Edited version of private advice

Authorisation Number: 1052129282146

Date of advice: 19 June 2023

Ruling

Subject: In specie transfer to superannuation

Question

Did CGT event E2 under section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when you made an in-specie transfer of your XXX units in the Investment Management Fund to the Superannuation Fund in the year ended 30 June XXXX?

Answer

Yes.

This ruling applies for the following period:

Year ending 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You owned XX units in the Investment Managed Fund since 30 June XXX. XX of these units were acquired prior to 1985.

The units were managed and administered originally by Investment Management Fund A then transferred to Investment Management Fund B (Investment Management Fund) on XXX.

There was another transfer to current Fund Manager between XXX and XXX.

On XXXX an in-specie transfer of the units in the Investment Managed Fund occurred from the Investment Management Fund to the Superannuation Fund.

The Superannuation Fund account where the units are now held, is a small APRA superannuation fund and holds your non-concessional contributions for the 20XX financial year.

You provided a copy of your Superannuation Fund superannuation application signed and dated XXX, where you specify that you are making an in-specie transfer of all of your units in Investment Managed Fund Australian Shares.

You stated that the market value of the assets transferred was a little less than $XXX in total.

No actual sale of assets has occurred.

On XXX, you provided periodic statements from the Fund Manager.

You provided a statement from Investment Management Fund A, which demonstrated that XX units out of total XX were purchased prior to June 1985. The value of these units as at 12/01/1986 was $XXX

You provided an account snapshot for the period XXXX for your Superannuation Fund account demonstrating your portfolio investment.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-3

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-25

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 section 115-5

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-100

Reasons for decision

Question:

Did CGT event E2 under section 104-60 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when you made an in-specie transfer of your XXX units in the Investment Management Fund to the Superannuation fund in the year ended 30 June XXX?

Detailed reasoning

Section 102-5 of the ITAA 1997 provides that your assessable income for an income year includes your net capital gain. Your net capital gain includes any capital gains or losses you made during the income year as a result of a CGT event, which includes the disposal or transfer of a CGT asset.

A CGT asset according to subsection 108-5(1) of the ITAA 1997 includes:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

Examples of CGT assets are:

•         land and buildings;

•         shares in a company and units in a unit trust;

•         options;

•         debts owed to you;

•         a right to enforce a contractual obligation;

•         foreign currency.

Taxation Determination TD 2000/32 Income tax: Capital gains: for capital gains purposes is the unit held by a unit holder in a unit trust the relevant CGT asset? states:

"The scheme of the Income Tax Assessment Act 1997 is to treat units in a unit trust as the relevant asset for capital gains purposes rather than any interest a unit holder might have in the underlying property of the unit trust. Section 108-5 of the ITAA 1997 specifically identifies units in a unit trust as an example of CGT assets."

Subsection 102-25(1) of the ITAA 1997 provides that where more than one of the CGT events outlined in division 104 of the ITAA 1997 can apply in a situation, you use the CGT event that is most specific to your situation.

CGT event A1 happens under section 104-10 of the ITAA 1997 if you dispose of an asset. You are taken to have disposed of an asset if a change of ownership occurs from you to another entity, whether because of some act or event; or because of an operation of the law. The time of the event is when you enter into a contract for the disposal; or when the change of ownership occurs if there is no contract.

CGT event E2 happens under section 104-60 of the ITAA 1997 if you transfer a CGT asset to an existing trust. The time of the event is when the asset is transferred. CGT event E2 does not happen where:

•         there is merely a change in the trustee of a trust; or

•         the transfer occurs; and you are the sole beneficiary of the trust; and you are absolutely entitled to the asset against the trustee of the trust; and the trust is not a unit trust.

ATO Interpretative Decision ATO ID 2003/559 Income tax: Disposal of a CGT asset to a trust: application of CGT event A1 or CGT event E2 provides that where a CGT asset is transferred to a trust, CGT event E2 will be the most specific CGT event where the transferor is a beneficiary or object of that trust.

A superannuation fund is considered to be a trust, and as such fits into the general definition of a trust. Assets are held in the fund for the future benefit of the named recipients of the fund. However, unlike a normal trust fund, members in a super fund do not have the same rights of entitlement as most beneficiaries in a trust.

The reason for that distinction is that members of a superannuation fund have a right to receive benefits from the fund but are not absolutely entitled to the assets themselves. Once they place assets into the fund (whether by sale or an in-specie transfer) they give up their claim to those assets until the fund ceases to function.

Members of superannuation funds only have a contingent interest (contingent upon the happening of a future event, such as retirement or death) in the assets of the fund and, as stated by O'Loughlin J in Coram, re: Ex parte Official Trustee in Bankruptcy v. Inglis (1992) 36 FCR 250; 109 ALR 353 at 257:

"....a member of a superannuation fund is neither the legal or beneficial owner of the amount that stands to the credit of his account from time to time...Hence the present right of a member of a superannuation fund is no more than an expectancy."

Therefore, members of a superannuation fund do not have absolute entitlements to the assets in the fund, rather they have a right to receive the benefits from the fund.

The second exception as listed in subsection 104-60(5) of the ITAA 1997, is where the asset is transferred to a trust from another trust and the beneficiaries and the terms of both trusts are the same.

Application to your circumstances

On XXX you made an in-specie transfer of all of your XX Investment Managed Fund units from the Investment Management Fund to the Superannuation Fund.

The Investment Managed Fund units represent a CGT asset, as defined in subsection 108-5(1) of the ITAA 1997 being a kind of property and specifically including shares in a company and units in a unit trust.

Transferring an asset as an in-specie contribution to a superannuation fund is specifically included as a superannuation contribution under section 66 of the Superannuation Industry (Supervision) Act 1993. The most common in-specie contributions permitted to be made by a member are listed securities or units in a unit trust.

The in-specie contribution represents a transfer of the legal ownership of the units from you to the trustee of the Superannuation Fund.

We need to distinguish in this case between the legal ownership of the units in the Investment Managed Fund and the legal ownership of the underlying shares held in the Investment Managed Fund. You were a beneficiary of the Investment Managed Fund but had legal ownership of the units allowing you to sell, transfer and dispose them if you require. Whereas the trustee of the Investment Managed Fund unit trust held the legal ownership of the underlying shares in the Investment Managed Fund.

Whilst there have been various changes in fund manager over the years, you have retained the legal ownership of the units since they were originally acquired. This is why subsection 104-10(2) of the ITAA 1997 would treat those transfers as a mere change of the Trustee of the fund where the units were held and not triggering CGT event A1. Similarly, the note to subsection 104-60(1) of the ITAA 1997 states that CGT event E2 will not happen merely because of a change in the trustee.

However, the transfer from the Investment Managed Fund to the Superannuation Fund differs from the transfers in the past because it is to a different fund and Trustee. When the in-specie contribution of the units to the Superannuation Fund was made there was no change to the legal ownership of the underlying shares held in the Investment Managed Fund, which are still held by the trustee of the Investment Managed Fund unit trust, but the legal ownership of the units in the Investment Managed Fund was transferred from you to the trustee of the Superannuation Fund.

By doing an off-market or in-specie transfer without selling the shares or the units held in the Investment Managed Fund you changed the beneficial ownership structure from you to the Superannuation Fund.

Paragraph 24 of Taxation Ruling TR 2010/1 Income tax: superannuation contributions states that a superannuation provider acquires the beneficial ownership of shares or units in an Australian Stock Exchange listed company or unit trust when the provider obtains a properly executed off-market share transfer in registrable form.

Paragraphs 200 to 203 of TR 2010/1 further confirms that a change in the legal ownership of shares or units in a unit trust is recognised when the trustee of the super fund obtains a properly executed off-market share transfer in registrable form. In the absence of evidence showing that beneficial ownership is not transferred at the same time as legal ownership, the Commissioner will treat a transfer of beneficial ownership of shares or units to a superannuation provider as happening at the time of the transfer.

You transferred all of your XXX Investment Managed Fund units to the Superannuation Fund by completing a Superannuation Fund in-specie transfer application form signed and dated on XXX.

You stated that the units were not sold and transferred at their market value of approximately $XXX as an in-specie contribution.

Upon transferring your units into the Superannuation Fund, both the legal and beneficial ownership of those units changed. This is due to the fact that you are no longer able to access the units in your fund, even though you are still entitled to receive the benefits arising from them.

Therefore, the in-specie contribution by the trustee of the Investment Managed Fund will trigger CGT event E2, as there is a change in the ownership of the units from the trustee of the Investment Managed Fund to the Superannuation Fund.

Exceptions

Subsection 104-60(5) of the ITAA 1997 states that CGT event E2 does not happen if you are the sole beneficiary of the trust and are absolutely entitled to the asset and the trust is not a unit trust.

If the beneficiaries and the terms of both the current and the new superannuation fund are the same then the exception will apply.

The Superannuation Fund is a small APRA fund open to the public with various members and you are not the sole beneficiary of the trust. Superannuation Fund is a different entity from the Investment Managed Fund with different beneficiaries and different terms. As determined by the analysis above you are not absolutely entitled to the asset following the transfer.

Therefore, the exception in subsection 104-60(5) of the ITAA 1997 will not apply and in accordance with ATO ID 2003/559, CGT event E2 as the most specific to your situation as a beneficiary (or member) of Superannuation Fund applies to the in-specie transfer of the units.

Capital Gain

Given that a CGT event E2 happened as a result of you transferring your Investment Managed Fund units, you are required to include any capital gain or capital loss you made as a result of the transfer in your assessable income under section 102-5 of the ITAA 1997.

The capital gain or capital loss is made at the time of the event. A capital gain is made if the amount received (called capital proceeds) from the disposal or transfer exceeds the cost base of the CGT asset. A capital loss is made if the capital proceeds are less than the reduced cost base.

Subsection 116-30(1) of the ITAA 1997 provides that if you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event. The market value is worked out as at the time of the transfer.

Subsection 104-60(6) of the ITAA 1997 states that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985.

Therefore, CGT event E2 does not extend to units that have been purchased prior to September 1985 since no CGT applies to pre-CGT assets. Therefore, since XX of the units transferred were acquired prior to 1985 they will be excluded from the CGT calculation.

According to subsection 102-3(1) of the ITAA 1997 you will be entitled to apply concessional rules to working out the net capital gain from the CGT event E2 in 2022 income year with regards to the transfer of the remaining XX units.

The applicable concession is that the net capital gain includes only part of the amount of the discount capital gain left after applying capital losses and net capital losses from earlier income years.

Under section 115-5 of the ITAA 1997 you make a discount capital gain if the following requirements are satisfied:

•         you are an individual, a trust or a complying superannuation entity

•         a capital gains tax (CGT) event happens to an asset you own

•         the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999

•         you acquired the asset at least 12 months before the CGT event, and

•         you did not choose to use the indexation method.

The discount percentage that would apply to the discount capital gain according to section 115-100 of the ITAA 1997 is 50%.

Therefore, you can reduce the capital gain that you make from the CGT event E2 in XX income year since you have acquired the units more than 12 months before you made the transfer on XXX. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years and you did not choose the indexation method.