Edited version of private ruling

Authorisation Number: 1011587436370

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Subject: Non-concessional contributions cap - CGT small business concessions

Question 1

For the purposes of satisfying the conditions for contributing a capital gain to superannuation under section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997), would the small business 15-year exemption in section 152-105 of the ITAA 1997 apply to allow you to disregard any capital gain from the sale of an asset which includes a residence in the 2009-10 income year?

Answer:

Yes.

Question 2

Will the amount to be contributed to a complying superannuation fund from the sale of the farm be a non-concessional contribution for the 2010-11 income year under section 292-90 of the ITAA 1997?

Answer:

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Your client and your client's spouse (the spouse) purchased property (the asset) pre 20 September 1985 from which they conducted a business.

In the 2009-2010 income year the asset was sold.

In addition to various structures, the asset included the residence of your client and the spouse.

During the period of ownership of the asset there were no improvements nor were any additional structures were constructed. Only small improvements were made to existing structures.

The proceeds from the sale of the asset were received by your client and the spouse in the 2010-11 income year.

Your client and the spouse intend to contribute each of their proceeds from the sale into a complying superannuation fund (the fund).

Your client's contribution to the fund is intended to be made prior to the lodgement of your client's 2009-10 income tax return.

An approved form is to be provided to the fund's provider, on or before the contribution is made, detailing the amount of the contribution to which the CGT small business concession will apply.

Neither your client nor the spouse have previously accessed the CGT cap amount or any of the lifetime limit amounts.

Your client and the spouse are each over 55 years of age.

Your client is in gainful employment.

Assumptions

You have been advised and agree with the following assumptions being made in issuing the Notice of private ruling:

· your client will, on or before the time the contribution is made, give the fund's provider an approved form specifying the amount of the contribution to which section 292-100 of the ITAA 1997 is to apply;

· the fund will remain a complying superannuation fund in the 2010-11 income year; and

· your client will make the contribution before your client is required to lodge a tax return for the 2009-10 income year, that is, the tax return for the income year in which the CGT event occurred.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 104-10.

Income Tax Assessment Act 1997 Section 152-10.

Income Tax Assessment Act 1997 Section 152-35.

Income Tax Assessment Act 1997 Section 152-40.

Income Tax Assessment Act 1997 Section 152-105.

Income Tax Assessment Act 1997 Section 152-330.

Income Tax Assessment Act 1997 Section 292-100.

Income Tax Assessment Act 1997 Section 292-90.

Income Tax Assessment Act 1997 Subsection 292-90(2)

Income Tax Assessment Act 1997 Section 292-100

Income Tax Assessment Act 1997 Subsection 292-100(1)

Income Tax Assessment Act 1997 Subsection 292-100(2)

Income Tax Assessment Act 1997 Subsection 292-100(9)

Income Tax Assessment Act 1997 Section 292-105

Reasons for decision

Summary

The contribution your client intends to make to a complying superannuation fund in the 2010-11 income year is excluded from being a non-concessional contribution as it relates to a CGT small business concession and does not exceed the CGT cap amount.

Detailed reasoning

Question 1

The framework for calculating a net capital gain is contained in section 102-5 of the ITAA 1997. Under that framework, only those capital gains that are not otherwise disregarded are taken into account under step 1 of that method statement.

The relevant CGT event in your client's case will be when your client and the spouse dispose of their asset, which will cause CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, to happen.

However, as your client and the spouse acquired the asset before 20 September 1985, any capital gain or capital loss made as a result of CGT event A1 is disregarded (paragraph 104-10(5)(a) of the ITAA 1997). As such, any disregarded capital gain is not taken into account at step 1 of the method statement in section 102-5 of the ITAA 1997, and that capital gain cannot be reduced further under step 4 (about capital gains that qualify for the small business concessions) of the method statement.

Your client's eligibility for the small business 15-year exemption will still need to be considered, however, to determine whether your client satisfies the conditions for contributing a capital gain to superannuation under section 292-100 of the ITAA 1997, as subsection 292-100(5) of the ITAA 1997 treats the farm as a post-CGT asset for this purpose.

Under the small business 15-year exemption in section 152-105 of the ITAA 1997, your client can disregard any capital gain in relation to the sale of the asset if all of the following conditions, as stated in section 152-105, are satisfied:

(a) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain;

(b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event

(c) if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset;

(d) either:

(i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or

(ii) you are permanently incapacitated at the time of the CGT event.

Condition (a)

Section 152-10 of the ITAA 1997 contains the basic conditions to be satisfied. These conditions are:

(a) a CGT event happens in relation to a CGT asset of yours in an income year. [This condition does not apply in the case of CGT event D1].

(b) the event would (apart from this Division [152 of the ITAA 1997]) have resulted in the gain

(c) at least one of the following applies:

(i) you are a small business entity for the income year

(ii) you satisfy the maximum net asset value test (see section 152-15), or

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership;

…

(d) the CGT asset satisfies the active asset test (see section 152-35).

Basic condition (a)

This condition requires a CGT event to happen in relation to your client's CGT asset in an income year. The asset in question was sold in the 2009-10 income year.

The relevant CGT event will be when your client and the spouse disposed of the asset, which will cause CGT event A1 to happen (section 104-10 of the ITAA 1997).

As the CGT event, not being CGT event D1, happened in relation to a CGT asset of your client in the income year in which the disposal occurred, this condition is satisfied.

Basic condition (b)

A capital gain will result from the above CGT event, which means this condition is satisfied.

Basic condition (c)

You have advised that your client satisfies the maximum net asset value test, and this condition is satisfied.

Basic condition (d)

This condition requires that the active asset test in section 152-35 of the ITAA 1997 is satisfied. To satisfy this test, subsections 152-35(1) and 152-35(2) of the ITAA 1997 state:

152-35(1) A CGT asset satisfies the active test if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period specified in subsection (2); or

(b) you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the period specified in subsection 2.

152-35(2) The period:

(a) begins when you acquired the asset and

(b) ends at the earlier of:

(i) the CGT event, and

(ii) if the relevant business ceased in the 12 months before the CGT event or such longer time as the Commissioner allows - the cessation of the business.

Active asset

The meaning of an active asset is set out in section 152-40 of the ITAA 1997. It must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business by your client or your client's small business CGT affiliate or another entity that is connected with your client under paragraph 152-40(1)(c) of the ITAA 1997.

The combined effect of sections 152-35 and 152-40 of the ITAA 1997 is that the property will meet the active asset test if the asset was used, or held ready for use, in the course of carrying on a business for at least 7 1/2 years, subject to the exclusions in subsection 152-40(4) of the ITAA 1997.

The definition of 'active asset' does not require exclusive use of the asset for business purposes.

If you own an interest in a CGT asset and acquire another interest in that asset, the two interests remain separate CGT assets for CGT purposes under Taxation Determination TD 2000/31.

Your client and the spouse acquired the asset pre 20 September 1985 and as no additional structure or major improvements have been constructed since the purchase, the asset is considered one CGT asset. As the asset was used in the business from the date of purchase until it was sold, it is considered all of the asset, including the residence, will be an active asset.

Active asset test

As your client owned the asset for more than 15 years, and as discussed above, the asset was an active asset for the full period of ownership, the active asset test in section 152-35 of the ITAA 1997 is satisfied.

This basic condition is therefore satisfied.

Summary for the basic conditions

Your client satisfies all of the basic conditions in Subdivision 152-A of the ITAA 1997 so condition (a) is satisfied.

Condition (b)

As the asset was acquired by your client and the spouse before 20 September 1985 and was sold in the 2009-10 income year, this condition is satisfied.

Condition (c)

Your client satisfies this condition as your client is a small business entity and satisfies the maximum net asset value test.

Condition (d)

Your client is over 55 years old and the asset was sold in connection with your client's retirement.

This condition is satisfied.

Conclusion

Your client satisfies all of the conditions for the small business 15-year exemption in section 152-105 of the ITAA 1997. The exemption would therefore apply to allow your client to disregard any capital gain from the disposal of the asset in the 2009-10 income year for the purposes of satisfying the conditions for contributing a capital gain to superannuation.

Question 2

Non-concessional contributions (also known as 'after-tax' contributions)

Non-concessional contributions are generally contributions made by or for that individual in a year that are not included in the assessable income of a superannuation provider.

From 1 July 2007, non-concessional contributions made to a complying superannuation fund are subject to an annual cap. A taxpayer will be required to pay tax on non-concessional contributions above the cap. For the 2010-11 income year the annual cap is $150,000.

Contributions excluded from being non-concessional contributions

Under subsection 292-90(2) of the ITAA 1997 certain contributions are excluded from being non-concessional contributions, including, as covered under section 292-100, a contribution arising from certain CGT related payments to the extent that it does not exceed the CGT cap amount.

Section 292-100 of the ITAA 1997 states:

(1) A contribution is covered under this section if:

(a) the contribution is made by you to a complying superannuation plan in respect of you in a financial year; and

(b) the requirement in subsection (2), (4), (7) or (8) is met; and

(c) you choose, in accordance with subsection (9), to apply this section to an amount that is all or part of the contribution.

(2) The requirement in this subsection is met if:

(a) the contribution is equal to all or part of the capital proceeds from a CGT event for which you can disregard any capital gain under section 152-105 (or would be able to do so, assuming that a capital gain arose from the event); and

(b) the contribution is made on or before the later of the following days:

(i) the day you are required to lodge your income tax return for the income year in which the CGT event happened;

(ii) 30 days after the day you receive the capital proceeds.

…

(5) In determining whether the conditions in subsection (2) or (4) are satisfied for a CGT event in relation to a pre-CGT asset, treat the asset as a post-CGT asset.

…

(9) To make a choice for the purposes of paragraph (1)(c), you must:

(a) make the choice in the approved form; and

(b) give it to the superannuation provider in relation to the complying superannuation plan on or before the time when the contribution is made.

Section 292-105 of the ITAA 1997 relates to the CGT cap amount (the CGT cap) which is a lifetime cap that is indexed annually. In the 2010-11 income year the CGT cap is $1,155,000.

The CGT cap applies to all excluded CGT contributions, for example contributions covered by section 292-100 of the ITAA 1997, regardless of whether they were made between 10 May 2006 and 30 June 2007 or after 1 July 2007.

Under the rules for the CGT cap a taxpayer, during his or her lifetime, can exclude from their non-concessional contributions cap an amount up to their CGT cap. Further, the taxpayer's CGT cap is reduced by the amounts the taxpayer elects to exclude from their non-concessional contributions cap.

In your client's case the contribution to made to a complying superannuation fund (the fund) in the 2010-11 income year will satisfy the relevant conditions in section 292-100 of the ITAA 1997 as:

(i) the Fund to which the contribution will be made is a complying superannuation fund (paragraph 292-100(1)(a) of the ITAA 1997)

(ii) your client's contribution represents your client's share of the capital proceeds from a CGT event, which as discussed in the detailed reasoning for question 1, is a CGT event for which your client can disregard any capital gain under section 152-105 of the ITAA 1997 (paragraph 292-100(2)(a) of the ITAA 1997)

(iii) the contribution will be made to the Fund no later than the date your client's 2009-10 income tax return is to be lodged, that is, the income tax return for the income year in which the CGT event occurred (paragraph 292-100(2)(b) of the ITAA 1997)

(iv) the asset disposed of, though a pre-CGT asset, is treated as a post-CGT asset (subsection 292-100(5) of the ITAA 1997) and

(v) your client will provide an approved form to the superannuation provider, on or before the contribution is made, stating section 292-100 of the ITAA 1997 is to apply to the whole amount of the contribution (paragraph 292-100(1)(c) and subsection 292-100(9) of the ITAA 1997).

As the contribution satisfies section 292-100 of the ITAA 1997 it follows that the contribution can be excluded from being a non-concessional contribution under subsection 292-90(2) to the extent that the contribution does not exceed the CGT cap.

In your client's case it is noted that his CGT cap in the 2010-11 income year is $1,155,000 and that your client has not previously accessed any of the lifetime CGT cap. Therefore, as your client's contribution does not exceed the CGT cap the full amount of the contribution can be excluded from being a non-concessional contribution.

Conclusion:

Based on the assumptions and facts provided your client will satisfy the requirements to exclude the contribution from being treated as a non-concessional contribution to the fund in the 2010-11 income year.

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