Edited version of your written advice

Authorisation Number: 1012503008540

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This edited version has been found to be misleading or incorrect. It does not represent the ATO's view of the relevant law.

This notice must not be taken to imply anything about:

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Ruling

Subject: Capital gains tax concessions for small business

Question 1

Do you satisfy the basic conditions necessary to be eligible for the capital gains tax (CGT) concessions for small business?

Answer:

Yes

Retirement exemption

Question 2

Are you eligible to disregard any remaining capital gain made on disposal/transfer of the property under the CGT retirement exemption concession for small business?

Answer:

Yes

Question 3

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 4

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

15-year exemption

Question 5

Are you eligible to disregard any capital gain made on disposal/transfer of the property under the CGT 15-year exemption concession for small business if you choose not to retire?

Answer:

No

Question 6

Are you eligible to disregard any capital gain made on disposal/transfer of the property under the CGT 15-year exemption concession for small business, if you choose to retire?

Answer:

Yes

Question 7

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 ITAA 1997 provided that the contribution is made by the relevant date and is on the approved form?

Answer:

Yes

Question 8

Is it the amount of the capital proceeds from the CGT event, for which you have disregarded a capital gain under the CGT 15-year 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, provided the amount does not exceed the CGT cap for the relevant year, the contribution is made by the relevant date and is on the approved form?

Answer:

Yes

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You hold 50% of the shares in Company A, which runs a business.

The business has continuously operated for over 20 years and continues to operate.

You work full time in the business.

The turnover for the business is under $2 million. You have no other affiliates or entities that are ‘connected with' you who operate a business.

You purchased a building in the 19XX's to use exclusively to operate the business. You state that the building has not been used for any other purpose or rented to any other person. The purchase price was $XX and the current market value is $XX.

You are over 55 years of age.

You state that you do not want to retire for a few more years.

You state that you intend to transfer ownership of your building to your self managed superannuation fund (SMSF).

Relevant legislative provisions

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 104-10

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Section 152-305

Income Tax Assessment Act 1997 Section 152-320

Income Tax Assessment Act 1997 Section 285-5

Superannuation (Industry) Supervision Act 1993 Section 66

Income Tax Assessment Act 1997 Section 116-30

Income Tax Assessment Act 1997 Section 292-90

Income Tax Assessment Act 1997 Section 292-100

Reasons for decision

Detailed reasoning

Small business CGT concession eligibility and the active asset test

Section 152-10 of the Income Tax Assessment Act 1997 (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 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 property 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 has been used in the course of carrying on a business by an entity ‘connected with' you for over 20 years.

Accordingly, you satisfy all the basic conditions necessary 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.

Small business 15-year exemption

The small business 15-year exemption takes priority over the other small business concessions and the CGT discount. If the small business 15-year exemption applies, you entirely disregard the capital gain so there is no need to apply any further concessions. Further, you do not reduce the capital gain by any capital losses before you apply the 15-year exemption concession.

Subsection 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied:

(a) you satisfy the basic conditions

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

(c) you are either:

i. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

ii. permanently incapacitated at the time of the CGT event.

In your case:

● you satisfy the basic conditions

● you have owned the asset for over 15 years

● you are aged over 55

However, you have advised that you do not wish to retire nor make a significant reduction in the number of hours you work.

Accordingly, you do not satisfy all the conditions necessary to be eligible for the small business 15-year exemption concession.

Small business 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 limit at a time 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.

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 your case:

● you satisfy the basic conditions

● you are over 55 years of age

Therefore, provided you keep a record of the amount you wish to disregard and make the contribution to your superannuation fund by the time detailed above, you will satisfy the necessary conditions to be eligible for the small business retirement exemption.

In specie transfer of business real property

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.

While the CGT retirement exemption concession is a separate concession to the CGT 15-year exemption concession, it is considered that the Commissioner's view on the transfer of real property for the retirement exemption will also apply to the 15-year exemption.

In your case:

● it has already been established that the property you wish to transfer to your SMSF is business real property, and

● you have stated that the property will be transferred at market value

Therefore, the property can be transferred to your SMSF if you wish to do so.

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(2) of the ITAA 1997 (about the 15 year exemption) 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 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(7) of the ITAA 1997 (about the retirement exemption) provides that the requirement in this subsection will be met if:

c) the contribution is equal to all or part of the capital gain from a CGT event that you disregarded under subsection 152-305(1); and,

d) 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.

Application to the 15-year exemption

Provided you satisfy the necessary conditions to qualify for the CGT concession under subsections 292-100(1), 292-100(2) and 292-100(9) of the ITAA 1997, the amount of capital proceeds under the 15-year exemption will be excluded from being a non-concessional contribution (up to the CGT cap amount for the relevant year) and will reduce your remaining lifetime CGT cap amount.

Therefore, provided the market value of the property is under the CGT cap amount for the relevant year, the total value of the property will be excluded from being a non-concessional contribution in your superannuation fund.

Application to the retirement exemption

Provided you satisfy the necessary conditions to qualify for the CGT concession under subsections 292-100(1), 292-100(7) and 292-100(9) of the ITAA 1997, the amount of the capital gain you disregard under the retirement exemption will be excluded from being a non-concessional contribution and will reduce your remaining lifetime CGT cap amount.

Importantly, it is only the amount of the capital gain disregarded under the retirement exemption that is excluded from being a non-concessional contribution. Any remaining value of the in-specie transfer, over and above the amount of capital gain disregarded under the retirement exemption, will be included in your standard non-concessional contribution limit for the relevant financial year. This may affect, depending on your personal circumstances, whether you are subject to excess contributions tax.