Edited version of administratively binding advice

Authorisation Number: 1012606467123

Advice

Subject: Contribution using capital gains tax small business concessions

Questions

1. Is the disposal of your interest in a property that you acquired prior to 20 September 1985 a capital gains tax (CGT) event that meets the requirements of paragraph 292-100(2)(a) of the Income Tax Assessment Act 1997 (the ITAA 1997)?

2. If the answer to question 1 is 'yes', will your contribution of the capital proceeds from the CGT event to a superannuation fund under section 292-100 of the ITAA 1997 reduce your CGT cap amount under section 292-105?

3. If the answer to question 1 is 'no', is the disposal of your interest in the property that you acquired prior to 20 September 1985 a CGT event that meets the requirements of section 292-100(7) of the ITAA 1997?

4. If the answer to question 3 is 'no', will the Commissioner exercise his discretion under section 292-465 of the ITAA 1997 to disregard your contribution of the capital proceeds from the CGT event to a superannuation fund for the purposes of determining whether you have excess non-concessional contributions?

Answers

1. Yes.

2. Yes.

3. No answer required.

4. No answer required.

This ABA applies for the following period

Income year ending 30 June 2014

The scheme commences on

On or after 1 January 2014

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

The superannuation fund (the Fund) is a complying superannuation fund with two members, who are also the individual trustees of the Fund (the Fund Trustee). The Fund's trust deed empowers the Trustee to accept in-specie contributions from members of the Fund.

Some time before 21 September 1985 one of the members (Member A) acquired a residential property in Australia (the Property). The Property were later converted to office accommodation. There are no current or proposed loans in respect of the Property.

In 20XX an independent valuer provided a market value for the Property. The Property has been leased to a related discretionary trust (the Trust). Member A is the sole director and shareholder of the corporate trustee of the Trust and has confirmed that the Property is being used by the Trust wholly and exclusively for carrying on a business (the Business). The Trust pays rent plus goods and services tax.

Member A had been the sole proprietor of the Property in fee simple. Shortly before turning 65 years of age, Member A utilised the 'bring-forward' provisions under subsections 292-85(3) and (4) of the Income Tax Assessment Act 1997 (the ITAA 1997) to make an in-specie contribution of part of the member's interest in the Property to the Fund. As Member A continues to hold the remaining interest in the Property personally, both Member A and the Fund Trustee are tenants in common of the Property in fee simple.

Member A proposes to make an in-specie contribution to the Fund in respect of the remaining interest in the Property, using the small business 15-year exemption under Subdivision 152-B of the ITAA 1997. Failing that, as Member A does not intend to fully retire in the near future, the small business retirement exemption under Subdivision 152-D may have application. This will result in the Fund Trustee being the sole proprietor of the Property.

According to the applicant for this administratively binding advice (the Applicant) Member A will satisfy the requirements of Subdivision 152-B or Subdivision 152-D of the ITAA 1997 because:

(a) Assuming the Property were a CGT asset (it is a pre-CGT asset) under section 108-5 of the Income Tax Assessment Act 1997 (Tax Act), CGT event E2 would occur on contributing Member A's remaining interest in the Property to the Fund and a capital gain to Member A would result under sections 152-10(1)(a) and (b) of the Tax Act.

(b) The capital gain would not result from CGT event K7 (i.e. the balancing adjustment event for a depreciating asset).

(c) Member A will satisfy the maximum net asset value test under section 152-15 of the Tax Act just before CGT Event E2 occurs.

(d) The Property satisfies the active asset test under section 152-40 of the Tax Act.

(e) In relation to the requirements under Subdivision 152-B of the Tax Act:

(i) Member A has continuously owned the remaining interest in the Property for the 15-year period ending just before CGT Event E2 occurs; and

(ii) (given that Member A is an individual and not permanently incapacitated) Member A will be age 55 or over at the time CGT Event E2 occurs.

(iii) CGT Event E2 will happen in connection with Member A's eventual retirement. Member A intends on retiring completely in several years' time. Member A has already begun reducing their hours of work from approximately X hours per week to approximately Y hours per week to enable Member A and Member A's spouse to travel extensively each year for holidays and visit the spouse's family overseas.

(f) In relation to the requirements under Subdivision 152-D of the Tax Act, Member A is aged 55 or above.

In relation to whether, in Member A's stated circumstances, the happening of CGT Event E2 is 'in connection with their retirement', the Applicant has advised that:

(a) The Business is an ongoing business.

(b) Member A is the sole director and shareholder of the corporate trustee of the Trust, which operates the Business. Member A's role in the Business is to oversee the management and business direction of the Business. Member A also markets the Business overseas.

(c) The corporate trustee of the Trust has leased the Property wholly and exclusively for use in the Business. The Trust has been operating the Business from the Property for over 10 years. The Business was previously conducted by Member A through a company structure for many years. The Trust later took over.

(d) Member A intends for the Trust to continue operating the Business from the Property for the near future. Member A plans on completely retiring and selling the Business in a few years' time. Member A is already spending more time each year travelling overseas with their spouse. Should Member A fail to find a suitable purchaser for the Business, the Business will continue being operated by its existing managers.

The Applicant has advised that, for the purpose of making the proposed in-specie contribution to the Fund, Member A will meet the work test required under regulation 7.04 of the Superannuation Industry (Supervision) Regulations 1994.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-60(6).

Income Tax Assessment Act 1997 Section 108-5.

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 292-85.

Income Tax Assessment Act 1997 Section 292-90.

Income Tax Assessment Act 1997 Subparagraph 292-90(2)(c)(iii).

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.

Income Tax Assessment Act 1997 Subsection 292-105(2).

Income Tax Assessment Act 1997 Subsection 292-105(4).

Income Tax Assessment Act 1997 Section 292-465.

Income Tax Assessment Act 1997 Paragraph 292-465(1)(a).

Reasons for decision

Summary

The disposal of your remaining interest in the Property is a CGT event that meets the requirements of the legislation. You may make an in-specie contribution of that remaining interest to the Fund as proposed if you can also meet the other relevant requirements under the legislation.

Detailed reasoning

Question 1

In order for a contribution made to a complying superannuation fund to be excluded from the amount of your non-concessional contributions, it must be equal to all or part of the capital proceeds from a CGT event for which you can disregard the capital gain under the small business 15 year exemption, or would have been able to disregard if the asset was not a pre-CGT asset (subsection 292-100(2) and subsection 292-100(5) of the ITAA 1997).

Generally, any capital gain made on the disposal of an asset that was acquired prior to 20 September 1985 is disregarded under paragraph 104-10(5)(a) of the ITAA 1997, and the small business concessions do not apply. However, subsection 292-100(5) operates to treat a pre-CGT asset as a post-CGT asset for the purposes of determining if the requirements of subsection 292-100(2) have been met.

The basic conditions for the CGT small business concessions are outlined in subsection 152-10(1) of the ITAA 1997:

(a) a CGT event happens in relation to an asset that the taxpayer owns

(b) the event would have, apart from the application of the small business concessions, resulted in a capital gain

(c) one or more of the following applies

(i) the taxpayer satisfies the maximum net asset value test

(ii) the taxpayer is a 'small business entity' for the financial year

(iii) the asset is an interest in an asset of a partnership which is a small business entity for the financial year, and the taxpayer is a partner in that partnership, or

(iv) the special conditions for passively held assets in subsections 152-10(1A) or 152-10(1B) are satisfied in relation to the CGT asset in the financial year and

(d) the asset satisfies the active asset test.

Active asset test

A CGT asset will satisfy the active asset 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 test period, 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 test period.

The test period begins when you acquired the asset and ends at the earlier of:

(a) the CGT event; and

(b) the cessation of business, if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows.

Subsection 152-40(1) of the ITAA 1997 details that a CGT asset is an active asset at a time if it is used, or is held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Connected entity

Under section 328-125 of the ITAA 1997 an entity controls a discretionary trust if the trustee either acts, or might reasonably be expected to act, in accordance with the directions or wishes of the entity or the entity's affiliates.

Some factors which might be considered include:

• The way in which the trustee has acted in the past.

• The relationship between the trustee and the entity or its affiliates, and the relationship the trustee has with both the entity and its affiliates.

• The amount of any property or services transferred to the trust by the entity or its affiliates, or both the entity and its affiliates.

• Any arrangement or understanding between the entity and any person who has benefited under the trust in the past.

This entity may control a discretionary trust in addition to any beneficiary with control.

In this case, the Property has been used in the course of carrying on a business by the Trust for more than 7½ years. To satisfy the active asset test, the Trust will need to be connected with you. You are the sole director and shareholder of the Trustee of the Trust. Given you control the Trustee; we accept that the Trust is connected with you.

15 year exemption

To qualify for the 15 year exemption under section 152-105 of the ITAA 1997, the following conditions must be met in addition to the basic conditions:

• you continuously owned the CGT asset for the 15-year period ending just before the CGT event happened; and

• you were;

n at least 55 years old at that time and the event happened in connection with your retirement; or

n permanently incapacitated at that time.

In connection with retirement

The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments at paragraph 1.68 about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession:

One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with a taxpayer's retirement', nor does it give any indication of the degree of retirement required in order to take advantage of this concession. It could be argued that the phrase 'in connection with retirement' means that the capital gain arising from the disposal of active assets is to be used to provide funds for a person's retirement rather than to precipitate retirement at the time of the CGT event. The words used in the EM support this interpretation.

The Advanced guide to capital gains tax concessions for small business 2012-13 (NAT 3359) also supports this view. It makes it clear that it is not necessary for there to be a permanent and everlasting retirement from the workforce. However, there would need to be at least a significant reduction in the number of hours worked or a significant change in the nature of the activities to be regarded as a retirement for the purposes of paragraphs 152-105(d) or 152-110(1)(d) of the ITAA 1997. The guide also provides that a CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement.

In this case, you currently work X hours per week and have begun reducing your hours to approximately Y hours per week. You plan to completely retire and sell the business within the next few years. You will continue to be employed by the Trust as the managing director of the business for at least Z hours each week during the relevant financial year.

Although you are not completely retiring from the business, we accept that there will be a significant reduction in the number of hours worked. Therefore, we consider that the CGT event will occur in connection with your retirement.

Application to your circumstances

The disposal of your interest in the Property that you acquired prior to 1985 would qualify for the 15 year exemption as if it had been acquired after 20 September 1985 due to the following:

• a CGT event occurred in relation to an asset you owned

• the event would have resulted in a capital gain

• you satisfy the maximum net asset value test

• the asset was an active asset as it was used in a business by a connected entity for more than 7½ years

• you owned the asset for a period of more than 15 years; and

• you were over the age of 55 at the time of the event and the event occurred in connection with your retirement.

Accordingly, the disposal of your remaining interest in the Property is a CGT event that meets the requirements of paragraph 292-100(2)(a) of ITAA 1997.

Question 2

You have proposed to make an in-specie contribution of your remaining interest in the Property to the Fund, a complying superannuation fund. Ordinarily, such a contribution would be counted towards your non-concessional contributions cap for the relevant income year.

However, provided the requirements of subsection 292-100(1) of the ITAA 1997 are met, your proposed contribution will not form part of your non-concessional contributions and will not, therefore, count towards your non-concessional contributions cap.

Subsection 292-100(1) of the ITAA 1997 requires that:

(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.

In this case, as the in-specie superannuation contribution is to be made from a capital gain that can be disregarded under section 152-105 of the ITAA 1997, the requirement in subsection 292-100(2) must be met.

Subsection 292-100(2) of the ITAA 1997 requires that:

(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.

Subsection 292-100(9) of the ITAA 1997 states that:

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.

Subsection 292-105(2) of the ITAA 1997 provides that:

If a contribution covered by section 292-100 is made in respect of you at a time, reduce your CGT cap amount just after that time:

(a) if the contribution falls short of your *CGT cap amount at that time - by the amount of the contribution; or

(b) otherwise - to nil.

For the 2013-14 income year, your indexed CGT cap amount under section 292-105 of the ITAA 1997 is $1,315,000. In accordance with subsection 292-105(2) this amount will be reduced by the amount of your proposed in-specie contribution and by any previous amount of contribution which you may have already made under that section.

Questions 3 and 4

Given that you can make an in-specie contribution of your remaining interest in the Property to the Fund as discussed above, it is not necessary to address questions 3 and 4.

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