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Ruling

Subject: capital gains tax concessions for small business and superannuation contribution

Question 1

Are you eligible for the 50% capital gains tax (CGT) discount on any capital gain made on disposal of the property?

Answer:

Yes

Question 2

Do you satisfy the basic conditions necessary to be eligible for the CGT concessions for small business, which therefore automatically entitles you to apply the 50% active asset reduction concession (after applying the 50% CGT discount) to any capital gain made on disposal of the property?

Answer:

Yes

Question 3

Are you eligible to reduce any remaining capital gain made (after applying the 50% CGT discount and 50% active asset reduction concession) on disposal of the property under the CGT retirement exemption concession for small business?

Answer:

Yes

Question 4

Will the proposed in-specie contribution of property made to a complying superannuation fund qualify for the CGT cap pursuant to subsection 292-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provided that the contribution is made by the relevant date and is on the approved form?

Answer:

Yes

Question 5

Is it only the amount of the capital gain that you have disregarded under the CGT retirement exemption that is eligible for the exclusion from being a non-concessional contribution under the CGT cap pursuant to subsection 292-100(1) of the ITAA 1997?

Answer:

Yes

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You and your spouse are aged over 55 years and currently working full time.

You purchased land and a building under a contract in the early 90's.

The building was used to conduct a business activity.

The business first operated as a partnership, and then as a company. You and your spouse each hold 50% of the shares in the company.

You have since worked as employees of the company.

No rent has been charged to the company for the use of the rooms.

Business turnover is less than $2 million per year. There are no other business entities that are connected with you.

You state that your net capital gains tax (CGT) assets are under $6 million.

You advised that your assets consisted of your family home and a holiday home. The homes are for personal use only and neither has been used to earn any income.

You have a connected entity, a trust, which does not carry on a business but holds investments.

You intend to dispose of the property and obtain an independent market valuation of the property to establish the amount of the capital gain.

You intend to establish your own self managed superannuation fund (SMSF) and, if the trust deed allows, transfer your ownership of the property to your SMSF as an in-specie contribution.

You intend to claim the 50% CGT discount for individuals and the 50% active asset reduction and the remaining gain will be disregarded under the retirement exemption.

You intend to include the amount of the gain excluded under the retirement exemption (part of the in-specie transfer value) against your lifetime retirement exemption limit.

You intend to include the amount of the gain excluded under the retirement exemption (part of the in-specie transfer value) as a contribution to your superannuation fund to take advantage of the non-concessional contribution exclusion afforded to CGT related payments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-15

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

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

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 152-40

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

Income Tax Assessment Act 1997 Paragraph 152-40(4A)(a)

Income Tax Assessment Act 1997 Subsection 328-125(1)

Income Tax Assessment Act 1997 Subsection 328-125(2)

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

Income Tax Assessment Act 1997 Section 115-10

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Subsection 152-305(1)

Income Tax Assessment Act 1997 Subsection 152-320(1)

Income Tax Assessment Act 1997 Section 285-5

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

Superannuation (Industry) Supervision Act 1993 Subsection 66(2)

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

Income Tax Assessment Act 1997 Subsection 116-30(1)

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

Income Tax Assessment Act 1997 Section 292-90

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(7)

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

Income Tax Assessment Act 1997 Paragraph 292-100(1)(c)

Reasons for decision

Detailed reasoning

You intend to transfer ownership of your rooms (the property) to your superannuation fund and will make a capital gain on the disposal. You wish to establish whether you are eligible to take advantage of the CGT concessions to reduce the capital gain made on the disposal and whether you can make an in-specie contribution of the property to your superannuation fund which will be excluded from your non-concessional contribution limit for the relevant financial year.

50% CGT discount

Section 115-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a discount capital gain can be made by an individual. A 50% discount may be applied to a discount capital gain realised by an individual where the asset that gave rise to the capital gain has been owned for a period of at least 12 months prior to the CGT event (section 115-25 of the ITAA 1997).

In your case, you have held an ownership interest in the asset for longer than 12 months, accordingly you are entitled to apply the 50% discount to the capital gain made on the sale of the property.

Small business CGT concession eligibility and the active asset test

Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are:

(a) a CGT event happens in relation to a CGT asset in an income year.

(b) the event would 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.

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

Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (eg. land or buildings) is transferred to another entity.

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.

However, subsection 152-40(4) explains that an asset whose main use is to derive rent can not be an active asset. Paragraph 152-40(4A)(b) of the ITAA 1997 provides that to determine the main use of an asset, treat any use by your affiliate, or an entity that is connected with you, as your use.

Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if:

a) either entity controls the other entity in a way described in this section; or

b) both entities are controlled in a way described in this section by the same third entity.

Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: if the other entity is a company - beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company.

Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if:

· 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 of ownership, or

· 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 and a half years.

In your case, you intend to transfer your ownership interest in the property to your self managed superannuation fund and the event will result in a capital gain. You do not carry on a business, however the asset is used in a business carried on by a small business entity that is connected with you (subsection 152-10(1A) of the ITAA 1997). Further, the asset in question has been used in the course of carrying on a business by an entity that is connected with you for over half the period of your ownership.

Accordingly, you satisfy all the basic conditions to be eligible for the CGT small business concessions.

As you satisfy all the basic conditions, you automatically qualify for the 50% active asset reduction concession.

Retirement exemption

You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. If you are an individual who chooses the retirement exemption, you do not need to terminate any activity or cease business. This concession allows you to provide for your retirement.

Subsection 152-305(1) of the ITAA 1997 explains that if you are an individual, you can choose to disregard all or part of a capital gain if:

· you satisfy the basic conditions

· you keep a written record of the amount you chose to disregard (the CGT exempt amount), and

· if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA).

You must make the contribution:

· when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or

· when you made the choice to use the retirement exemption if the relevant event is CGT event J2, J5 or J6.

If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA even though you may have been under 55 years old when you received the capital proceeds.

Subsection 152-320(1) of the ITAA 1997 provides that an individual's CGT retirement exemption lifetime limit is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under this Subdivision.

In your case:

· you satisfy the basic conditions

· you have stated that you intend to keep a record of the amount you choose to disregard

· although you are not under 55 years of age, you intend to take advantage of the CGT cap on non-concessional superannuation contributions for capital gains disregarded under the retirement exemption

Accordingly, you are entitled to disregard all or part of the capital gain made on the transfer of ownership of the property.

Therefore, based on the information supplied, you may choose to apply the small business retirement exemption after the small business 50% active asset reduction, that is, to the remaining 50% (or if the CGT discount has also applied, the remaining 25%) of the capital gain after capital losses have been applied.

The consequences of applying the retirement exemption to your capital gain means that your lifetime limit of $500,000 for the retirement exemption will be reduced by the amount excluded under this exemption.

In specie transfer of land

Section 285-5 of the ITAA 1997 provides that a superannuation contribution can be made by transferring property to the superannuation provider (an in-specie contribution) providing the payment is or includes the market value of the property.

Subsection 66(1) of the Superannuation (Industry) Supervision Act 1993 (SISA) provides that subject to subsection (2), a trustee or an investment manager of a regulated superannuation fund must not intentionally acquire an asset from a related party of the fund. Subsection 66(2) of the SISA explains that subsection (1) does not prohibit a trustee or investment manager acquiring an asset from a related party of the fund if the fund is a superannuation fund with fewer than 5 members and the asset is business real property of the related party acquired at market value.

Subsection 66(5) of the SISA states that business real property in relation to an entity is defined as meaning:

· any freehold or leasehold interest of the entity in real property, or

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

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 a beneficiary of a trust estate.

Subsection 116-30(1) of the ITAA 1997 provides that if you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event (the market value is worked out as at the time of the event).

In cases where a taxpayer has directed that the proceeds from the disposal of the property to their superannuation fund be credited to their member account in the superannuation fund, they are taken to have received money or other property if it has been applied for their benefit or as they direct (subsection 103-10(1) of the ITAA 1997).

ATO Interpretative Decision ATO ID 2010/217 discusses the transfer of real property to a superannuation fund to satisfy the payment of the CGT retirement exemption amount. It explains that, for an individual, the transfer of real property to a complying superannuation fund satisfies the contribution required under the retirement exemption as long as the transfer satisfies the relevant provisions of the SISA.

In your case, you intend to obtain an independent market valuation of the property and then transfer the property to your self managed superannuation fund.

Accordingly, as your proposal satisfies the relevant provisions of the SISA, an in-specie transfer of the business real property to your superannuation fund is allowable.

CGT Cap - exclusion from non-concessional contributions cap

Section 292-90 of the ITAA 1997 explains that some contributions are specifically excluded from being non-concessional contributions. One of the contributions that is excluded is a contribution covered under section 292-100 of the ITAA 1997 (certain CGT related payments) to the extent that it does not exceed the CGT cap amount ($1,255,000 for the 2012-13 financial year) when the contribution is made.

The CGT cap is a lifetime limit which is indexed annually. The CGT cap is reduced by the amount of each contribution that a person has elected to be covered by the exemption from the non-concessional contributions cap under section 292-100 of the ITAA 1997.

To qualify for the CGT concession under subsection 292-100(1) of the ITAA 1997 certain conditions must be met. These are:

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(7) of the ITAA 1997 provides that the requirement in this subsection will be 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 subsection 152-305(1) (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(9) of the ITAA 1997 explains 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.

Based on the information provided, you will satisfy the necessary conditions to qualify for the CGT concession under subsection 292-100(1) of the ITAA 1997 as long as you also meet the requirements under subsections 292-100(7) and 292-100(9) of the ITAA 1997.

Therefore, the amount you disregard under the retirement exemption will be excluded from being a non-concessional contribution and will reduce your remaining lifetime CGT cap amount.

It is only the amount disregarded under the retirement exemption that is excluded from being a non-concessional contribution. Any remaining value of the in-specie transfer will be included in your standard non-concessional contribution limit for the relevant financial year/s.