On Mon 21.8.2017, the ATO issued Draft Practical Compliance Guideline: PCG 2017/D16, on propagation arrangements adopted by registrable superannuation entities (RSEs). The draft sets out the ATO’s compliance approach to the use of propagation to select assets for disposal. It is aimed at the large superannuation industry, ie it does not apply to SMSFs.
Propagation is a term adopted by custodians to describe a tax parcel selection process. Under propagation, the tax parcel selection methodology agreed, with the RSE is applied across the RSE’s asset class level holdings, instead of being confined to the individual fund manager level. When assets are disposed of, the relevant parcel is selected from the propagated portfolio for each transaction, based on the parcel selection methodology agreed with the RSE.
The draft provides that the Commissioner will generally not apply compliance resources to the propagation arrangement of an RSE if all of the following circumstances are satisfied:
- the custodian (who provides custodial and investment administration services for the RSE’s assets) is the legal owner of all the relevant assets;
- all assets subject to the arrangement are held for the purposes of the RSE;
- the relevant assets are fungible (ie identical in all respects);
- asset identification and selection are contemporaneous with the actual disposal transaction;
- the RSE uses either a single pool of assets to support member interests, or multiple pools of assets to support specific member interests and any propagated portfolios are confined within each specific pool;
- where applicable, propagation only occurs within a sub-fund of the RSE; and
- assets identified for disposal under the arrangement are also reflected as the assets disposed of for non-tax regulatory or accounting purposes.
However, the Commissioner will treat a propagation arrangement as “inappropriate” (and may therefore apply compliance resources) if:
- the RSE has segregated assets to support specific member interests in any way, including assets identified under a member directed investment option, or assets segregated for members in retirement phase, and propagation occurs across both segregated and unsegregated pools;
- a sub-fund of the RSE is treated as a separate RSE and propagation occurs across the assets of both RSEs;
- propagation occurs across assets held by separate sub-custodians and each sub-custodian holds legal title to that portion of the portfolio.
The draft also outlines features that may attract Pt IVA (eg the RSE is unsegregated, uses the proportionate method to determine its exempt income, uses propagation to form a segregated current asset pool with an unbalanced allocation of assets and then ceases to maintain the pool when the assets are realised).
PROPOSED DATE OF EFFECT: 1 July 2016.