Edited version of administratively binding advice

Authorisation Number: 1012629490366

Advice

Subject: Non concessional contributions cap -CGT small business concessions

Question 1

Is the Taxpayer entitled to claim the small business 15-year exemption under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the amount to be contributed to a complying superannuation fund be a non-concessional contribution in the 2013-14 financial year under section 292-90 of the ITAA 1997?

Answer

No, provided the conditions in section 292-100 of the ITAA 1997 are met.

Question 3

Will any stamp duty be chargeable in respect of the transaction?

Answer

We are unable to advise as stamp duty Acts are not administered by the Commissioner of Taxation (the Commissioner).

This ABA applies for the following periods:

Income year ending 30 June 2014

Income year ending 30 June 2015

The scheme commences on:

During the income year ending 30 June 2014

Relevant facts and circumstances

The Taxpayer is a member of a superannuation fund (the Fund), a self-managed superannuation fund.

The Taxpayer is the sole owner of a business real property (the Property) which was acquired in 1987.

The Taxpayer has leased the Property to a medical practice company (the Medical Practice), to be used as a medical surgery.

Medical Practice is a small business entity. The total issued capital is 5,000 ordinary $1 shares.

The shareholders of the Medical Practice are the Taxpayer and their spouse. The Taxpayer holds 4,999 shares and their spouse holds 1 share.

The Taxpayer wishes the Fund to acquire the Property and intends to contribute (to the Fund) the proceeds of the sale utilising the lifetime CGT cap of $1.315 million.

Based on the value of The Property the Taxpayer will realise a capital gain upon its disposal.

The Taxpayer is over 60 years of age and plans to retire by the end of 2015.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Subdivision 152-C

Income Tax Assessment Act 1997 Subsection 152-10(1A)

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Subsection 152-40(1)

Income Tax Assessment Act 1997 Section 152-105.

Income Tax Assessment Act 1997 Section 292-80

Income Tax Assessment Act 1997 Section 292-85

Income Tax Assessment Act 1997 Subsection 292-85(2).

Income Tax Assessment Act 1997 Section 292-90.

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

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).

Taxation Administration Act 1953 Division 359 of Schedule 1

Taxation Administration Act 1953 Section 357-55 of Schedule 1

Reasons for decision

Summary

The Taxpayer satisfies the basic conditions and the requirements of the small business 15-year exemption for the purposes of section 152-105 of the ITAA 1997.

An amount of up to $1,315,000 from the sale of the Property to be contributed to a complying superannuation fund will not be a non-concessional contribution in the 2013-14 financial year under section 292-90 of the ITAA 1997 provided all the conditions under section 292-100 of the ITAA 1997 have been met.

The Commissioner is unable to provide advice on the issue of the payment of stamp duty as stamp duty is not a tax imposed by an Act of which the Commissioner has the general administration.

Detailed reasoning

To qualify for the small business Capital Gains Tax (CGT) concessions, a taxpayer must satisfy several conditions that are common to all the concessions. These are called the basic conditions.

A capital gain that a taxpayer makes may be reduced or disregarded under Division 152 of the ITAA 1997 if the following basic conditions are satisfied:

• A CGT event happens in relation to a CGT asset of the taxpayer in an income year;

• The event would have resulted in a gain;

• The CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997, and

• At least one of the following applies,

• the taxpayer is a small business entity for the income year,

• the taxpayer satisfies the maximum net asset value test in section 152-15 of the ITAA 1997,

• the taxpayer is a partner in a partnership that is a small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or

• the taxpayer does not carry on a business, but their CGT asset is used in a business carried on by a small business entity that is their affiliate or an entity connected with them.

Passively-held assets

The conditions in subsection 152-10(1A) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year if:

• the taxpayer's affiliate, or an entity that is connected with the taxpayer, is a small business entity for the income year; and

• the taxpayer does not carry on a business in the income year (other than in partnership); and

• if the taxpayer carries on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

• in any case - the small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraphs 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b) of the ITAA 1997) in relation to the CGT asset.

Connected entity

An entity is connected with another entity if either entity controls the other entity, or both entities are controlled by the same third entity. Under subsection 328-125(2) of the ITAA 1997, an entity controls a partnership company or trust (except a discretionary trust) if it:

• beneficially owns or has the right to acquire beneficial ownership of, interest in the other entity that give the right to receive at least 40% of any distribution of income or capital by the other entity, or

• if the other entity is a company, beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company.

Active asset test

A CGT asset will satisfy the active asset test if:

a) a taxpayer has owned the asset for 15 years or less and the asset was an active asset of theirs for a total of at least half of the test period, or

b) the taxpayer has owned the asset for more than 15 years and the asset was an active asset of theirs for a total of at least 7½ years during the test period.

The test period beings when the taxpayer acquired the asset and ends at the earlier of the CGT event and, if the relevant business ceased to be carried on in the 12 months before that time - the cessation of the business.

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 held ready for use, in the course of carrying on a business that is carried on by a taxpayer, or a taxpayer's affiliate, or another entity that is connected with a taxpayer.

The Taxpayer's circumstances

In this case, when the property is sold, the Taxpayer will make a capital gain. The Taxpayer currently leases the Property to the Medical Practice which uses it in the course of carrying on their business. In order to determine whether the Property is an active asset we first need to consider whether the Medical Practice is connected with the Taxpayer.

The Taxpayer holds more than 40% of the shares issued by the Medical Practice. Therefore, the Taxpayer is connected with the Medical Practice.

The Taxpayer has owned and leased the Property to the Medical Practice for more than 20 years. The Medical Practice has used the Property in the course of carrying on a business during the entire ownership period. Therefore, the Property will satisfy the active asset test and the basic conditions have been satisfied.

15-year exemption

Subdivision 152-B of the ITAA 1997 provides a small business 15- year exemption as part of the CGT small business relief provisions. If a taxpayer qualifies for the small business 15- year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any other concessions.

If the taxpayer is an individual, the taxpayer can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) the basic conditions are satisfied;

(b) the taxpayer 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 a total of at least 15 years;

(d) either:

(i) the taxpayer is 55 or over at the time of the CGT event and the event happens in connection with the taxpayer's retirement, or

(ii) the taxpayer is permanently incapacitated at the time of the CGT event.

In this case, the Taxpayer has satisfied the basic conditions for the small business concessions. The Taxpayer has continuously owned the CGT asset for more than 15 years and the Taxpayer is more than 55 years of age.

We consider that the event will happen in connection with the Taxpayer's retirement as the Taxpayer intends to stop working by the end of 2015. Therefore, the Taxpayer is entitled to claim the small business 15-year exemption under section 152-105 of the ITAA 1997.

Other relevant comments

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

1.68 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 2011-12 (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.

Although there is a delay between the CGT event and the individual's retirement, when taking their age and future plans into account, it is considered that there is a clear link between the sale of the business and the individual's retirement.

Question 2

Non-concessional contributions made to superannuation funds are subject to an annual cap in accordance with subsection 292-85(2) of the ITAA 1997. For the 2013-14 and 2014-2015 financial years, the non-concessional contributions cap is $150,000 and $180,000 respectively.

A person will be liable to pay excess non-concessional contributions tax at the rate of 46.5% on non-concessional contributions that exceed the cap amount for a financial year (sections 292-80 and 292-85 of the ITAA 1997).

Non-concessional contributions for a financial year are defined in section 292-90 of the ITAA 1997 and include:

• personal contributions for which an income tax deduction is not claimed;

• contributions a person's spouse makes to their superannuation fund account;

• transfers from foreign superannuation funds (excluding amounts included in the fund's assessable income); and

• excess concessional contributions (if any) for the financial year.

Exclusions from the non-concessional contributions cap

Under subsection 292-90(2) of the ITAA 1997 certain contributions are excluded from the definition of non-concessional contributions for a financial year. In particular, subparagraph 292-90(2)(c)(iii) of the ITAA 1997 excludes a contribution covered under section 292-100 of the ITAA 1997.

To qualify for the CGT concession under section 292-100 of the ITAA 1997 certain conditions must be met. These are:

(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, the relevant requirements that must be met for the purposes of paragraph 292-100(1)(b) of the ITAA 1997 are set out in subsection 292-100(2) of the ITAA 1997. These requirements will be 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

In accordance with subsection 292-100(9) of the ITAA 1997, to make a choice, a taxpayer must:

• make the choice in the approved form; and

• give it to the superannuation fund trustee on or before the time the contribution is made.

Subsection 292-105(2) of the ITAA 1997 provides that where a taxpayer makes a choice under section 292-100 of the ITAA 1997 for contributions to come under their CGT cap, the CGT cap amount is reduced just after the time the contribution is made. If the contribution is less than the CGT cap amount at that time, the CGT cap amount is reduced by the contribution. It is reduced to nil if the contribution equals the CGT cap amount.

The CGT cap amount, which is indexed at the start of each financial year after 2007-08 financial year (subsections 292-105(3) and (4) of the ITAA 1997) is:

2013-14 financial year	$1,315,000
2014-15 financial year	$1,355,000

Application of the above to the Taxpayer's circumstances

In the 2013-14 financial year, the Taxpayer can make a contribution from the disposal of the Property up to $1,315,000 which will not count towards the Taxpayer's non-concessional contributions cap for that financial year if:

• the contribution is made to a complying superannuation fund;

• the contribution is made within the timeframe specified in paragraph 292-100(2)(b) of the ITAA 1997;

• the choice to make the contribution is made in the approved form under subsection 292-100(9);

• the form is given to the superannuation fund on or before the contribution is made; and

• the contribution from the sale of the Property does not exceed $1,315,000.

Question 3

Division 359 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that a private ruling is a written statement of the Commissioner's opinion of how a relevant provision applies, or would apply, to a particular entity in relation to a specified scheme. The provisions that are relevant for rulings are listed in section 357-55 of Schedule 1 to the TAA :

Only provisions of Acts and regulations administered by the Commissioner are directly covered by section 357-55 of Schedule 1 to the TAA.

The issue of stamp duty relates to an Act which is not administered by the Commissioner therefore, the Commissioner is unable to advise on this issue.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).