment (the non-assessable part) is not included in your assessable income. 20. According to section 104-135 CGT event G1 happens if: (a) a company makes a payment to you in respect of a share you own in the company (except for CGT event A1 or C2 happening in relation to the share); and (b) some or all of the payment (the non-assessable part) is not a dividend, or an amount that is taken to be a dividend under section 47 of the Income Tax Assessment Act 1936; and (c) the payment is not included in your assessable income. The payment can include giving property: see section 103-5. 21. The respective capital gain or capital loss resulting from these CGT events, that, is, A1, C2, E4, and, G1 is worked out in accordance with sections 104-10, 104-25, 104-70 and 104-135 respectively. However, no capital loss arises under CGT event E4 and G1. 22. The Fund uses a combination of portfolios and locator codes to separate segregated current pension assets from all other assets. The Commissioner accepts the taxpayer can use the 'specific identification' method (as described in TD 33 where adequate records are maintained) to identify which CGT assets (where they form part of a holding of identical assets) are held in each investment portfolio for the purposes of calculating the capital gains and losses in accordance with sections 104-10, 104-25, 104-70 and 104-135 (arising as a result of CGT events A1, C2, E4 and G1 respectively) happening to assets held in those portfolios. | Detailed Reasoning - Question 5: If the answer to question 1 is yes, is a loss made from a financial arrangement that is a segregated current pension asset not allowable as a deduction under subsection 230-30(3)? | Summary: On the basis that the answer to question 1 is yes, a loss made from financial arrangement that is a segregated current pension asset is not allowable as a deduction under subsection 230-30(3). | Detailed Reasoning - Detailed reasoning: 23. An arrangement will be a Division 230 financial arrangement if it meets the requirements of either section 230-45 or 230-50. 24. Generally, subsection 230-15(2) provides that a loss you make from a financial arrangement is deductible to the extent that the loss is made in gaining or producing your assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. 25. The exception to this can be found in subsection 230-30(3): A loss you make from a *financial arrangement is not allowable as a deduction to you under any provision of this Act (other than subsection 230-15(3)) to the extent that you make it in gaining or producing your: i. *exempt income; or ii. *non-assessable non-exempt income. *denotes a term defined in section 995-1. 26. Income from the Fund's segregated current pension assets is exempt from income tax due to the application of subsection 295-385(1). On the basis that there is a financial arrangement that satisfies section 230-45 or 230-50, a loss from a financial arrangement held in the AP portfolios is a loss made in producing exempt income. Therefore, a loss made on a Division 230 financial arrangement which is a segregated pension asset will not be allowable as a deduction under subsection 230-30(3). | Detailed Reasoning - Question 6: If the answer to question 1 is yes, is a forex realisation loss from a segregated current pension asset disregarded pursuant to section 775-35? | Summary: On the basis that the answer to question 1 is yes, a forex realisation loss from a segregated current pension asset is disregarded pursuant to section 775-35. | Detailed Reasoning - Detailed reasoning: 27. Generally, forex realisation losses are deductible under section 775-30. An exception to this general rule can be found in section 775-35. 28. Subsection 775-35(1) states: A *forex realisation loss you make as a result of forex realisation event 1, 2 or 5 is disregarded to the extent that it is made in gaining or producing *exempt income or non-assessable *non-exempt income. 29. Subsection 775-35(2) states: A *forex realisation loss you make as a result of forex realisation event 3, 4 or 6 is disregarded to the extent that: (a) it is made in gaining or producing *exempt income or *non-assessable non-exempt income; and (b) the obligation, or the part of the obligation, does not give rise to a deduction. *denotes a term defined in section 995-1. 30. Section 775-35 uses similar wording to that found in subsection 230-30(3). 31. Income from the Fund's segregated current pension assets is exempt from income tax due to the application of subsection 295-385(1). On the basis that a forex realisation loss was made on contracts held in the AP portfolios, this loss was made in producing exempt income. As such, the loss will be disregarded under section 775-35. | Detailed Reasoning - Question 7: If the answer to question 1 is yes, is a loss on the disposal or redemption of a traditional security which is a segregated current pension asset not allowable as a deduction pursuant to subsection 70B(2A) of the ITAA1936? | Summary: On the basis that the answer to question 1 is yes, a loss on the disposal or redemption of a traditional security which is a segregated current pension asset is not allowable as a deduction under subsection 70B(2A). | Detailed Reasoning - Detailed reasoning: 32. Generally, subsection 70B(2) of the ITAA 1936 sets out that when a taxpayer disposes of or redeems a traditional security, the amount of any loss on the disposal or redemption is allowable as a deduction from the assessable income of the taxpayer. 33. However, subsection 70B(2A) of the ITAA 1936 expressly sets out that a deduction will not be allowable under subsection 70B(2) where the traditional security is also a segregated current pension asset of a complying superannuation fund. Subsection 70B(2A) of the ITAA 1936 states: A deduction is not allowable under subsection (2) for a loss on the disposal or redemption of traditional securities that are: (a) segregated exempt assets (for the purposes of the Income Tax Assessment Act 1997) of a life assurance company; or (b) segregated current pension assets (as defined in the Income Tax Assessment Act 1997) of a complying superannuation fund. 34. Therefore, on the basis that a loss was made on the disposal or redemption of a traditional security which is a segregated current pension asset, subsection 70B(2A) of the ITAA 1936 will prevent the Fund from claiming a deduction for the loss.

Reasons for decision: All legislative references in the Ruling are to the Income Tax Assessment Act 1997 unless otherwise indicated. | Will the Account-based Pension (AP) investment portfolios be considered segregated current pension assets for the purposes of subsection 295-385(3) following the proposed changes to the Fund's investment process?