Edited version of private ruling

Authorisation Number: 1011666020276

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Ruling

Subject: Income tax: Capital gains tax - active asset and small business concessions

Issue 1

Question 1

Is the first property an 'active asset' for the purposes of the small business capital gains tax concessions of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the second property an 'active asset' for the purposes of the small business capital gains tax concessions of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

29 September 2010

Issue 2

Capital gains tax: small business concessions

Question 1

Will an in-specie transfer of real property to a self-managed superannuation fund satisfy the requirements of the 15-year exemption of the ITAA 1997?

Answer

Yes.

Question 2

In using the 15 year concession or the retirement concession is it acceptable to make the contribution to a capital gains tax concession stakeholder's account in a self managed superannuation fund and still be entitled to use the capital gains tax small business concessions of the ITAA 1997?

Answer

Yes.

Question 3

Is there any impediment to accessing the capital gains tax cap amount of the ITAA 1997 for the scenarios in the above two questions?

Answer

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

29 September 2010

Issue 3

Question

Is the cost base of the property transferred to the proposed self- managed superannuation fund as contributions made on behalf of the members a dividend according to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

29 September 2010

Issue 4

Meaning of business real property - Superannuation Industry (Supervision) Act 1993

Question

Whether your property meets the definition of business real property under subsection 66(5) of Superannuation Industry (Supervision) Act 1993 (SISA 1993)?

Answer

Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commences on:

29 September 2010

Relevant facts and circumstances

When the company was incorporated you and your spouse had a 50% share in the company. Later, you and your spouse acquired a 100% share in the company which conducts large business with many employees. You and your spouse are both the directors and equal shareholders of the company and are employed by the company.

You are below 55 years of age and your spouse is above 55 years of age. Your duties are primarily business management, tenders and quoting etcetera whereas your spouse performs administrative duties of the business. If it is necessary to qualify for a small business capital gains tax (CGT) concession, consideration would be given to your spouse retiring from the business. It is proposed to transfer both the properties from the company to a yet to be created self managed superannuation fund (SMSF) as contribution to the fund. The only members of the fund would be you and your spouse.

You state that under Subdivision 152-A of the ITAA 1997, it is only necessary to satisfy one of the basic conditions for relief to qualify for the small business capital gains tax concessions. You state that the company and the concession stakeholders satisfy is the maximum net value asset test. You and your spouse are the CGT concession stakeholders.

The properties are on two separate titles owned and acquired by the company over the last 15 years. the first property was acquired more than 15 years ago and the second property was acquired less than 15 years ago.

The first property is occupied by the company and used to provide storage, office space and vehicle parking for its business. As a consequence, in your opinion, this property meets the requirement as an 'active asset' for the purposes of the small business capital gains tax concessions (section 152-40 of the ITAA 1997). The second property is used for car parking and storage of items.

You are of the opinion that the contribution of a piece of land that was an active asset and held for 15 years by the company as an in specie contribution to a superannuation fund would constitute a CGT event and still satisfy the conditions of the 15 year exemption.

You need to know that while the small business reliefs may operate to exempt the gain, whether the balance of any sale price (being the cost base) may be deemed a dividend under section 109 of the ITAA 1936.

You have provided the cost base and capital gains tax calculations for the assets in question. Your intention is to transfer the property to a SMSF and rent will be charged to the company and any tenants.

You wish to know whether it is necessary to transfer the assets to the CGT concession stakeholders and subsequently from the CGT concession stakeholders to the SMSF. You say that avoiding such a scenario would reduce stamp duty considerations and you are of the opinion that if it is credited to the CGT concession stakeholder's account, then this should be sufficient to trigger the small business concessions.

You state that there are a number of limits that cap the superannuation contributions. As both you and your spouse are over 50 years of age, the higher transitional limits apply. The current limits are:

§ Concessional contributions: $50,000 each per year

§ Non-concessional contributions: $150,000 each per year

§ Capital gains tax cap amount: $1.155 million each

It is intended that the properties be an in specie contribution to the fund utilising the $1.155 million cap by exercising either the 15 year exemption or the CGT exempt amount (of up to $500,000) under the retirement exemption.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 7A

Income Tax Assessment Act 1997 Division 116

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Subdivision 152-D

Income Tax Assessment Act 1997 subsection 103-10(1)

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 108-7

Income Tax Assessment Act 1997 section 109

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 section 116-25

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 section 152-10

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

Income Tax Assessment Act 1997 subsection 152-10(1B)

Income Tax Assessment Act 1997 paragraph 152-10(1)(d)

Income Tax Assessment Act 1997 subparagraph 152-10(1)(d)(i)

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 subsection 152-35(1)

Income Tax Assessment Act 1997 subsection 152-35(2)

Income Tax Assessment Act 1997 section 152-40

Income Tax Assessment Act 1997 paragraph 152-40(1)(a)

Income Tax Assessment Act 1997 subsection 152-40(4)

Income Tax Assessment Act 1997 section 152-50

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 152 -110

Income Tax Assessment Act 1997 paragraph 152-110(1)(d)

Income Tax Assessment Act 1997 subsection 152-125(3)

Income Tax Assessment Act 1997 section 152-305

Income Tax Assessment Act 1997 paragraph 152 -305(1)(b)

Income Tax Assessment Act 1997 subsection 152-310(1)

Income Tax Assessment Act 1997 subsection 152-310(2)

Income Tax Assessment Act 1997 section 152-315

Income Tax Assessment Act 1997 subsection 152-315(4)

Income Tax Assessment Act 1997 section 152-320

Income Tax Assessment Act 1997 section 152-325

Income Tax Assessment Act 1997 subsection 152-325(7)

Income Tax Assessment Act 1997 subsection 152-325(8)

Income Tax Assessment Act 1997 subsection 152-325(4)

Income Tax Assessment Act 1997 subsection 152-325(11)

Income Tax Assessment Act 1997 subsection 285-5(1)

Income Tax Assessment Act 1997 subsection 285-5(3)

Income Tax Assessment Act 1997 section 292-90

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

Income Tax Assessment Act 1997 section 292-100

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

Income Tax Assessment Act 1997 paragraph 292-100(4)(c )

Income Tax Assessment Act 1997 section 292-105

Income Tax Assessment Act 1997 subsection 328-110(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Superannuation Industry (Supervision) Act 1993 subsection 66(1)

Superannuation Industry (Supervision) Act 1993 paragraph 66(2)(b)

Superannuation Industry (Supervision) Act 1993 subsection 66(5)

Reasons for decision

Issue 1 Question 1

Summary

The first property is an 'active asset' for the purposes of the small business capital gains tax concessions as it falls within the definition of active asset in section 152-40 of the ITAA 1997.

Issue 1 Question 2

Summary

The other property is also an 'active asset' for the purposes of the small business capital gains tax concessions as it falls within the definition of active asset in section 152-40 of the ITAA 1997.

Detailed reasoning (Issue 1 Question 1 and 2)

The meaning of 'CGT asset' is stated in section 108-5 of the ITAA 1997. A CGT asset basically covers any kind of property and rights, whether legal or equitable and whether or not they are forms of property. It also specifically includes goodwill, foreign currency and partnership interests.

Individuals who own a CGT asset as joint tenants are treated as if they each own a separate CGT asset constituted by an equal interest in the asset, and as if each person holds that interest as a tenant in common (section 108-7 of the ITAA 1997).

Therefore, in your circumstances, both the properties are CGT assets. You state that both the properties are used in the course of carrying on your business.

The meaning of 'active asset' is explained in section 152-40 of the ITAA 1997. The relevant provision here is paragraph 152-40(1)(a) which states:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; or

b) if the asset is an intangible asset …

Subsection 152-40(4) of the ITAA 1997 states CGT assets which are not active assets included:

§ interests in an entity connected with the taxpayer;

§ shares in companies and interests in trusts;

§ financial instruments, such as loans, debentures, bonds, promissory notes, futures contracts, forward contracts, currency swap contracts, or rights or options in respect of a share, security, loan or contract; or

§ assets whose main use was to derive interest, annuities, rent, royalties or foreign exchange gains. This particular exclusion as an active asset did not apply if the asset was an intangible asset which had been substantially developed, altered or improved by the taxpayer so that its market value had been substantially enhanced, or an asset whose main use for deriving rent was only temporary.

From the facts presented to us, both the properties do not fall into the definition of assets that are not 'active assets'. Further, the definition of 'active asset' does not require exclusive use of the asset for business purposes. Hence both the properties will qualify as 'active assets' for the purposes of section 152-40 of the ITAA 1997.

Issue 2 Question 1

Summary

An in-specie transfer of real property to a self-managed superannuation fund will satisfy the requirements of the 15-year exemption provided the conditions in section 152-110 of the ITAA 1997 are satisfied.

Issue 2 Question 2

Summary

In using the 15 year concession or the retirement concession it is acceptable to make the contribution to a capital gains tax concession stakeholder's account in a self managed superannuation fund and still be entitled to use the capital gains tax small business concessions.

Detailed reasoning (Issue 2 Question 1 and 2)

Subsection 328-110(1) of the ITAA 1997 states that if you are a small business entity, you can choose to access any one or more of the small business concessions available. An entity is a small business entity if it:

§ carries on a business, and

§ satisfies the $2m aggregated turnover test.

Small business relief - basic conditions for relief

Section 152-10 of the ITAA 1997 sets out some basic conditions that must be satisfied by a taxpayer in order to be eligible for the small business CGT concessions. Depending on the CGT concession claimed, the effect of these concessions is that any capital gain arising from the CGT event happening to a CGT asset owned by the taxpayer is either disregarded, reduced or deferred.

The basic conditions of relief as stated in section 152-10 are:

a) a CGT event happens in relation to a CGT asset that the taxpayer owns in an income year;

b) The event would (apart from the concessions applying) have resulted in a capital gain (except a gain from CGT event K7);

c) At least one of the following applies:

I. the taxpayer is a "small business entity" for the income year;

II. the taxpayer satisfies the maximum net asset value test;

III. 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;

IV. the rules in subsection 152-10(1A) or 152-10(1B) regarding passively held assets of connected affiliates or entities or partnerships are satisfied in relation to the CGT asset in the income year;

d) the CGT asset satisfies the active asset test.

The small business entity test, as stated earlier is based on a $2 million aggregated turnover of the entity (section 152-10 of the ITAA 1997) whereas the maximum net asset value test is based on the net value of assets of the entity which cannot exceed $6million (section 152-15 of the ITAA 1997). Though the company does not satisfy the small business entity test but it satisfies the maximum net asset value test.

The basic condition of paragraph 152-10(1)(d) of the ITAA 1997 is that the CGT asset needs to satisfy the active asset test. The active asset test is further defined by section 152-35 of the ITAA 1997. Subsection 152-35(1) states that a CGT asset satisfies the active asset test if:

a) you have owned the asset for 15 years or less and the asset was your active asset 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 7 1/2 years during the period specified in subsection (2).

Subsection 152-35(2) states that the period is the period that begins when you acquired the asset and ends at the earlier of:

I. the CGT event, and

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

Basically, what is meant by the above requirements is that if the assets have been owned for less than 15 years, the CGT asset must be an active asset of the taxpayer for at least half of the period starting when the taxpayer acquired the asset and ending when the CGT event happens or the cessation of the taxpayer's business. If the taxpayer owned the asset for more than 15 years, the asset only needs to be an active asset for at least half of the 15 year period ending when the CGT event happens or cessation of the taxpayer's business.

As the company owned the first CGT asset for more that 15 years and has used it in its business actively for more than 7 ½ years, the CGT asset would satisfy the active asset test as provided for in section 152-35 of the ITAA 1997.

The second asset is owned for less than 15 years. The asset need to be an active asset for at least half of the period starting from when it was acquired and ending when the CGT event happens. As the asset has been actively used in the business since it was acquired, the other CGT asset would satisfy the active asset test as per section 152-35 of the ITAA 1997 as it was used actively in the business for at least half the period starting from when it was acquired.

Therefore, an in-specie transfer of the CGT assets from the company to the SMSF would satisfy all the basic conditions of sections 152-10 of the ITAA 1997 as:

§ there would be a CGT event (CGT event E2 which is explained further below in this Ruling) happening in relation to the asset;

§ the CGT event would trigger a capital gain;

§ the company meets the maximum net asset value test; and

§ the CGT asset will satisfy the active asset test.

Hence, an in-specie transfer of the first property will not affect ones ability to access the small business 15 year exemption in respect of that asset.

As a result, the company will be able to access the small business 15 year asset exemption concessions, in respect of the capital gain made on the first property if the specific conditions in section 152-110 of the ITAA 1997 are met. The company will be able to access the small business retirement exemption in respect of the capital gain made on the other property if the specific conditions in subsection 152-305(2) of the ITAA 1997 are met.

The discussion below indicates that the small business 15 year exemption is only available to exempt the capital gain that will be made on the transfer of the first property and it is the small business retirement exemption that exempts the capital gain that will be made on the transfer of the other property.

Small business 15-year asset exemption

If a small business entity qualifies for the small business 15-year asset exemption, any capital gain is entirely disregarded. It is therefore unnecessary to apply any further concessions.

However, to qualify for the 15-year asset exemption, an entity must satisfy all the following conditions (as set out in section 152-105 of the ITAA 1997 for individual taxpayers and 152-110 for companies and trust taxpayers):

a) the entity must comply with the basic conditions for small business concessions as provided for in Subdivision 152-A;

b) the entity must continuously owned the CGT asset for the 15-year period leading up to the CGT event;

c) the entity must have a significant individual throughout the period of ownership (the significant individual does not have to be the same individual during the whole period);

d) the individual who is a significant individual just before the CGT event was either:

I. age 55 or over at that time and the CGT event happened in connection with the individual's retirement; or

II. was permanently incapacitated at that time.

One of the requirement of the 15-year asset exemption as stated in paragraph 152-110(1)(d) of the ITAA 1997 is that the significant individual must be at least of age 55 years at the time of the relevant CGT event and the CGT event happens 'in connection with the individual's retirement' or the individual was permanently incapacitated at the time of the CGT event. There is no statutory definition of 'retirement'. However, the word 'retirement' is defined in The Macquarie Dictionary to mean 'the withdrawal from office, business or active life'. (The expression 'in connection with the individual's retirement' depends on the particular circumstances of each case. The Australian Taxation Office publication Advanced guide to CGT concessions for small business (NAT 3359-08.2004) provide further guidance as to the scope of the expression).

The CGT asset must also be continuously owned by the entity for at least 15 years ending just before the CGT event. The entity's ownership of the CGT asset therefore starts when the entity actually acquires the asset. The entity must also at all times have a significant individual throughout the period of ownership of the asset and must satisfy the basic conditions for small business concessions as stated in Subdivision 152-A. As the second property was not held for at least 15 years, the capital gain made on its transfer is not exempted by the small business CGT 15 year exemption. It may however, qualify for the small business retirement exemption.

Section 152-55 of the ITAA 1997 defines a significant individual in a company or trust at a time if, at that time the individual has a small business participation percentage in the company or trust of at least 20%. Section 152-50 of the ITAA states that an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event.

A small business participation percentage is defined in section 152-65 of the ITAA 1997 as the sum of the direct small business percentage and the indirect small business participation percentage in another entity.

The two shareholders of the company are you and your spouse. Therefore, both of you are significant individuals because you have had a direct participation percentage of at least 25% since incorporation. Hence, the company will have had a significant individual for more than 15 years. An entities direct participation percentage in another entity is the percentage they have due to owning shares in the company, of either:

a) voting power; or

b) dividend; or

c) distribution of capital

whichever is the smallest.

Based on the facts provided, your spouse as a significant individual will be over 55 years of age and will officially retire from the business. As the first property has been owned for more than 15 years, therefore the transfer of this property (the CGT asset), from the company to the yet to be created SMSF will be a CGT event that will be linked to your spouse's retirement from the business pursuant to subparagraph 152-110(1)(d)(i) of the ITAA 1997. As the transfer would satisfy all the basic conditions of Subdivision 152-A and 152-B of the ITAA 1997, any capital gain derived by the company will be disregarded.

Small business retirement exemption

The small business 15-year exemption concession is the only concession that disregards any capital gain in its entirety. If you qualify for the 15-year asset exemption, this will take priority over the retirement exemption and the other concessions available in Subdivision 152 of the ITAA 1997. The taxpayer must first apply the capital losses against the capital gain before the remaining capital gain can be further reduced by applying these other concessions.

Under Subdivision 152-D of the ITAA 1997, which deals with the small business retirement exemption, a small business entity (company or trust) can choose to disregard a capital gain from a CGT event happening to a CGT asset of their small business if the capital proceeds from the event are used in connection with the taxpayer's retirement and, as the entity making the capital gain is a company, the specific conditions in subsection 152-305(2) of the ITAA 1997 are satisfied.

The above subsection states an entity can disregard the capital gain if:

§ the basic conditions in Subdivision 152-A are satisfied for the capital gain;

§ the entity satisfies the significant individual test under section 152-50;

§ the company or trust conditions in section 152-325 are satisfied.

It has been established earlier that the basic conditions in Subdivision 152-A of the ITAA 1997 and the significant individual test under section 152-50 of the ITAA 1997 have been satisfied. Therefore it remains to be determined if the conditions in section 152-325 of the ITAA 1997 have been satisfied.

The relevant conditions in section 152-325 of the ITAA 1997 that need to be satisfied are :

(i) The company makes a payment to at least one of its CGT concession stakeholders, if it receives capital proceeds from a CGT event which it makes a choice under the small business retirement exemption,

(ii) If the capital proceeds from the CGT event are received by the company in instalments condition (i) is met for each instalment.

(iii) If the payment is made to more than one CGT concession stakeholder the amount of the payment is worked out in accordance with each individual's percentage as required under subsection 152-315(5) of the ITAA 1997.

(iv) If the CGT concession stakeholder is an employee of the company, the payment must not a payment that is exempt from income tax for the CGT concession stakeholder and cannot be deducted from the company's assessable income.

(v) The amount of the payment or the sum of the payments is equal to the lesser of the capital proceeds and the CGT exempt amount.

(vi) if the CGT concession stakeholder is under 55 just before the payment is made, the payment must be made by the company contributing to a complying superannuation fund or retirement savings account (RSA) and inform the trustee of the fund or RSA that the contribution is made in accordance with section 152-325 of the ITAA 1997.

The consequence of choosing the retirement exemption as per section 152-305 of the ITAA 1997 for any part of the capital gain from the CGT asset is that, that part of the capital gain which equal to its CGT exempt amount is disregarded as provided in subsection 152-310(1) of the ITAA 1997. Additional conditions are stated in subsection 152-310(2) of the ITAA 1997.

The additional condition for a company is that the choice to use the retirement exemption is made in respect of a CGT concession stakeholder. The first part of the definition of a CGT concession stakeholder in subsection 152-60(a) of the ITAA 1997 is an individual who is a significant individual in a company or trust. As explained earlier, both you and your spouse are significant individuals. Hence, both are also CGT concession stakeholders.

As the second property has been owned for less than 15 years by the company, it may qualify for the small business retirement exemption. The transfer of this CGT asset to the SMSF has to be for market value. The market value capital proceeds from the transfer of the CGT asset to the SMSF arise via the operation of section 103-10(1) and 116-20 of the ITAA 1997 which is contributed to the SMSF. The market value capital proceeds from the sale must be credited to you and your spouse's account in the SMSF to the extent of their individual percentage of the CGT asset which must not exceed their individual CGT exempt amount that is attributable to each of them.

Provided that the conditions in section 152-325 of the ITAA 1997, as outlined above are satisfied, the retirement exemption will be available to both you and your spouse in respect of the capital gain made on the disposal of the other property.

As explained above, it is acceptable to make the contribution to either you or your spouse's account in a SMSF. However, for the 15 year exemption, the contribution must be equal to all or part of their participation percentage (in the company) of the capital proceeds from the CGT event as stated in paragraph 292-100(4)(c) of the ITAA 1997. In your case, the contribution will be on the basis of 50% to you and your spouse in respect to the other property.

Subsection 292-100(8) of the ITAA 1997 applies to the retirement concession for the second property which states that the contribution is equal to all or part of the capital gain made from the CGT event. This provision does not contain a condition that the contribution must be made in proportion to your participation percentage (in the company). Therefore, it is acceptable to contribute the capital gain to either yourself or your spouse. The remainder of the contribution (the remainder of the capital proceeds) can also be distributed to either yourself or your spouse.

Issue 2 Question 3

Summary

There is no impediment to accessing the capital gains tax cap amount for these two scenarios. However, only the capital gain portion of the capital proceeds from the transfer of the other property can form part of the CGT cap amount.

Detailed reasoning

Section 292-90 of the ITAA 1997 deals with non-concessional contributions for a financial year into a superannuation fund. Superannuation contributions that arise from gains that qualify for the small business 15-year asset exemption and the retirement exemption are excluded from the annual non-concessional contributions cap up to a lifetime indexed CGT cap amount (subparagraph 292-90(2)(c)(iii)).

The CGT cap amount (section 292-105 of the ITAA 1997) is indexed at the start of each income year (subsections 292-105(3) and (4) of the ITAA 1997). For 2010/11 income year the CGT cap amount is $1.155 million (the non-concessional annual contributions cap is $150,000 for the 2010-11 financial years). The CGT contribution cap amount only applies to the small business15-year asset exemption and the retirement exemption concessions.

An amount is a contribution covered by subparagraph 292-90(2)(c)(iii) of the ITAA 1997 if it is a contribution covered by section 292-100 of the ITA 1997. For the CGT small business 15 year exemption the conditions in subsection 292-100(1) and the specific conditions in subsections 292-100(2)(b) must be met and for the CGT small business retirement exemption the conditions in subsection 291-100(1) and the specific conditions in subsection (8).

Subsections 292-100(1) of the ITAA 1997 states:

a) the contribution is made to a complying superannuation fund;

b) the requirement of subsections (2), (4) (7)or (8) is met;

c) you choose to apply this section in accordance with subsection (9).

The contribution that will be made to the SMSF will be assumed to be made to a complying superannuation. It is assumed that the choice will be made in accordance with subsection 292-100(9) of the ITAA 1997. Therefore, if the specific conditions as in the subsections of subsection 292-100(1) as mentioned in the preceding paragraph are met, then the contribution will be a contribution to which the CGT cap amount as defined in section 292-105 of the ITAA 1997, applies.

In respect of the small business 15 year exemption, the relevant criteria in subsections 292-100(2)-(6) of the ITAA 997 that also need to be satisfied are;

I. the contribution is all or part of the capital proceeds from the CGT event for which you can disregard a capital gain under the small business 15 year exemption

II. the contribution is made by the later of the time the you are required to lodge the relevant tax return or 30 days after receipt of the capital proceeds

III. you are a CGT concessions stakeholder at the time of the CGT event

IV. the entity makes a payment to you within 2 years of the CGT event

V. the contribution is equal to all or part of your stakeholders participation percentage of the capital proceeds

VI. the contribution is made with 30 days of payment in (iv) above.

In respect of the small business retirement exemption, the relevant criteria in subsections 292-100(7) and (8) of the ITAA 1997 that need to be satisfied are:

I. the contribution is equal to all or part of the capital gain from a CGT event which can be disregarded under the small business retirement exemption. Note: section 152-315 of the ITAA 1997 imposes a lifetime limit of $500,000 on the amount that can be exempted under the small business retirement exemption.

II. the contribution is made by the later of the day you are required to lodge the relevant tax return and 30 days after you receive the capital proceeds

III. just before the CGT event you are a CGT concession stakeholder

IV. the contribution is equal to all or part of the capital gain made

V. the contribution is made within 30 days of the payment required under section 152-325 of the ITAA 1997.

As the small business 15 year exemption is available for the first property and the small business retirement exemption is available for the other property, provided all the conditions outlined above are satisfied, there is no impediment to accessing the capital gain tax cap amount. However, only the capital gain portion of the capital proceeds from the transfer of the other property can form part of the CGT cap amount.

Further, if the calculation of the capital gain is as per facts provided, you and your spouse will not exceed their CGT cap amounts and contributions from the CGT small business concessions will be excluded from being non-concessional. You must also take into account previous contribution into any complying superannuation fund that arose from the use of the small business 15 year exemption or the small business retirement exemption in determining if the CGT cap amount has been exceeded.

Issue 3 Question 1

Summary

The cost base of the property to the company transferred to the proposed self-managed superannuation fund as contributions made on behalf of you and your spouse will be a dividend.

Detailed reasoning

In relation to the small business 15-year exemption (subdivision 152-B), subsection 152-125(3) of the ITAA 1997 states that if a company makes such a payment, this Act applies to the disregarded payment as if it were not a dividend or a frankable distribution. This means that such a payment will have no other tax consequences.

For the small business retirement exemption (subdivision 152-D), subsection 152-325(11) of the ITAA 1997 states that a retirement exemption payment made by the company under section 152-325 of the ITAA 1997 (after 23 June 2009) will be excluded from the operation of section 109 and Division 7A of the ITAA 1936.

The meaning of 'payment' here relates to the exempt amount to the extent that it represents a distribution of the capital gain.

Further, Explanatory Memorandum to the Tax Laws Amendment (2009 Measures No 2) Bill 2009 states:

The application of the deemed dividend provisions to the small business retirement exemption is counter to the policy objective of the exemption, which is to allow small business operators to sell their small business assets and provide for their retirement as their business and its assets may be their sole retirement asset (to a $500,000 lifetime limit).

This extract for the Explanatory memorandum backs up the previous statement that what is excluded from being a dividend is the amount of the capital gain exempted by either the small business 15 year exemption or the small business retirement exemption.

As the capital gain will be basically calculated by subtracting the cost base of the CGT asset from the capital proceeds (or deemed capital proceeds) from the transfer of the CGT assets to the SMSF, the payment will not include the cost base.

Therefore, the cost base of the property transferred will be a dividend, as it is part of a distribution to or on behalf of a shareholder, and is not part of the 'payment' exempted by subsection 152-325(10) of the ITAA 1997.

Issue 4 Question 1

Summary

Both the properties would meet the definition of business real property under subsection 66(5) of the SISA 1993.

Detailed reasoning

Subsection 66(1) of the SISA 1993 prohibits trustees from intentionally acquiring assets for the fund from a related party of the fund.

Paragraph 6 of Draft Self Managed Superannuation Fund Ruling SMSFR 2008/D2: the application of subsection 66(1) of the SISA 1993 to contributions of assets to a self managed superannuation fund by a related party of that fund states:

6. The phrase acquire an asset in subsection 66(1) encompass the acceptance of a contribution of an asset.

Therefore, as a member of the SMSF will be proposing to make an in-specie contribution, subsection 66(1) of the SISA 1993 will apply.

Paragraph 66(2)(b) of the SISA 1993 provides an exception to subsection 66(1) of the SISA 1993 where a fund with fewer than 5 members acquires business real property (BRP) at market value from a related party.

Subsection 66(5) of the SISA 1993 defines BRP for the purposes of section 66 of the SISA 1993 as:

(a) any freehold or leasehold interest of the entity in real property; or

(b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

(c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph - any interest belonging to that class that is held by the entity;

where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.

The Commissioners view as per Self Managed Superannuation Fund Ruling SMSFR 2009/1 Self Managed Superannuation Funds: business real property for the purposes of the Superannuation Industry (Supervision) Act 1993 (SMSFR 2009/1) provides further guidance on what constitutes business real property. It states that two basic conditions must be satisfied before a SMSF or any other party (including a related party) can be said to hold business real property, namely, the entity holds an eligible interest in the property, and the property must pass the business use test.

For the BRP exception to apply, the asset must be acquired by the fund at market value. Paragraph 19 of SMSFR 2008/D2 states that, an asset that is contributed to a SMSF is acquired at market value for the purposes of the exceptions if the acquisition of the asset is treated as a contribution equal to the assets market value.

In your case, the assets in question are described as land and buildings which are used in your business which fits paragraph (a) of the definition of BRP in subsection 66(5)) of the SISA 1993. Therefore, both the properties are BRP for the purpose of the SISA 1993.