Exposure Draft: Limiting the trading stock exception for superannuation entities

Following announcements made in the 2011-12 Budget, the government has recently released Exposure Draft legislation and explanatory material for consultation which would remove access to the trading stock exception to the capital gains tax (CGT) primary code rule for certain assets owned by a complying superannuation entity.

The amendments apply from 7.30pm (AEST) on 10 May 2011. Assets owned by the entity and held as trading stock prior to that time can continue to be treated as trading stock of the entity.

Background

By way of background, the CGT primary code rule in s295-85 of the Income Tax Assessment Act 1997 ensures that gains and losses on most assets owned by complying superannuation entities are taxed according to the CGT provisions.

There are a number of exceptions to the CGT primary code rule that ensure that gains and losses on certain assets are taxed on revenue account, where appropriate. One of those exceptions is trading stock held by a relevant entity.

Notwithstanding that the general industry practice is to tax gains and losses on share transactions according to the CGT provisions, during the recent economic downturn, a number of superannuation entities sought, for the first time, to treat some of their shares as trading stock.

Some entities sought to treat some shares as trading stock in order to use losses made in relation to those shares against non-CGT income (such as dividends or interest), despite in earlier income years using the CGT provisions for shares where a gain was made in order to benefit from the CGT discount.

Due to uncertainty regarding the appropriate tax treatment of gains and losses made from the sale of shares owned by complying superannuation entities, the law will be amended to remove this ambiguity.

Amendments

Under the amendments, complying superannuation entities cannot account for gains and losses on certain assets (primarily shares, units in a unit trust and land) on revenue account using the trading stock exception.  

A similar amendment applies to life insurance companies.

Example from the Explanatory Memorandum

Smith Super Fund (Smith) is a self-managed superannuation fund. Between 1 July 2011 and 30 June 2012, Smith buys and sells a large volume of shares for the purpose of providing for the retirement of the fund's members.

To prepare Smith's income tax return for the 2011-12 income year, Smith works out whether there has been a capital gain or capital loss on each share that was disposed of during the year.

Smith does not need to consider whether the buying and selling of shares would qualify as being in the business of share trading, or whether the shares that were bought and sold during the income year would be trading stock.

The closing date for submissions is Friday, 10 February 2012.

A copy of the Exposure Draft and explanatory materials can be accessed here:

http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=2260