Private ruling: Transitional CGT relief
Date of advice: 28 February 2018
Published: June 2018
Ruling period: 2016-17 income year
Date scheme commenced: 1 July 2016

Ruling: Q1: Can the trustee of a self-managed superannuation fund apply transitional CGT relief under section 294-115 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) where no member would have had a transfer balance in excess of $1.6 million at 30 June 2017? | A1: No.

Relevant facts and circumstances: The Fund is a complying self-managed superannuation fund established in the 1990s. The Fund has four members. Member 1 and 2 are in accumulation phase. Their combined balance is under $1 million. Neither member has reached preservation age or suffered disability. Member 3 and 4 are in pension phase. Their combined balance is under $200,000. The Fund has elected to apply the proportionate method in respect of the 2016-17 income year. The Fund’s assets are unsegregated. An actuarial certificate will show an exempt percentage greater than zero. The assets were held throughout the pre-commencement period. The trustee will make an election in connection with the application for transitional CGT relief.

Relevant legislative provisions: Division 294 of the Income Tax (Transitional Provisions) Act 1997 | Subdivision 294-100 of the Income Tax (Transitional Provisions) Act 1997 | Subdivision 294-115 of the Income Tax (Transitional Provisions) Act 1997

Reasons for decision: Summary: The trustee cannot apply CGT relief because the Fund fails to meet the object of CGT relief as prescribed in section 294-100 of the ITTPA. Accepting that the Fund’s assets meet the eligibility criteria in section 294-115 of the ITTPA, our view is that the trustee may only elect to apply CGT relief where it is consistent with the object clause of the CGT relief in section 294-100. Paragraphs 9 and 10 of the Law Companion Guideline LCG 2016/8 – Superannuation reform: transitional CGT relief for complying superannuation funds and pooled superannuation trusts outline the Commissioner’s views on the impact of the object clause in section 294-100 of the ITTPA: 9. The object of the CGT relief provisions is to provide temporary relief from certain capital gains that might arise as a result of individuals complying with the transfer balance cap, or TRIS reforms, commencing. In respect of the transfer balance cap amendments, the use of the term 'as a result of' in the object clause indicates that CGT relief is connected with actions an individual takes so as to comply with the reforms starting. In the case of the TRIS reforms, the CGT relief provisions seek to preserve the exemption for unrealised gains that accrued during the period when, if the relevant assets had been disposed of, the gains would have been exempt in the fund. 10. When interpreting the CGT relief provisions, an interpretation that best achieves this object is to be preferred. In a self-assessment environment, this means that the onus is on a fund's trustee to ensure that any of the following choices it makes is consistent with this object… | Detailed Reasoning - Object clauses -aids for statutory interpretation: The Federal Court has often referred to the object clause as setting out the purpose of the Act under consideration and therefore acts as an aid to its interpretation. The object is also often referred to as the ‘simplified outline’. Meaning that this included section of the Act is thereby considered part of the Act which cannot be ignored and therefore holds value in the purpose of construction (See Hudson v Minister for Immigration and Citizenship [2010] FCAFC 119 at [88]). It was discussed that such an outline may help resolve ambiguities in, or doubts about the scope of, other provisions of the Act. The Commissioner’s view on the impact of the object clause in section 294-100 of the ITTPA reflects a purposive approach to the interpretation of the CGT relief provisions; it is implicit in provisions that they are do not apply to funds that fail to meet the objective of the provisions, even where an asset of the fund might meet the eligibility criteria in section 294-115. | Detailed Reasoning - Statutory Interpretation – ‘purposive approach preferred’: Section 15AA of the Acts Interpretation Act provides a basis for adopting a purposive approach to interpretation of Commonwealth legislation (like the ITTPA): In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation. In the United Kingdom in Jones v Wrotham Park Settled Estates Lord Diplock outlined three elements that would need to be met in adopting a purposive construction of legislation in favour of a literal reading. The High Court adopted this test in Newcastle City Council v GIO General Ltd: “Lord Diplock said that three conditions must be met before a court can read words into legislation. First, the court must know the mischief with which the statute was dealing. Second, the court must be satisfied that by inadvertence Parliament had overlooked an eventuality which must be dealt with if the purpose of the legislation is to be achieved. Third, the court must be able to state with certainty what words Parliament would have used to overcome the omission if its attention had been drawn to the defect.” McHugh JA described the scope of a purposive approach to statutory interpretation in the NSW Court of Appeal in Kingston and Anor v Keprose Pty Ltd (1987) 11 NSWLR 404 at 422 (and referenced with approval by the High Court see Bropho v State of Western Australia (1990) 171 CLR 1; Kirby J (dissenting) in Commissioner of Taxation (Cth) v Ryan [2000] HCA 4 at [82]): “If the consequences of the literal or grammatical construction raise a real doubt as to Parliament’s intent, the court is justified in refusing to give the words their literal or grammatical construction…. ….A strained construction may be justified because words have been admitted… or because by inadvertence Parliament has failed to deal with an eventuality required to be dealt with if the purpose of the Act is to be achieved… or because the purpose of the provision indicates that Parliament did not intend the grammatical meaning to apply…” In Whittaker v Comcare (1998) 86 FCR 532, the Federal Court indicated that purposive interpretation will only significantly depart from the literal words where the intention of a provision has been clearly identified: “…a court, in our opinion, can only be justified in using the more radical techniques of interpolation, excision and rewriting, if it can identify the intent or purpose of the statutory provision.” The accompanying Explanatory Memorandum to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 is also helpful in determining the purpose and scope of a provision. It states that the object of the provisions is to provide relief for complying superannuation funds from the tax consequences for capital gains accumulated before 1 July 2017, where these gains would have been exempt income if realised prior to a commutation being made to comply with the transfer balance cap or the change to the treatment of TRIS (Paragraph 3.322 of the Explanatory Memorandum). It is implicit within the provisions that they do not apply to superannuation funds that fail to meet the object of the provisions, even where an asset of the fund might meet the eligibility criteria in section 294-115.