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Subject: CGT - Small business concessions

Question 1

Upon disposal of the property, will the Capital Gains Tax (CGT) event be deemed to have happened in connection with your retirement in accordance with the requirements of paragraph 152-105(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

If the answer to Question 1 is 'yes', then for the purposes of being excluded from incurring excess contributions tax, will the in-specie contribution satisfy the conditions under section 292-100 of the ITAA 1997 and therefore qualify as a CGT cap amount under section 292-105 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commences on:

01 July 2011

Relevant facts and circumstances

You are over 55 years old.

You own a commercial property.

When you purchase the commercial property, you rented it to Company A.

You hold all of the shares in Company A.

Company A runs a business in the commercial property.

You intend to sell the business and commercial property, and contribute those funds to your Self Managed Superannuation Fund (SMSF) in order to supplement your retirement.

Company A sold the business to Company B, with a two year option to purchase the commercial property.

Company B did not exercise the option to acquire the commercial property, but continued to rent it from you.

You are transferring the commercial property in-specie to your SMSF during this financial year.

The transfer will result in a capital gain to you.

You satisfy the basic conditions for small business relief.

When you dispose of the commercial property the in-specie contributions will be made before the days outlined in subsection 292-100(2)(b) of the ITAA 1997.

You will make the choice to transfer the commercial property to your SMSF in the approved form and will provide it to the trustee of your SMSF at the time you make the contribution.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A,

Income Tax Assessment Act 1997 section 152-105,

Income Tax Assessment Act 1997 paragraph 152-105(d)(i),

Income Tax Assessment Act 1997 Division 292,

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

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), and

Income Tax Assessment Act 1997 paragraph 292-100(2)(b).

Reasons for decision

Note all subsequent legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Section 152-105 states that you can disregard any capital gain in relation to the sale of a CGT asset if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain;

(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 company or trust had a significant individual for a total of at least 15 years … during which you owned the CGT asset;

(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.

Application to your circumstances

15-year exemption condition (a)

You stated in your application that you satisfy all of the basic conditions in Subdivision 152-A. Therefore you also satisfy condition (a) of the small business CGT 15-year exemption provision.

15-year exemption condition (b)

You have held the property for longer than the 15-year requirement; therefore condition (b) is satisfied.

15-year exemption condition (c)

This condition pertains to interests in companies and trusts only. As you are applying in your individual capacity condition (c) is not applicable to your circumstances.

15-year exemption condition (d)

You are over 55 years old and indicated that your retirement plan included the sale of your business and the commercial property. Although you retired sometime before the CGT event will occur, it has always been your intention to dispose of the commercial property to supplement your retirement.

To satisfy this condition the CGT event has to happen in connection with your retirement. NAT3359 provides guidance on this issue and states that depending on the particular circumstances the words 'in connection with' can apply where the CGT event occurs sometime after retirement.

In your situation, we accept that when you transfer the commercial property in-specie to your SMSF that it will be in connection with your retirement and therefore condition (d) is also satisfied.

Conclusion

As the transfer of your commercial property in-specie to your SMSF is considered to be in connection with your retirement and you satisfy all of the other requirements in section 152-105 then you qualify for the small business 15 years exemption. As such, any capital gain in relation to the disposal of your commercial property is disregarded.

Question 2

In accordance with Division 292 a taxpayer must pay excess contributions tax on the contributions to a complying superannuation fund that exceed the stated CGT cap amount for the financial year in question ($1.205 million for the year ended 30 June 2012).

Subparagraph 292-90(2)(c)(iii) in Subdivision 292-C provides that a contribution covered under section 292-100, to the extent that it does not exceed your CGT cap, is not considered a non-concessional contribution for the financial year.

Subsection 292-100(1) outlines when a contribution is covered under 292-100. It is covered when:

(a) it is made to a complying super fund,

(b) the requirement in subsection (2), (4), (7) or (8) is met, and

(c) you choose under subsection (9) to apply 292-100 to all/part of the contribution.

The requirements of subsection 292-100(2) are:

(a) you must be able to disregard the relevant capital proceeds (which gave rise to the contribution) under the 15-year exemption provisions in section 152-105, and

(b) the contribution is made on or before the later of the day you are required to lodge your tax return for the relevant year, and, 30 days after you received the capital proceeds.

Subsection 292-100(9) states that to make a choice for the purposes of paragraph 292-100(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.

Application to your circumstances

Contributions - CGT small business concessions (a)

In your situation you have indicated that you will be contributing the commercial property in-specie to your SMSF during this financial year. Therefore when you make these contributions to your SMSF condition (a) will be satisfied.

Contributions - CGT small business concessions (b)

As previously discussed, the asset will be disposed of in connection with your retirement and as a result the capital gain will be disregarded by applying the 15 year exemption under section 152-105.

In addition you have indicated that the in-specie contribution will be made to your SMSF within the requirement outlined in paragraph 292-100(2)(b). Therefore the condition in subsection 292-100(2) will be met, meaning that condition (b) will also be satisfied.

Contributions - CGT small business concessions (c)

You have stated that your in-specie contribution to your SMSF will be equal to some or all of the proceeds from the disposal of the commercial property. You have also confirmed that you will make the choice in the approved form and provide it to the trustee of your SMSF at the time the contribution is made. Therefore upon disposal of the commercial property condition (c) will also be satisfied.

Conclusion

As the transfer of your commercial property in-specie to your SMSF satisfies all of the conditions relating to the small business concessions in subsection 292-100(1), then the contribution to your SMSF can be made under the CGT cap.