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Ruling

Subject: Income tax: Capital gains tax- retirement exemption

Question 1

Can the taxpayer, a company making a capital gain on the transfer of business real property to a self managed superannuation fund, claim the retirement exemption under Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) by making the contribution to the superannuation fund by transfer of the property the subject of the gain?

Answer

Yes

Relevant facts and circumstances

You state that the superannuation fund is acquiring a business real property from the taxpayer company.

You further state that the said asset is an active asset of the company and the company is eligible for the small business concessions. The company has a significant individual.

The company wishes to reduce the assessable capital gain by accessing the retirement exemption under subdivision 152-D of the ITAA 1997. It wishes to make the contribution by transfer of the property subject of the gain into the superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-D,

Income Tax Assessment Act 1997 section 152-10,

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

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

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

Income Tax Assessment Act 1997 section 152-15,

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

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 Subdivision 152-A,

Income Tax Assessment Act 1997 section 152-50,

Income Tax Assessment Act 1997 section 152-325,

Income Tax Assessment Act 1997 subsection 152-315(5),

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 section 152-320,

Income Tax Assessment Act 1997 section 285-5,

Income Tax Assessment Act 1997 paragraph 152-325(7)(a),

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

Income Tax Assessment Act 1997 section 116-20,

Superannuation Industry (Supervision) Act 1993 section 66,

Superannuation Industry (Supervision) Act 1993 subsection 66(2) and

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

Summary

The taxpayer company can claim the retirement exemption by making the contribution to the superannuation fund by transfer of the property the subject of the gain, as the sale proceeds will be applied for the benefit of the CGT concession stakeholder, provided the conditions as discussed below are satisfied.

Detailed reasoning

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

· carry on a business, and

· satisfy the $2m aggregated turnover test.

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 CGT retirement exemption is available to a company provided the basic conditions are satisfied. The basic conditions as stated in section 152-10 of the ITAA 1997 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 whereas the maximum net asset value test is based on the net value of assets of the entity and other entity connected with the entity and affiliates of the entity and connected entities of the affiliates which cannot exceed $6million (section 152-15 of the ITAA 1997).

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 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) of the ITAA 1997states 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 asset has been owned by you for less than 15 years, the CGT asset must be an active asset of yours for at least half of the period starting when you acquired the asset and ending when the CGT event happens or the cessation of your business. If you 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 your business.

Subdivision 152-D of the ITAA 1997, states that 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 further specific conditions in subsection 152-305(2) of the ITAA 1997 needs to be satisfied.

The above subsection basically states that a company or trust can disregard the capital gain if:

· the basic conditions in Subdivision 152-A are satisfied for the capital gain (as discussed above);

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

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

Section 152-50 of the ITAA 1997 states that an entity satisfies the "significant individual" test if the entity had at least one significant individual before the CGT event. An individual is a "significant individual" in a company if the individual has at least a 20% small business participation percentage in the company.

The 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 be 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 (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 (subsection 152-310(1) of the ITAA 1997). Additional conditions are stated in subsection 152-310(2) of the ITAA 1997.

If the taxpayer is a company, the amount chosen cannot exceed the CGT retirement exemption limit of each individual for whom the choice is made (section 152-315 of the ITAA 1997). There is a lifetime limit of $500,000 which is reduced by any previous amounts disregarded under the small business retirement exemption (section 152-320 of the ITAA 1997).

A superannuation contribution can be made in a number of ways including by transferring an asset to the superannuation fund (section 285-5 of the ITAA 1997). Paragraph 10 of the Taxation Ruling TR 2010/1, Income Tax: superannuation contributions states that the capital of a superannuation fund may be increased directly by transferring an existing asset to the superannuation provider (an in specie contribution).

A superannuation provider may be in breach section 66 of the Superannuation Industry (Supervision) Act 1993 (SISA) if it acquires an asset from a related party of the fund, such as a member (refer Self Managed Superannuation Fund Ruling SMSFR 2010/1). However, subsection 66(2) of the SISA provides an exception to this prohibition where the asset is a "business real property" (as defined in subsection 66(5) of the SISA) and other conditions are satisfied.

The superannuation fund to which the CGT asset is transferred has to be a complying superannuation fund (paragraph 152-305(1)(b) of the ITAA 1997).

As no capital proceeds are being received, section 116-30 of the ITAA 1997 deems the capital proceeds to be the market value of the asset being transferred to the superannuation fund. It is this market value that is used to calculate the capital gain made on the transfer of the asset, which you are choosing to fully or partly disregard under Subdivision 152-D of the ITAA 1997.

Under Subdivision 152-D of the ITAA 1997, the capital gain is disregarded for a CGT concession stakeholder, who is under 55 years of age, if a payment is made to a complying superannuation fund or a retirement savings account (RSA). The payment can either be by way of money or any other property.

Subsection 103-10(1) of the ITAA 1997 states that you are taken to have received money or other property if it is applied for your benefit. That is you will be taken to have received capital proceeds equivalent to the amount applied on your behalf.

In this case, the sale proceeds although not received, will be applied for the benefit of the CGT concession stakeholder as superannuation contribution. Therefore, the payment required under Subdivision 152-D will have been made.

Provided all the conditions as outlined above are satisfied, the retirement exemption will be available to the taxpayer company in respect of the capital gain made on the disposal of a business real property to the superannuation fund.