Private ruling: Capital Gains Tax - CGT event A1 - Identification of shares
Published: September 2013
Ruling period: 1 July 2013 to 30 June 2016

Ruling: Q1: Is a superannuation fund able to identify the 'specific assets' from the sub-portfolio of assets (that are subject to the CGT event) based on the first in - first out method in order to determine the fund's overall capital gain or loss for a particular income year? | A1: Yes. | Q2: Are the records generated by the fund sufficient for the purposes of section 121-20 of the Income Tax Assessment Act 1997 (ITAA 1997) and to satisfy the principles set out in CGT Determination Number 33 (TD 33)? | A2: Yes.

Relevant facts and circumstances: The Fund The Fund is a complying superannuation fund. The Fund is governed by its Deed. The Deed outlines the purpose of the Fund as well as the powers and responsibilities of its Trustee. The Trustee The Trustee manages the Fund. Functions, Powers and Responsibilities of the Trustee Under the Deed, the Trustee has been given a number of powers in relation to operating the Fund. These powers include the power to: · appoint/remove Managers and Custodians; · manage and control all proceedings, matters and things in connection with the Fund; · do all things necessary, desirable or expedient to administer, maintain or preserve the Fund; · may apply the whole or part of the Fund in any manner as if acting personally and not in a fiduciary capacity but as a sole and absolute legal beneficial owner of the fund; · apply and invest all assets of the Fund in any investment the Trustee sees fit; · appoint appropriate advisers; and · delegate the Trustee's powers to any person it sees fit. In applying the powers conferred to it under the funds deed, the Trustee has appointed a number of Managers and has appointed a Custodian over the funds assets. Accounts, Audit and Taxation responsibilities The Deed provides that the Trustee is required to properly maintain adequate books, accounts, records and reports. At the end of each financial year, the Trustee is required to comply with all the statutory and audit requirements and to: · appoint an auditor; · have the accounts of the Fund audited; and · distribute the financial statements together with the auditor's report to members. Further, the Trustee has the responsibility of providing members with regular reports and detailing the performance of the Fund. The Trustee is also required to determine the taxable income of the Fund. Functions, Powers and Responsibilities as the Custodian The Trustee appointed the Custodian. The Custodian services include but are not limited to: · hold and segregate in its records, or direct its Sub-custodians and Nominees to hold and segregate in its records, or their records for the account of the Fund all securities and other non-cash assets; · receive, hold, deal with, apply, release, deliver or pay (or direct its nominees to do likewise) any security or other asset of the Fund in accordance with the Agreement; · receiving and holding on behalf of all of the documents of title to the assets; · exchange securities or execute in the Trustee's name such as ownership and other certificates as may be required to obtain the payment of income from the exchange; and · do all such other things that are incidental to the above services. In appointing a custodian, the Trustee has entered into an Agreement. Some of the key aspects to the Agreement are: · the Custodian must hold the assets of the Fund on account of, and on behalf of, the Fund or appoint a Nominee to do likewise and to act in accordance with Proper Instructions as are given from time to time by the Trustee or an Investment Manager; · the custodian must receive, credit, release and deliver assets of the Fund on receipt of proper instructions from the Fund or authorised person (e.g. Manager) and only in respect of the specific circumstances; · the Custodian must ensure that the acquired assets of the Fund are registered in the name of the Custodian or a sub-custodian or nominee. The Custodian is the registered owner of almost all of the assets of the Fund; · the Custodian must collect income and other payments; and · the Custodian must undertake transaction processing and corporate action processing in respect of the Fund. The Agreement also grants the Custodian the ability to do anything which is in the Custodian's reasonable opinion necessary or incidental to carrying out any 'proper instructions'. The Custodian must also maintain complete records relating to the 'custodian services' it provides; including without limitation, records of trade transactions. All records are to comply with any statutory or audit requirements applicable to the Custodian. In addition, the Agreement provides that the Custodian must in effect maintain at all times, proper internal control structures and compliance systems to ensure that there is a separation of powers, functions and responsibilities between the officer, employees and staff of the Custodian. Reports · Under the Agreement, the Custodian must provide the trustee with various daily, weekly, monthly and annual reports. Under the custody agreement, the Custodian must also provide the Trustee with various taxation reports. The reports generated by the Custodian are purely for reconciliation purposes and the Trustee is ultimately responsible for the keeping of books and taxation reporting. Functions, Powers and Responsibilities of the Managers The Trustee has the power to appoint a Manager to assist the Trustee with the investments of the Fund. The Trustee has appointed a number of Managers and each Manager is assigned a portfolio of assets to manage. Each Manager is appointed under a Management Agreement. Reports Under the Management Agreement the Manager is required to deliver a number of reports. System Capabilities The systems and reports provided by Custodian and Managers are used by the Trustee for the following purposes: · Tax Compliance : Capturing the 'tax attributes' to assist the Fund to determine its taxable income for each income year. · Statutory accounting : Capturing the information, to assist the Fund in preparing annual reports in accordance with Australian Accounting Standards for each income year. · Manager performance management: Each Manager is assigned a portfolio of the Fund's assets. The system captures information to assist the Fund to evaluate the performance of the particular Manager for each income year. Notwithstanding, each report/data is used for different purposes, all the relevant information used to produce the varying reports/data is essentially generated/sourced from the same system. That is, the Fund, through its Custodian has in place, one system with multiple capabilities that provides the various reports, etc that are used by the Fund to comply with its various obligations relating to income tax, corporations law, statutory accounts etc (achieves multiple outcomes). Recent developments The Custodian has recently restructured its records management system. This new systems capability enables the cost and time constraints in calculation of the capital gain or loss at the aggregate level to be reduced. Given that the Trustee now has the capability to undertake the calculation of the Fund's capital gains and losses at a "propagated" level, the Fund intends to determine the capital gains and/or losses that occur for each of its assets (i.e. parcel of assets) at a 'propagated' level, which reflects the actual ownership level of all the parcels of assets across the Fund's entire portfolios. Calculation of capital gain or loss All of the assets of the Fund are held by the Custodian. In this respect, the Custodian is registered as the legal owner of the assets. Although, the Custodian is registered as the legal owner under its agreement with the Fund, it is required to maintain systems that notionally segregate the assets 'belonging' to the Fund. To facilitate its function as custodian, the Custodian maintains systems that identify the assets belonging to the Fund that are held in its custody. In addition, the Custodian shall properly maintain adequate books, accounts, records and reports relating to the Fund. The Fund maintains systems that also identify the assets held by the Custodian on behalf of the Fund. Further, under the Management Agreement, the Manager is also required to maintain systems that identify the assets of the Fund given to the Manager to manage. The new systems capability of the Custodian is that it undertakes tax parcel optimisation in that it allows tax parcel selection to be applied at the propagated level of the entity rather than individually at the sub-portfolio level. When a Manager provides the Custodian with an instruction to sell assets, unless the Custodian receives instructions to the contrary from the Trustee, the Custodian will dispose of the assets. This disposal on behalf of the Fund gives rise to CGT event A1 (s 104-10 of the ITAA 1997) to the Fund. Transaction records With respect to the record keeping requirements for tax purposes, the Custodian's system is designed to: · record the date that a manager entered the contract to acquire and/or dispose of assets; · record the number of assets that have been acquired and/or disposed; · record the details of the Manager that requested the acquisition and /or disposal; · record the cost of the assets, in the case of an acquisition; · record the proceeds received, in the case of a disposal; · record the 'incidental' costs incurred in respect to the acquisition and or disposable; · record the 'nominated' assets that were subject to the CGT event; and · reconcile the closing balance of the assets to the assets held by the Custodian with the records of the Fund. Both the 'old' system and the proposed system captures the critical information required to determine the tax liability (e.g. capital gain or capital loss) by; · capturing details pertaining to the acquisition, including, the name of the asset, date of acquisition, quantity and cost; · capturing details pertaining to the disposal, including the name of the asset, date of disposal, quantity and proceeds; and · capturing the 'nominated' asset that is subject to the CGT event using the information pertaining to this asset in calculating the realised capital gain or loss.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 | Section 104-10 | Section 110-25 | Section 112-20 | Section 121-20 | Subsection 121-20(1) | Subsection 121-20(2) | Subsection 121-20(3) | Subsection 121-20(4) | Section 121-25

Reasons for decision: Summary: Generally, when CGT assets, like shares, are disposed of, CGT event A1 under subsection 104-10(1) of the ITAA 1997 happens. The capital gain or capital loss from a CGT event is determined by reference to the capital proceeds, the cost base and the date of acquisition of each asset. This is a matter of fact when the assets are able to be individually distinguished, for example, by reference to share numbers or other distinctive rights or obligations attached to them. However, in situations where the disposal of shares forms part of a holding of identical shares, that is, of the same class and in the same company, which are acquired over a period of time, it may not always be possible for a taxpayer to distinguish or identify the particular shares that have been disposed of. Such a situation exists for the Fund in the present case. In this case, all the assets belonging to the Fund are held by the Custodian. The Custodian is registered as legal owner of the assets on the respective registry. Although the Custodian is required to maintain systems that notionally segregate the assets belonging to the Fund, the assets are unidentifiable at the registry level. Although the Custodian, the Trustee and the Managers all maintain systems to identify the assets belonging to the Fund, the assets are not identified as single assets but as parcels of assets. When the Custodian receives an instruction to sell a parcel of assets, it disposes of a parcel of assets from its unidentifiable 'pool' of assets. Paragraph 3 of TD 33 states the Commissioner's view in such situations as follows: In these circumstances, the taxpayer will need to decide which particular shares are being disposed of. Taxpayer's 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. Paragraph 4 of TD 33 further states that: In the past, where unidentifiable shares have been disposed of, the Commissioner has accepted the '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. Historically, the Fund elected to determine the capital gain or loss on a FIFO basis. Recently, the Fund has upgraded its system capabilities. These upgrades allow the Fund to determine the capital gain or losses that occur for each of its assets. The Commissioner will accept the Fund's decision to nominate a particular parcel of shares from the Funds aggregate parcel of indistinguishable shares for the purpose of capital gain or capital loss calculations, provided there is adequate record keeping. On the facts, the Commissioner accepts the manner in which the capital gain or loss is calculated by the Fund. That is by nominating the specific assets or the parcel of assets from the Fund's aggregate assets that are subject to a CGT event in order to determine the Fund's overall capital gain or loss for a particular income year. The Commissioner notes that the fair value or average cost methodology will be used by the Fund only for statutory accounting purposes. The Commissioner does not accept the fair value or average cost methodology for calculating capital gains or losses unless the shares satisfy all of the following requirements in paragraph 5 of TD 33: · they are in the same company; and · they are acquired on the same day; and · they confer identical rights and impose identical obligations. Any shares for which section 112-20 of the ITAA 1997 deems a market value cost of acquisition need to be excluded from the average cost calculation. Section 121-20 of the ITAA 1997 deals with records that must be maintained in order to determine the capital gain or a capital loss made from a CGT event. Subsection 121 -20(1) of the ITAA 1997 states: 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 of the ITAA 1997 also specifies that records that are relevant to determine the CGT liability are records that: · identify the date on which the assets are bought or sold; · identify the price at which the assets are purchased and sold; · record the details of every act, transaction, event or circumstance that is relevant to work out the capital gain or capital loss from a CGT event; and · are in English or readily accessible and convertible into English. Further, section 121-25 of the ITAA 1997 deals with the retention of such records to substantiate the taxpayers CGT liabilities. Such record keeping could be either in paper format or in electronic format as long as the records are accurate. In TR 2005/9 Income Tax: record keeping - electronic records , the Commissioner notes: 35. The Tax Office recognises that many taxpayers process and keep their records electronically. There are many advantages associated with such an approach; however the Tax Office requires that the records, whether kept on paper or electronically, must be kept accurately so as to enable that person's liability to be readily ascertained….. In terms of maintaining CGT asset registers, the Commissioner provided guidance in TR 2002/10 Income Tax: capital gains tax: asset register . In this respect, the Commissioner noted: 6. The asset register must contain all of the information that can reasonably be expected to be relevant to working out whether you have made a capital gain or capital loss, otherwise you must retain your original document. 7. Your asset register must contain essential information about CGT assets, acts, transactions, events or circumstances that you transferred from your original documents. Original documents include, for example, invoices, receipts, contracts and valuations, or other records, including taxpayer created records such as elections, options or choices made and evidenced in writing. Where the shares are not identifiable as single shares but as a parcel of shares, TD 33 requires the taxpayer to keep adequate records of the transactions so that decisions made by the taxpayer can be supported at a future point in time. In this respect, the key documents that the Fund needs to maintain for CGT purposes with respect to an asset and or parcel of assets are: · the date, CGT cost base and reduced cost base, quantity, name, and type of asset acquired by the Fund (that is, the tax attributes); · the date, quantity, name, capital proceeds, the 'parcel' of assets (nominated) that have been disposed for tax purposes; · the calculation of the capital gain or loss realised for tax purposes for a particular income year; · the balance of the assets remaining in the Fund and the 'tax attributes' for the remaining assets; and · the documents/entries tracking the adjustments required under the taxation law (for example, return of capital, share splits, etc.) | Detailed Reasoning - Transaction records: With respect to the record keeping requirements for tax purposes, the Custodians system is designed to: · record the date that a Manager entered the contract to acquire and/or dispose of a parcel of assets (that is, a parcel of identical shares); · record the number of assets (for example, parcel of shares) that have been acquired and/or disposed; · record details of the Manager that requested the acquisition and/or disposal; · record the cost of the parcel of assets, in the case of an acquisition; · record the proceeds received, in the case of a disposal; · record the incidental costs (for example, brokerage) incurred in respect to the acquisition and or disposal; · record the nominated parcel of assets that was subject to the CGT event; and · reconcile the closing balance of assets to the assets held by the Custodian with the records of the Fund. Some of the key aspects of section 121-20 of the ITAA 1997, TR 2005/9, and TR 2002/10 is the requirement to maintain adequate documents that are relevant in determining the tax liability (that is, capital gain or capital loss calculation). The Fund informed that both the old systems and the upgraded systems implemented by the Trustee capture the critical information required to determine the tax liability (that is, the capital gain or capital loss) by: · capturing details pertaining to the acquisition, including, the name of the security, date of acquisition, quantity and cost; · capturing details pertaining to the disposal, including, the name of the security, date of disposal, quantity and proceeds; and · capturing the nominated parcel that is subject to the CGT event and using the information pertaining to this parcel in calculating the realised capital gain or capital loss. The Fund and Custodian confirmed that the Fund's electronic storage system meets the record keeping requirements set out in paragraph 37 of TR 2005/9 Based on the information provided, all these records generated by the upgraded system of the Trustee are sufficient to enable the fund to specifically identify the shares that have been disposed of, and to calculate a capital gain or loss in relation to the disposal of a parcel of shares nominated by the Fund. The Commissioner therefore confirms that the records generated by the upgraded system of the Trustee are sufficient for the purposes of section 121-20 of the ITAA 1997 and satisfy the principles set out in TD 33.