Edited version of your written advice

Authorisation Number: 1013054081138

Date of advice: 15 July 2016

Ruling

Subject: CGT: small business concessions/in-specie transfer to self-managed superannuation fund

Question 1

Can you claim the capital gains tax (CGT) Small Business 15 year exemption in subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) on the disposal of your share in the Company in the 20ZZ-AA income year?

Answer

Yes

Question 2

Is the in-specie transfer of your share in the Company to your self-managed superannuation fund (SMSF) treated as a non-concessional contribution under section 292-90 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20AA

The scheme commences on:

19WW

Relevant facts and circumstances

The Company was registered in 19VV. At that time you and your former spouse owned the shares in equal proportions.

The Company had no operations as the business you intended to establish did not eventuate.

You are the sole shareholder of the company. You are over 55 years old.

In 19WW, the Company purchased a commercial property (the premises) for the purpose of providing suitable premises for the running the business of your and your spouse at that time.

The business was the sole occupant of the premises from the time of its purchase in 19WW until 20XX.

The business qualifies as a small business and its aggregate earning has always been under $2 million per annum. It has operated in a full time capacity since it began.

In 20XX you and your former spouse separated..

As part of your settlement you obtained full ownership of the premises and became the sole shareholder of the company. This occurred in late 20XX.

You have chosen to include your former spouse's ownership and active asset periods of the premises.

You have been unable to lease or sell the premises for the past 6 years due to a slump in demand for commercial property in the area.

Upon your acquisition of full ownership of the premises, you actively attempted to lease or sell the premises through a real estate agent for over 2 years without success. The premises were signed as available for lease or sale, and it was listed on the internet. After this time period, you took it off the official market, however, you made it clear to your real estate agent that it was available and remained on their 'books'.

The market is now recovering and the premises is listed officially with the same real estate agent again for lease and for sale

Your preference is to lease it.

The current market value of the premises is over $600,000.

You will transfer the share in your company to your self-managed superannuation fund (SMSF). As the sole asset of the company is the premises, the market value of the share is equal to the market value of the premises.

You retired in the 20YY-ZZ income year.

You will transfer a proportion of the share to the SMSF as a non-concessional contribution up to your non-concessional limit. The SMSF will purchase the remaining proportion of the share.

Relevant legislative provisions

Division 152 of the Income Tax Assessment Act 1997

Section 292-100 of the Income Tax Assessment Act 1997

Section 292-90 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

You meet all of the relevant conditions to access the small business 15 year exemption upon the disposal of the share in your Company. Therefore, you can disregard any capital gain you make from the disposal of your share in the 20ZZ-AA income year.

Detailed reasoning

The Small Business 15 Year exemption

This concession provides a total exemption for a capital gain if you have continuously owned the CGT asset for at least 15 years and you are over 55 or older and retiring.

To access this concession, you must satisfy the basic conditions in Division 152 of the ITAA 1997. These are discussed below.

In addition, where the assets is a share in a company, the company must have had a significant individual for periods totalling at least 15 years during the entire time you owned the share.

Section 152-55 of the ITAA 1997 states that an individual is a significant individual in a company, if at that time, the individual has a small business participation percentage of at least 20%. You and your former spouse held the shares in the company in equal proportions for the first 12 years of your ownership period, and then you were the sole shareholder from 20XX. Therefore, you meet this condition.

Basic Conditions

To qualify for the small business CGT concessions in Division 152 of the ITAA, you must satisfy several conditions that are common to all the concessions. These are called the basic conditions and are as follows:.

The basic conditions, contained in section 152-10 of the ITAA 1997, are as follows:

• A CGT event happens in relation to a CGT asset of yours 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;

• you are a small business entity for the income year,

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

• you are 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

• you do not carry on a business, but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you.

Passively-held assets

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

a) your affiliate, or an entity that is connected with you, is a small business entity for the income year; and

b) you do not carry on a business in the income year (other than in partnership); and

c) if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and

d) 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 subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

In your situation the Company owned the premises and leased it to an entity that was connected to you, being the business, from 19WW to 20XX; a period totalling approximately 12 years.

Marriage Breakdown

If you have a CGT asset transferred to you because of a marriage breakdown, and the capital gain arising from that transfer was rolled over under the marriage breakdown rollover provisions, for purposes of the active asset test you can choose whether to:

• include the ownership and active asset periods of your former

spouse, or

• commence the ownership and active asset periods from the

time the asset was transferred to you.

If you choose to include your former spouse's ownership and active asset periods of the CGT asset, that asset is treated as if it had been:

• acquired by you when your former spouse acquired the asset, and

• was an active asset of yours at all times when the asset was an active asset of your former spouse.

You have chosen to treat the premises/share in the Company as though they were acquired in full by you when you and your spouse acquired them in 19WW. In addition you have chosen to treat it as an active asset of yours at all times when the asset was an active asset of your spouse.

Active Asset

For the sale of the property to qualify for any of the small business CGT concessions, the CGT asset must also satisfy the active asset test in section 152-35 of the ITAA 19WW.

The meaning of an active asset is given in subsection 152-40 (1) of the ITAA 1997. Paragraph 152-40(1) (a) states that a CGT asset is an active asset at a given time if at that time, you own it and:

• use it in the course of carrying on a business, or

• hold it ready for use in the course of carrying on a business by:

i. you; or

ii. your affiliate; or

iii. another entity that is connected with you

When shares are Active Assets

A CGT asset is also an active asset at a given time if you own it and:

• it is either a share in a company that is an Australian resident at that time for CGT purposes for the income year in which that time occurs, and

• the total of the market value of the active assets of the company is more that 80% of all of the assets of the company.

In your case, the asset you are disposing of is a share in a company. Therefore, the total market value of the active assets must be more than 80% of all of the assets in the company. As the premises is the only asset of the Company, if it is an active asset for the relevant period, then the share in the Company will also be an active asset.

It is accepted in your situation that the Premises was an active asset for the period between 19WW and 20XX when you and your former spouse leased it to your accountancy business.

In addition, the active asset test is satisfied if:

• You have owned the property for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period.

The test period:

• begins when you acquired the asset;

• ends at the earlier of:

• the CGT event, and

• when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

In this case, the CGT event will occur in the 20ZZ-AA income year. As the disposal of the property did not occur within 12 months of the cessation of the business being carried on by the connected entity, the test period ends at the time of the CGT event in in the 20ZZ-AA income year.

You have owned the Premises for approximately 18 years. The Premises was an active asset for approximately 12 years from 19WW until 20XX. The asset was an active for at least half of the test period. Therefore, the active asset test is satisfied.

Conclusion

You have met the relevant conditions to access the small business 15 year retirement concession. You are able to choose to disregard any capital gain you make from the disposal of your share in the company.

Question 2

Summary

Detailed reasoning

Where an individual aged over 55 who qualifies for the small business capital gains tax (CGT) concessions makes an in-specie contribution of their business real property to their self-managed super fund (SMSF) the individual can reduce or disregard their capital gain made in respect of that property in accordance with the small business CGT concession they have claimed.

However, the contribution of the business real property will be treated as a non-concessional contribution.

The market value substitution rule means the capital proceeds from the in-specie transfer will be the market value of the property at the time of the transfer.  The market value is also the contribution amount to the SMSF.

Detailed reasoning

Can a Transfer of Property be a Contribution?

The term 'contribution' is not defined in the ITAA 1997. Taxation Ruling TR 2010/1 sets out the Commissioner's view on the ordinary meaning of contribution, how a contribution can be made and when contributions are made for the purposes of the ITAA 1997. Under section 285-5 of the ITAA 1997, a transfer of property can be a contribution. Such a contribution is called an in-specie contribution.

Paragraph 20 of TR 2010/1 states:

A contribution by way of a transfer of an asset will be made when the superannuation provider obtains ownership of the asset from the contributor. The Commissioner accepts the superannuation provider obtains ownership of an asset when beneficial ownership of the asset is acquired and that beneficial ownership can be acquired earlier than legal ownership.

Contributions made to a fund for or by a person may be included in the person's concessional contributions or non-concessional contributions. There are also situations where the contributions may not be included in the person's concessional contributions or non-concessional contributions.

Non-Concessional Contributions

Pursuant to subsection 292-90(1) of the ITAA 1997, the amount of non-concessional contributions for a financial year is the sum of each contribution covered by subsection 292-90(2) of the ITAA 1997; each amount covered by subsection 292-90(4) of the ITAA 1997; and the amount of an individual taxpayer's excess concessional contributions (if any) for the financial year.

Will the Contribution be a Non-Concessional Contribution?

The contribution will not be included in the assessable income of the SMSF pursuant to subsection 295-190(1) of the ITAA 1997. As such, it will be treated as a non-concessional contribution pursuant to paragraph 292-90(2)(b) of the ITAA 1997 unless it falls into one of the subparagraphs of paragraph 292-90(2)(c) of the ITAA 1997.

Relevantly, subparagraph 292-90(2)(c)(iii) of the ITAA 1997 refers to a contribution covered under section 292-100 (certain CGT-related payments), to the extent that it does not exceed a taxpayer's CGT cap amount when it is made.

As paragraph 292-100(1)(b) refers to meeting the requirements in either subsection 292-100(2), 292-100(4), 292-100(7) or 292-100(8) of the ITAA 1997, it is necessary to consider which of those subsections applies in the circumstances.

Given that you intend to disregard the capital gain made as a result of the disposal of the share in the company (the CGT event) under section 152-105 or section 152-305 of the ITAA 1997, subsections 292-100(2) and 292-100(7) of the ITAA 1997 are the appropriate subsections to consider.

Paragraph 292-100(2)(b) of the ITAA 1997 and 292-100(7)(b) of the ITAA 1997 both state that the contribution to the superannuation fund must be made:

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

b) on or before 30 days after the day you receive the capital proceeds from the CGT event .

It is clear that these paragraphs contemplate the CGT event and the payment to SMSF happening at separate times.

Application to your situation

You will not be able to exclude the contribution from being a non-concessional contribution pursuant to section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997). That is, the contribution cannot be a contribution under the CGT cap. This is because, section 292-100 of the ITAA 1997 makes it clear that a contribution made to the SMSF is made after the CGT event happened and/or the capital proceeds are received. 

The legislation does not contemplate that the CGT event, choice and contribution of the CGT exempt amount can happen simultaneously. Rather, each of the relevant steps must happen sequentially, therefore, that initial transfer of the property cannot also be the final contribution required under section 292-100. You will not be able to exclude the contribution from being a non-concessional contribution under paragraph 292-90(2)(c) of the ITAA 1997.

The contribution of the share, therefore, will be a non-concessional contribution which will occur at the market value of the share in the company at the time of the transfer.

Note: We note in your situation you have proposed to make a proportionate contribution/sale to your SMSF to avoid exceeding your non-concessional contribution cap as the property is valued at over $600,000. There are strict rules regarding SMSF's acquiring assets from related parties. We recommend you seek financial advice regarding the broader implications of entering into this arrangement.

In addition we have included ATO ID 2008/90 - Superannuation contributions: return of fund capped contributions by self-managed super fund and ATO ID 2009/29 - Superannuation Contributions: return of contribution by self-managed superannuation fund - after 30 day time limit for your consideration.

ATO view documents

Tax Determination (TD) 2006/78

Taxation Ruling (TR) 2010/1

ATO ID 2003/503

ATO ID 2010/217

ATO ID 2008/90

ATO ID 2009/29

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