House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 6 - Extend the temporary loss relief for merging superannuation funds by three months

Outline of chapter

6.1 Schedule 6 to this Bill amends the Tax Laws Amendment (2009 Measures No. 6) Act 2010 to extend the end date of the temporary loss relief for complying superannuation fund mergers by three months - from 30 June 2011 to 30 September 2011, to provide additional time for mergers to take place before the loss relief expires.

Context of amendments

6.2 Capital gains tax (CGT) is the primary code for calculating gains and losses of 'complying superannuation entities', which are defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

6.3 The transfer of assets from one superannuation fund to another under a merger between the two funds will typically trigger CGT event A1 (section 104-10 of the ITAA 1997) or may trigger CGT event E2 (section 104-60 of the ITAA 1997), and the realisation of capital gains or capital losses for the transferring fund. Following this asset transfer, and the transfer of members' accounts to the receiving fund, the transferring fund will generally be wound up.

6.4 Net capital losses are extinguished on the ending of an entity. As capital losses can be used to offset present and future capital gains, they carry value broadly equal to the tax liability that would otherwise be payable on the reduced capital gains if not for the offsetting losses. This value is extinguished on the winding up of the transferring superannuation fund following the asset and member transfer.

6.5 The current temporary loss relief was introduced in response to the severe economic and financial market conditions faced by superannuation funds in late 2008. The loss relief has allowed funds to transfer losses when they merge that would have otherwise been extinguished when the merging fund was wound up. The period of operation of the temporary loss relief was granted for CGT events between 24 December 2008 and 30 June 2011.

6.6 The current loss relief is conditional on the requirement that all the transfer events for an eligible merger and the completion time for the losses choice, must happen in a single income year of the transferring entity. This rule was included to avoid the complexities arising from mergers occurring over more than one income year, and to avoid the need for claw-back rules where the loss relief was claimed in one year but where the merger does not ultimately satisfy the eligibility requirements for the loss relief, or does not proceed at all, in a later year.

6.7 The three-month extension responds to concerns expressed to the Government that due to the complexity of fund mergers, existing transactions may well be completed after 30 June 2011, meaning superannuation funds would not qualify for the tax relief, disadvantaging their members.

Summary of new law

6.8 This measure provides an extension to the period during which superannuation funds may transfer assets and members in mergers and continue to be eligible for the temporary loss relief. The period is extended to cover transfer events under a merger that are commenced on or after 1 July 2010 and completed on or before 30 September 2011.

Comparison of key features of new law and current law

Detailed explanation of new law

6.9 The application provisions for the temporary loss relief for merging superannuation funds in the Tax Laws Amendment (2009 Measures No. 6) Act 2010 are amended to extend the period for superannuation funds to complete mergers and continue to be eligible to choose the loss relief. The extension is for three months, to 30 September 2011. Specifically, the loss relief may be obtained if the eligibility conditions of the temporary loss relief are satisfied during the period starting on 1 July 2010 and ending at the end of 30 September 2011 and all the transfer events occur during the period starting on 1 July 2010 and ending on 30 September 2011. [Schedule 6, item 5, subitem 11(2) of Schedule 2 to the Tax Laws Amendment (2009 Measures No . 6) Act 2010 ]

6.10 The extension to 30 September 2011 is noted in the main temporary loss relief provisions in Division 310 of the ITAA 1997. [Schedule 6, item 1, section 310-1 (note 1) of the ITAA 1997 ]

6.11 The application provision for Schedule 2 to the Tax Laws Amendment (2009 Measures No. 6) Act 2010 is also amended to reflect the insertion of the additional subitem. [Schedule 6, items 2 to 4, item 11 of Schedule 2 to the Tax Laws Amendment (2009 Measures No . 6) Act 2010 ]

6.12 The current loss relief also includes a requirement that the transfer events for the merger must all happen in the income year for the transferring entity that includes the completion time for the losses choice.

6.13 The three-month extension of the loss relief is provided for transfer events in respect of mergers that are completed in the period 1 July 2010 and 30 September 2011. The extension does not cover mergers that commenced in earlier income years, which must be completed on or before 30 June 2010 in order to be eligible for the loss relief.

Treatment of losses transferred during the extended period

6.14 The three-month extension of the loss relief means that certain transactions of eligible superannuation funds may occur after 30 June 2011. This extension applies only for the purpose of determining eligibility for the loss relief.

6.15 Accordingly, the existing CGT rules will apply for the purposes of determining how transferred losses and assets will be dealt with for the continuing fund. In particular, where asset transfers occur during the extended period, they will be taken into account by the continuing entity in the income year of the transfer.

Example 6.22

Bronze Super (the transferring entity) merges with Gold Super (the continuing entity) on 30 June 2011. Bronze Super ceases to have any members on 30 June 2011. This is the completion time of the merger as defined by the loss relief provisions.

Most of Bronze Super's assets are transferred to Gold Super on 30 June 2011. However, a small number of the transferring entity's assets were subject to legal impediments such that they cannot be transferred until 31 August 2011.

In the hands of Gold Super, the losses transferred before 1 July 2011 will be available for Gold Super to utilise in determining its net capital gain for the 2010-11 income year. Applying the existing CGT rules, capital losses transferred on 31 August 2011 will be available for Gold Super in calculating its net capital gain for the 2011-12 income year.

Application and transitional provisions

6.16 A transitional provision is included to treat a completion time for a merger finishing during the period starting on 1 July 2010 and ending on 30 September 2011 as happening in the 2010-11 income year for the transferring entity. The provision also treats a transfer event happening during the extended period as happening during the 2010-11 income year. These transitional provisions apply for the purpose of determining eligibility for the loss relief only. As noted in paragraph 6.15, for all other purposes transfer events during the period 1 July 2011 and 30 September 2011 will occur in the 2011-12 income year. [Schedule 6, item 6, Schedule 2 to the Tax Laws Amendment (2009 Measures No . 6) Act 2010 ]

6.17 This transitional provision ensures that the three-month extension of the loss relief is available for entities that commenced merger transfer events on or after 1 July 2010 by treating the additional three-month period as part of the 2010-11 income year for these mergers.

6.18 The measure applies for transfer events in the period 1 July 2010 to 30 September 2011 for the purpose of determining eligibility for the temporary loss relief. The measure has an element of retrospectivity in that some of the mergers it applies to involve some CGT events happening in the period 1 July 2011 to 30 June 2011 and some CGT events happening after 30 June 2011. However, the measure benefits taxpayers affected by these and other mergers by extending the period of the temporary loss relief to mergers that would otherwise be completed too late to qualify for the loss relief.

Example 6.23

Green Super has been undertaking preparatory work to merge with Blue Super in the first half of 2011 but is unable to undertake the transfer of any members or assets to Blue Super until 15 August 2011.

Green Super begins transferring assets and members to Blue Super on 15 August 2011, with the final tranche of assets and members being transferred on 20 September 2011. The completion time for the merger of Green Super and Blue Super is 20 September 2011.

For the purposes of determining eligibility for the loss relief, this completion time is taken to have occurred during the 2010-11 income year. Also, the transfer of assets occurring between 15 August 2011 and 20 September 2011 are taken to have occurred in the 2010-11 income year for the purpose of determining Green Super's eligibility for the loss relief.

Provided that the other requirements for loss relief are satisfied, Green Super will be eligible for the loss relief as if the member and asset transfers had occurred during the 2010-11 income year. However, it should be noted that for general tax purposes the transfer of assets and losses are taken to have happened in the 2011-12 income year.