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Ruling

Subject: Small business 15-year exemption and superannuation contributions

Question 1

Will the small business 15-year exemption in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) apply in relation to the disposal of the property?

Answer

Yes.

Question 2

Can amounts be contributed into superannuation without incurring any excess contributions tax on the contributions?

Answer

The Commissioner can not give private binding advice on excess contributions tax. General guidance, however, has been provided.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You purchased a property more than 15 years ago.

A business was also purchased by a discretionary trust at the same time that you purchased the property.

The property is an integral part of the business and was used solely for that business continuously since purchase.

You do not live, or reside at the property.

The trust paid you rent for the use of the property.

Both the property and the business were recently sold resulting in a capital gain.

You have been director and shareholder of the trustee company of the trust since purchase of the property.

The beneficiaries of the trust include you and your family, and entities associated with you.

You have advised that you satisfy the maximum net asset value test.

You are over 55 years of age.

You retired as director and secretary of the trustee company immediately on settlement of the contracts of sale. You have no intention of returning to work and are now fully retired.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Section 292-25

Income Tax Assessment Act 1997 Section 292-85

Income Tax Assessment Act 1997 Section 292-90

Income Tax Assessment Act 1997 Section 292-100

Income Tax Assessment Act 1997 Subsection 295-190(1)

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 328-130

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Under the small business 15-year exemption in section 152-105 of the ITAA 1997, you can disregard any capital gain in relation to the disposal of the Property if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied for the gain

(b) you continuously owned the Property for the 15-year period ending just before the CGT event and

(c) 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.

Condition (a)

Section 152-10 of the ITAA 1997 contains the basic conditions to be satisfied. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year. This condition does not apply in the case of CGT event D1

(b) the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain

(c) at least one of the following applies:

(i) you are a small business entity for the income year

(ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997

(iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or

(iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year.

(d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997.

Basic condition (a)

CGT event A1 under section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, happened in relation to the sale of the property in the income year and this basic condition is satisfied.

Basic condition (b)

The event resulted in a capital gain and this basic condition is satisfied.

Basic condition (c)

You have stated that you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 and this basic condition is satisfied.

Basic condition (d)

This condition requires that the active asset test in section 152-35 of the ITAA 1997 is satisfied. This test is satisfied if:

(a) you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period detailed below 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 at least 7 ½ years during the period detailed below:

The period:

(a) begins when you acquired the asset and

(b) ends at the earlier of:

(i) the CGT event and

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

Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is connected with you, in the course of carrying on a business.

Paragraph 152-40(4)(e) of the ITAA 1997 states, however, that an asset whose main use in the course of carrying on the business is to derive rent can not be an active asset unless the main use for deriving rent was only temporary.

In your case, you owned the property for more than 15 years, however you did not use the property in the course of carrying on a business during this time. The property was used by the trust in the course of carrying on its business. It will therefore need to be determined whether the trust is an affiliate of yours, or is an entity connected with you.

Section 328-130 of the ITAA 1997 provides the meaning of 'affiliate'. Under this provision, only an individual or a company can be an affiliate, and the trust therefore can not be an affiliate of yours.

Section 328-125 of the ITAA 1997 provides the meaning of 'connected with' an entity. Under this provision, the trust will be connected with you if you control the trust in a way described. Under subsection 328-125(3) of the ITAA 1997, you will control the trust if the trustee of the trust acts, or could reasonably be expected to act, in accordance with your directions or wishes.

As you have been director and shareholder of the company which acts as trustee of the trust since purchase of the property, it would be reasonable to expect the trust to act in accordance with your directions or wishes. The trust would therefore be an entity connected with you under subsection 328-125(3) of the ITAA 1997, and the land would therefore be an active asset of yours, being used by an entity connected with you in the course of carrying on a business.

The exclusion in paragraph 152-40(4)(e) of the ITAA 1997 will not apply in this case as the property was leased to a connected entity and there is no indication that the property was used by the connected entity to derive rent (Taxation Determination TD 2006/63).

The active asset test and this basic condition will be satisfied.

Summary for basic conditions

All of the basic conditions will be satisfied in this case, which means condition (a) for the small business 15-year exemption will be satisfied.

Condition (b)

You continuously owned the property for the 15-year period ending just before the CGT event, and this condition will be satisfied.

Condition (c)

On the basis of the facts supplied with your application, condition (c)(i) will be the relevant condition to be satisfied in your case.

You were over 55 years of age at the time of the CGT event and you retired as director and secretary of the trustee company immediately on settlement of the contracts of sale. You have no intention of returning to work and you are now fully retired.

This condition will therefore be satisfied.

Conclusion

As you will satisfy all of the above conditions, the small business 15-year exemption in section 152-105 of the ITAA 1997 will apply in relation to the disposal of the property.

Question 2

The Commissioner cannot give private binding advice on excess contributions tax. However, he can provide the following general guidance.

You do not make 'concessional' or 'non-concessional' contributions.

Contributions you make to obtain superannuation benefits for yourself are personal contributions.

Whether or not a contribution will be 'concessional' or 'non-concessional' or not meet the definition of either, will depend on various matters and in particular what amount of the contribution, if any, is included in the superannuation fund's assessable income and whether the contribution meets certain conditions including giving approved forms to the superannuation fund within required timeframes.

Concessional contributions

Your concessional contributions are defined by section 292-25 of the ITAA 1997.

292-25(1)  The amount of your concessional contributions for a *financial year is the sum of:

(a) each contribution covered under subsection (2); and

(b) each amount covered under subsection (3).

Note: For rules about defined benefit interests, see Subdivision 292-D.

292-25(2)  A contribution is covered under this subsection if:

(a) it is made in the *financial year to a *complying superannuation plan in respect of you; and

(b) it is included in the assessable income of the *superannuation provider in relation to the plan, or, by way of a *roll-over superannuation benefit, in the assessable income of a *complying superannuation fund or *RSA provider in the circumstances mentioned in subsection 290-170(5) (about successor funds); and

(c) it is not any of the following:

(i) an amount mentioned in subsection 295-200(2);

(ii) an amount mentioned in item 2 of the table in subsection 295-190(1);

(iii) a contribution made to a *constitutionally protected fund.

292-25(3)  An amount in a *complying superannuation plan is covered under this subsection if it is allocated by the *superannuation provider in relation to the plan for you for the year in accordance with conditions specified in the regulations.

292-25(4)  Disregard Subdivision 295-D for the purposes of paragraph (2)(b).

Under Item 1 of subsection 295-190(1) of the ITAA 1997 a complying superannuation fund's assessable income includes a personal contribution

§ made to the complying superannuation fund, and

§ covered by a valid and acknowledged notice given to the *superannuation provider of the superannuation fund under section 290-170.

That is, if you make a personal contribution, an amount of which is covered by a valid and acknowledged 290-170 notice, the amount so covered must be included in the fund's assessable income and therefore will be included in your concessional contributions for the financial year.

Note that there are time limits for giving a 290-170 notice to a superannuation fund in order to be eligible for an income tax deduction.

Note that under 292-90(4)(b) of the ITAA 1997 the amount of a contribution covered by a valid and acknowledged 290-170 notice will be a non-concessional contribution to the extent that it is not allowable as a deduction to you. A deduction is not allowable to you to the extent it makes or increases an income tax loss.

Your non-concessional contributions cap for a financial year

Your non-concessional contributions cap is determined by section 292-85 of the ITAA 1997. Relevantly it states

292-85(2)  Your non-concessional contributions cap is:

(a) for the 2007-2008 *financial year - the amount that is 3 times your *concessional contributions cap for the year; and

(b) for the 2008-2009 financial year - the amount that is 3 times your concessional contributions cap for the year; and

(c) for the 2009-2010 financial year or a later financial year - the amount that is 6 times your concessional contributions cap for the year.

292-85(3)  However, subsection (4) applies instead of subsection (2) in determining your non-concessional contributions cap for a *financial year (the first year) if:

(a) your *non-concessional contributions for the first year exceed the amount mentioned in subsection (2) for that year; and

(b) you are under 65 years at any time in the first year; and

(c) a previous operation of subsection (4) does not determine your non-concessional contributions cap for the first year.

292-85(4)  

Work out your non-concessional contributions cap for the first year and for the following 2 *financial years (the second year and third year) as follows:

(a) your cap for the first year is 3 times the amount mentioned in subsection (2) for the first year;

(b) your cap for the second year is:

(i) if your *non-concessional contributions for the first year fall short of your cap for the first year (worked out under paragraph (a)) - the shortfall; or

(ii) otherwise - nil;

(c) your cap for the third year is:

(i) if your *non-concessional contributions for the second year fall short of your cap for the second year (worked out under paragraph (b)) - the shortfall; or

(ii) otherwise - nil

That is, if you are aged 64 or less on 1 July of a financial year and you are not already in a bring-forward period your non-concessional contributions cap will be 3 x the non-concessional contributions cap for that year if your non-concessional contributions are greater than the non-concessional contributions cap for that year.

Non-concessional contributions

Your non-concessional contributions are defined by section 292-90 of the ITAA 1997.

292-90(1)  The amount of your non-concessional contributions for a *financial year is the sum of:

(a) each contribution covered under subsection (2); and

(aa) each amount covered under subsection (4); and

(b) the amount of your *excess concessional contributions (if any) for the financial year.

292-90(2)  A contribution is covered under this subsection if:

(a) it is made in the *financial year to a *complying superannuation plan in respect of you; and

(b) it is not included in the assessable income of the *superannuation provider in relation to the *superannuation plan, or, by way of a *roll-over superannuation benefit, in the assessable income of any *complying superannuation fund or *RSA provider in the circumstances mentioned in subsection 290-170(5) (about successor funds); and

(c) it is not any of the following:

(i) a Government co-contribution made under the Superannuation (Government Co-contribution for Low Income Earners) Act 2003;

(ii) a contribution covered under section 292-95 (payments that relate to structured settlements or orders for personal injuries);

(iii) a contribution covered under section 292-100 (certain CGT-related payments), to the extent that it does not exceed your *CGT cap amount when it is made;

(iv) a contribution made to a *constitutionally protected fund (other than a contribution included in the *contributions segment of your *superannuation interest in the fund);

(v) contributions not included in the assessable income of the superannuation provider in relation to the superannuation plan because of a choice made under section 295-180;

(vi) a contribution that is a *roll-over superannuation benefit.

292-90(3)  Disregard Subdivision 295-D for the purposes of paragraph (2)(b).

292-90(4)  An amount is covered under this subsection if it is any of the following:

(a) an amount in a *complying superannuation plan that is allocated by the *superannuation provider in relation to that plan for you for the year in accordance with conditions specified in the regulations;

(b) the amount of any contribution made to that plan in respect of you in the year that is covered by a valid and acknowledged notice under section 290-170, to the extent that it is not allowable as a deduction for the person making the contribution;

(c) the sum of each contribution made to that plan in respect of you at a time on or after 10 May 2006 when that plan was not a complying superannuation plan (other than a contribution covered under this paragraph in relation to a previous financial year).

Under subsection 295-190(1) of the ITAA 1997 a personal contribution will not be included in a superannuation fund's assessable income unless it is one of the items described in this subsection.

That is, personal contributions, to the extent to which they are not allowable to you as an income tax deduction, will generally be non-concessional contributions. However, your non-concessional contributions for a financial year do not include a contribution that is covered under section 292-100 of the ITAA 1997 to the extent that it does not exceed your CGT cap amount when it is made.

Amounts covered under section 292-100 of the ITAA 1997

A contribution is covered under section 292-100 of the ITAA 1997 if

(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.

Subsection 292-100(2) of the ITAA 1997 states

The requirement in this subsection is 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

(b) the contribution is made on or before the later of the following days:

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

(ii) 30 days after the day you receive the capital proceeds.

Subsection 292-100(4) of the ITAA 1997 states

292-100(4)  The requirement in this subsection is met if:

(a) just before a *CGT event, you were a *CGT concession stakeholder of an entity that could, under section 152-110, disregard any *capital gain arising from the CGT event (or would be able to do so, assuming that a capital gain arose from the event); and

(b) the entity makes a payment to you within 2 years after the CGT event; and

(c) the contribution is equal to all or part of your stakeholder's participation percentage (within the meaning of subsection 152-125(2)) of the *capital proceeds from the CGT event (but not exceeding the amount of the payment mentioned in paragraph (b)); and

(d) the contribution is made within 30 days after the payment mentioned in paragraph (b).

Subsection 292-100(9) of the ITAA 1997 states

To make a choice for the purposes of paragraph (1)(c), you must:

(a) make the choice in the *approved form; and

(b) give it to the *superannuation provider in relation to the *complying superannuation plan on or before the time when the contribution is made.

That is, if you make a contribution to a complying superannuation fund which meets either of the requirements of subsections 292-100(2) or (4) of the ITAA 1997 and you make a choice to cover an amount of the contribution in the approved form which you give to the superannuation provider on or before the time you make the contribution, it will not be a non-concessional contribution to the extent it doesn't exceed your CGT cap when it is made.

Your CGT cap

Your CGT cap is determined by section 292-85 of the ITAA 1997. Your CGT cap is increased by indexation and is reduced by the amount of any contributions covered by section 292-100 of the ITAA 1997.

The indexed CGT cap amount for the 2011-12 financial year is $1.205 million.

That is, your CGT cap for the 2011-12 financial year will be $1.205 million if no amount of your contributions have previously been covered by section 292-100 of the ITAA 1997.