Revised Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 2 - CGT roll-over for superannuation entities that merge under new superannuation safety arrangements
Outline of chapter
2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide an automatic capital gains tax (CGT) roll-over for the transfer of assets of registrable superannuation entities that merge during the transitional period to comply with licensing requirements under superannuation safety reforms.
2.2 The CGT roll-over ensures that the capital gain or capital loss that would otherwise be recognised when the transfer of assets occurs is disregarded and that the recognition of the accrued capital gain or loss is deferred until later disposal of the assets by one or more successor registrable superannuation entity trustees.
Context of amendments
2.3 The new superannuation safety arrangements, which modernise and strengthen the prudential regulation of superannuation funds, commenced on 1 July 2004 and have a two year transitional period.
2.4 The arrangements, among other things, require trustees of registrable superannuation entities to meet the new licensing requirements to ensure better management and protection of member benefits.
2.5 If the trustee of a registrable superannuation entity is unable to meet the new licensing requirements, the superannuation safety arrangements allow that entity to merge with one or more registrable superannuation entities with a licensed trustee.
2.6 Superannuation industry representatives have raised concerns that the potential CGT consequences for registrable superannuation entities will discourage compliance with the new superannuation safety arrangements. The amendments are directed at addressing these concerns.
Summary of new law
2.7 An automatic CGT roll-over applies during the period from 1 July 2004 to 30 June 2006 inclusive (transitional period) for the transfer of assets by a registrable superannuation entity whose trustee is not licensed to one or more registrable superannuation entities whose trustees are licensed.
2.8 It also applies for registrable superannuation entities whose trustees did not seek a licence but during the transitional period merged with other registrable superannuation entities whose trustees intended to be licensed by the end of the transitional period.
2.9 The effect of the CGT roll-over is that the capital gain or capital loss that would otherwise be recognised when the transfer occurs is disregarded - the recognition of the accrued capital gain or loss is deferred until later disposal of the assets by one or more successor registrable superannuation entities.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| An automatic CGT roll-over applies when during the transitional period assets of a registrable superannuation entity whose trustee is not licensed are transferred to one or more registrable superannuation entities whose trustees are licensed, or whose trustees are not licensed at the time of the transfer but where it is reasonable to assume that they will be licensed by 1 July 2006.
The CGT roll-over ensures that the capital gain or capital loss that would otherwise be recognised when the transfer of assets occurs is disregarded and that the recognition of the accrued capital gain or loss is deferred until later disposal of the assets by one or more successor registrable superannuation entities. |
Assets transferred from a registrable superannuation entity whose trustee is not licensed to one or more registrable superannuation entities whose trustee is licensed cause CGT events to happen.
Any capital gain or capital loss arising because of the transfer of assets is taken into account in determining the registrable superannuation entity's net capital gain or net capital loss for that income year. |
Detailed explanation of new law
2.10 Schedule 2 to this Bill inserts new Subdivision 126-F into the ITAA 1997. The new Subdivision provides for an automatic roll-over if all of the following conditions apply:
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- During the transitional period, one or more CGT events happen because the trustee (the first registrable superannuation entity trustee) of a registrable superannuation entity ceases to hold all CGT assets.
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- Because of the cessation, CGT assets (the identical assets) that, together, are identical to all the first registrable superannuation entity trustee's CGT assets just before the CGT events start to be held during the transitional period by a trustee or trustees (successor registrable superannuation entity trustee) of one or more registrable superannuation entities.
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- The cessation and starting occur because it is expected that the first registrable superannuation entity will not have a licence under Part 2A of the Superannuation Industry Supervision Act 1993 (SIS Act) by 1 July 2006 while each successor registrable superannuation entity trustee has a licence or will have such a licence by 1 July 2006.
[Schedule 2, item 2, subsection 126-210(1)]
2.11 A registrable superannuation entity is defined in subsection 10(1) of the SIS Act (as amended by the Superannuation Safety Amendment Act 2004 ) to mean a regulated superannuation fund, an approved deposit fund or a pooled superannuation trust, but does not include a self managed superannuation fund. The definition does not include exempt public sector superannuation schemes because they are not regulated under the SIS Act.
2.12 A licence under Part 2A of the SIS Act means a 'registrable superannuation entity licence' granted under section 29D of that Act. All existing trustees of registrable superannuation entities need to obtain a registrable superannuation entity licence by the end of the transitional period.
2.13 The amendments do not provide a roll-over for exchange of members' interests in registrable superannuation entities because it is already provided for in existing CGT provisions. Section 118-305 of the ITAA 1997 provides an exemption for certain capital gains or capital losses from transfers of rights in superannuation funds and approved superannuation funds. Section 118-350 provides an exemption for certain capital gains or capital losses in relation to a unit in a pooled superannuation trust.
2.14 Subsections 126-210(2) to (4) provide for the following effects of the roll-over:
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- The capital gain or loss made by the first registrable superannuation entity trustee from each of the CGT events is disregarded - recognition of the accrued capital gain or loss is deferred until later disposal of the assets by one or more successor registrable superannuation entity trustees.
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- For a successor registrable superannuation entity trustee, the first element of the cost base of each of the identical assets the successor registrable superannuation entity trustee holds is the cost base of the corresponding asset for the first registrable superannuation entity trustee at the time of the relevant CGT event.
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- For a successor registrable superannuation entity trustee, the first element of the reduced cost base of each of the identical assets the successor registrable superannuation entity trustee holds is the reduced cost base of the corresponding asset for the first registrable superannuation entity trustee at the time of the relevant CGT event.
[Schedule 2, item 2, subsections 126-210(2) to (4)]
2.15 An example is given after subsection 126-210(4) to illustrate that identical assets include the cancelling of units in a unit trust on the request of the first registrable superannuation entity trustee and the issuing of the same number of units in the unit trust to the successor registrable superannuation entity trustee.
2.16 One of the consequences of the CGT roll-over is that if the first registrable superannuation entity trustee acquired the asset before 20 September 1985, the successor trustee is taken to have acquired the asset before that day - that is, the pre-CGT status of the asset is preserved. [Schedule 2, item 2, subsection 126-210(5)]
2.17 However, pre-1985 CGT asset status is in practice only relevant where the superannuation fund or approved deposit fund is non-complying. This is because all CGT assets owned by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust on 30 June 1998 are treated as if they were acquired on that date (section 306 of the Income Tax Assessment Act 1936).
2.18 If the trustees of the registrable superannuation entities do not acquire the required licence by 1 July 2006 the roll-over will be treated as if it had never happened. [Schedule 2, item 2, subsection 126-210(6)]
Application and transitional provisions
2.19 The CGT roll-over applies to CGT events that happen to a CGT asset during the superannuation safety reform transitional period - that is, from 1 July 2004 to 30 June 2006 (inclusive).
Consequential amendments
2.20 The superannuation safety CGT roll-over involves the transfer of an asset from one registrable superannuation entity to one or more successor registrable superannuation entities - that is, the roll-over is a same asset roll-over. Therefore, the table in section 112-150 which contains a list of the same asset roll-overs is amended to make reference to the CGT roll-over for superannuation entities that merge under new superannuation safety arrangements. [Schedule 2, item 1, section 112-150]
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