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Propagation arrangements – finally some public guidance

Propagation arrangements – finally some public guidance

Dana Fleming and Stephen Ross discuss on the guidance on new propagation arrangements issued by Australian Taxation office.

Ross Stephens

Director, Corporate Tax

KPMG Australia


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Now that superannuation funds are generally back in net capital gains positions, many have been considering whether their systems for parcel selection produce the most efficient outcome from a tax perspective.

Most of the custodians providing tax reporting for funds have systems available that enable parcel selection to occur at a “whole of fund” or “whole of asset class” level, rather than at the level of the individual fund manager. These systems are commonly known as propagation.

Primarily for governance reasons, most funds commencing to use these propagation arrangements have sought private rulings from the Australian Taxation Office (ATO) to confirm the acceptability of these arrangements to record and calculate the fund’s capital gains.

Prior to about April last year, the ATO had issued a number of private rulings for this purpose, but from about this time, put all such applications on hold whilst the ATO undertook an internal review of the issues arising from propagation arrangements. The ATO only recommenced issuing rulings on these issues from about June this year.

On Monday, 21 August 2017, the ATO released draft Practical Compliance Guideline (PCG), which now provides public guidance. Once finalised, provided both custodians’ systems for propagation and the particular fund’s proposed use of propagation are consistent with the PCG, this should negate the need for funds to seek private rulings on these issues in future.

Some important points to note from the PCG are:

  • It requires that the custodian’s systems for identifying the parcel for disposal are contemporaneous with the actual disposal transaction (and thus, that it is not possible to subsequently claim that a different parcel was sold)
  • There can be more than one propagated pool within a single superannuation fund, but there cannot be any intermingling of parcel selection between these pools
  • In particular, funds that segregate assets to support member interests in any way, including assets within a member directed investment option, or assets held solely for accumulation or pension members, cannot apply propagation in a manner that results in the intermingling of parcel selection between these segregated pools
  • The Commissioner may still devote compliance resources to confirm that the propagation arrangements of a particular fund satisfy the parameters set out in the PCG.

The largest controllable part of a fund’s tax liabilities is capital gains tax (CGT). For this reason, it is incumbent on all funds to closely examine strategies such as propagation arrangements that assist in both deferring the payment date for capital gains, and ensuring that the one-third CGT discount is accessed wherever possible. Appropriate tax management of investment decisions by funds can have a significant impact onreturns to members over time.

In this light, the release of public guidance by the ATO on propagation, providing greater certainty to the industry in respect of these arrangements, is to be greatly welcomed.

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