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Authorisation Number: 1011990563539

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Advice

Subject: Non-concessional contributions cap - CGT small business concessions

Questions

1. Will the amount of $1,205,000 arising from the disposal of a pre-capital gains tax asset and to be contributed by your client to a complying superannuation fund be counted towards her non-concessional contribution cap for the 2011-12 income year?

2. Does the CGT cap amount of $1,205,000 for the 2011-12 income year apply?

Advice

1. No, provided the contributions are made within the specified timeframe under paragraph 292-100(2)(b) of the ITAA 1997.

2. Yes.

This advice applies for the following period:

30 June 2012

The arrangement commences on:

1 July 2011

Relevant facts and circumstances

Your client is over age 65 and under age 75 in the 2011-12 income year.

Your client is one of three partners in a partnership. The other partners of the partnership are your client's spouse and your client's child.

Your client and your client's spouse are the major shareholders of the partnership.

The partnership purchased a property before 20 September 1985. From the date of purchase until the property was sold to an unrelated party, the property was an asset used in your client's business.

In the 2010-11 income year, the partners of the partnership entered into a contract of sale for the property. The sale settled in the beginning of the 2011-12 income year. The proceeds from the sale of property were over three million dollars.

Your client intends to contribute $1,205,000 from the capital gain made from the sale of the property under the CGT cap and a concessional contribution to a complying superannuation fund.

You advised that your client meets the work test requirements in the 2011-12 income year as your client was an active partner in the farming business and was engaged in activities of the business for 50 hours per week until the property changed hands.

The partnership will be wound up after the lodgement of the final business activity statement for the first quarter of the 2011-12 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-20.

Income Tax Assessment Act 1997 Subsection 292-20(2).

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 Subsection 292-90(2).

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 Paragraph 292-100(2)(b).

Income Tax Assessment Act 1997 Subsection 292-100(3).

Income Tax Assessment Act 1997 Paragraph 292-100(5).

Income Tax Assessment Act 1997 Paragraph 292-100(6).

Income Tax Assessment Act 1997 Subsection 292-100(9).

Income Tax Assessment Act 1997 Section 100-45.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 Section 152-105.

Income tax (Transitional Provisions) Act 1997 Section 292-20

Income tax (Transitional Provisions) Act 1997 Subsection 292-20(2)

Reasons for decision

Summary

As your client is eligible for the small business 15-year exemption your client will be eligible to make a superannuation contribution of up to $1,205,000 from the capital gain made from the sale of the property to be measured under the CGT cap.

In addition, your client is able to use the transitional concessional contributions cap of $100,000, the non-concessional contributions cap of $150,000 and the lifetime CGT cap of $1,205,000 in the 2011-12 income year.

Detailed reasoning

Concessional contributions

Concessional contributions include employer contributions (including contributions made under a salary sacrifice arrangement) and personal contributions claimed as a tax deduction by a self-employed person.

Concessional contributions made to superannuation funds are subject to an annual cap of $25,000. The concessional contributions cap will be indexed to upward movements of average weekly ordinary time earnings (AWOTE) in $5,000 increments (subsection 292-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). For the 2011-12 income year the annual cap remains at $25,000.

A person will be taxed on concessional contributions over the $25,000 cap at a rate of 31.5%. The superannuation fund can be asked to release money to pay this excess contributions tax.

Between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply. During this time, the annual cap will be $100,000 for people aged 50 or over. If a person has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap (subsection 292-20(2) of the Income Tax (Transitional Provisions) Act 1997). The transitional concessional contributions cap is not subject to indexation.

Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap.

In the present case, your client is a partner in a partnership which conducts a business. Your client is over age 65 and under age 75 in the 2011-12 income year. The partnership entered into a contract for the sale of the property in the 2010-11 income year. The settlement was in the beginning of the 2011-12 income year.

You advised that your client was an active partner in the business prior to the sale of the property. Your client continued to be engaged in activities of the business for 50 hours per week until the property changed hands to the new owner. On this basis, you have advised your client meets the work test requirements in the 2011-12 income year.

Your client intends to make a personal contribution to a complying superannuation fund in the 2011-12 income year and claim that contribution as a deduction under section 290-150 of the ITAA 1997.

As the contributions will be tax deductible personal contributions they will be concessional contributions. As such, the contributions will count toward your client's concessional contributions cap of $100,000 for the 2010-12 income year.

Non-concessional contributions

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

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

· contributions a persons 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.

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 2011-12 income year, the non-concessional contributions cap is $150,000.

A person will be liable to pay excess non-concessional contributions tax at the rate of 46.5% on non-concessional contributions over the cap (sections 292-80 and 292-85 of the ITAA 1997).

Contributions in excess of the non-concessional contributions cap will be taxed at the rate of 46.5%. The member will be required to ask their superannuation fund to release an amount that is equal to the tax liability.

Some contributions are specifically excluded from being non-concessional contributions (paragraph 292-90(2)(c) of the ITAA 1997. These include:

· a Government co-contribution;

· a contribution arising from a structured settlement or an order for personal injury;

· a contribution relating to some capital gains tax (CGT) small business concessions to the extent that it does not exceed the CGT cap amount ($1,000,000 indexed annually) when it is made (section 292-100 of the ITAA 1997); and

· a roll-over superannuation benefit.

In the present case, you are asking whether the proposed contributions to be made by your client from the amounts arising from the disposal of a pre-CGT asset can be excluded from the non-concessional contributions cap to the extent that they do not exceed the CGT cap amount.

The CGT cap is a lifetime limit and is reduced by the amount of each contribution that an individual has elected to be covered by the exemption from the non-concessional contributions cap. As noted above, the CGT cap is indexed annually. For the 2011-12 income year the CGT cap amount is $1,205,000.

Under section 102-20 of the ITAA 1997 a capital gain or capital loss is made when a CGT event happens to a CGT asset an individual owns. However, there is generally an exception for pre-CGT assets; that is, those acquired prior to 20 September 1985, under paragraph 104-10(5)(a) of the ITAA 1997.

In order to meet the conditions for contributing a capital gain to a superannuation fund under subsections 292-100(2), 292-100(3), 292-100(5) and 292-100(6) of the ITAA 1997, contributions of capital proceeds arising from the 15-year-exemption that are allowed under the CGT cap, can include capital proceeds that would have qualified for the exemption but for:

(a) the CGT event resulting in no capital gain or loss under the rule in section 100-45 (that is, where the gain is calculated by reference to indexation and the capital proceeds are greater than the cost base but less than the indexed cost base)

(b) the asset being a pre-CGT asset (that is, gains on pre-CGT assets), or

(c) the asset being disposed of before the 15-year holding period had elapsed because of permanent incapacity of the person which occurred after the asset was acquired.

In other words, capital proceeds that can be contributed under the CGT cap limit can include these capital proceeds.

A contribution will only count towards the CGT cap if the individual makes the choice in the approved form and gives it to their superannuation fund before, or when, the contribution is made under section 292-100(9) of the ITAA 1997.

The contribution must be made no later than the day on which the individual is required to lodge their tax return for the income year in which the CGT event occurred or 30 days after the day the individual received the capital proceeds, whichever is the later (section 292-100(2) of the ITAA 1997).

Therefore, section 292-100 allows an individual to treat the asset as a post CGT asset. An individual then determines the amount to disregard under the small business 15-year exemption or small business retirement exemption.

Small Business 15 year exemption

Subdivision 152-B of the ITAA 1997 states that the capital gain made on the sale of an asset can be entirely disregarded if an individual qualifies for the small business 15-year exemption. Further, an individual do not need to apply any other concessions, and capital losses are not applied before the 15-year exemption.

Section 152-105 of the ITAA 1997 outlines the conditions an individual must satisfy to be eligible for the 15-year exemption. They are as follows:

(a) You must satisfy the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997;

(b) You 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 asset must have had a significant individual for a total of at least 15 years during which you owned the CGT asset; and

(d) either:

(i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

(ii) you are permanently incapacitated at the time of the CGT event.

The conditions applied to your client's facts to determine her eligibility for the exemption are as follow:

(a) Your client satisfies the basic conditions for the small business CGT concessions.

(b) Your client has held the asset for well over the 15 years.

(c) The CGT asset was a property held in partnership by your client, your client's spouse and your client's child. This condition does not apply to your client.

(d) Your client was over 55 years of age when the CGT event occurred.

Your client intends to contribute the proceeds from the sale of the property to a complying superannuation fund.

Your client satisfies the criteria set out in section 152-105 of ITAA 1997 and she is eligible for the small business 15 year exemption.

Under section 292-100 of the ITAA 1997 your client will be eligible to make a superannuation contribution of up to $1,205, 000 from the capital gain made from the sale of her farming property to be measured against the CGT cap. Provided the contributions are made within the specified timeframe under paragraph 292-100(2)(b) of the ITAA 1997, the proposed contributions of $1,205,000 will not be included as non-concessional contributions for the 2011-12 income year.

As noted above, your client is required to make a choice under subsection 292-100(9) of the ITAA 1997 in the approved form. We have enclosed a copy of the Capital gains tax (CGT) cap election form which your client can complete and give to the trustee of the complying superannuation fund.

Which income year should the CGT cap amount apply?

Subsection 292-100(1) of the ITAA 1997 indicate that a contribution is covered under this section if the contribution is made by an individual to a complying superannuation fund in respect of the individual in a financial year.

The proposed contributions to be made by your client will be in the 2011-12 income year. Accordingly, the CGT cap amount of $1,205,000 for the 2011-12 income applies to your client.