Draft Practical Compliance Guide PCG 2017/D16 released last week confirms at an industry level that the ATO will accept large funds actively selecting parcels of shares for sale, what the industry calls ‘propagation’, rather than being restricted to the default first-in-first-out rule. The ATO has set parameters but fears it might be unduly restrictive have been largely allayed.
Propagation involves a fund’s custodian identifying which particular shares in a company to sell. Shares purchased at different times can for example carry different unrealised gains (or losses), or may not have been held long enough to qualify for the CGT discount (12 months) or franking credits (45 days).
The ATO will generally accept sale selections provided the parcel is from within the asset pool or sub-fund having its stake in the company reduced. So for example an accumulation asset pool exposure to BHP can’t be reduced by a sale of shares in a non-taxable segregated pension asset pool. Likewise, an Investor Directed Portfolio Service instruction to sell bank shares can’t be met by a sale of bank shares held for another IDPS investor. There are also some common sense restrictions, for example the same selection must apply for accounting and regulatory purposes as well as for tax.
Importantly though, selections can occur at the custodian level and need not be confined within, say, investment manager mandates or member investment options.
The draft does not comment on simple ‘cross-trades’ of assets between taxable accumulation pools and tax free segregated pension asset pools, i.e., asset reallocations between pools to satisfy matching buy and sell orders. There isn’t a sale by the fund in these cases and at least the inference is that the ATO is comfortable with them.
The guide will not apply to SMSFs. It has been released for consultation until 2 October 2017.