Edited version of your written advice

Authorisation Number: 1012916689897

Date of advice: 27 November 2015

Ruling

Subject: Capital gains tax (CGT) retirement exemption

After applying the 50% CGT discount and 50% active asset reduction concession to the capital gain arising from distributions made to the beneficiaries, is the Trustee eligible to reduce any remaining capital gain made on disposal of the Property under the CGT retirement exemption concession in Division 152-D of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the in-specie contribution of the Property made to a complying superannuation fund qualify for the CGT cap pursuant to subsection 292-100(1) of the ITAA 1997?

Answer

Not applicable.

Question 3

Can the CGT event, the decision to disregard the capital gain and the contribution of the Property occur simultaneously?

Answer

No.

This ruling applies for the following periods:

1 July 2013 - 30 June 2014

1 July 2014 - 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

1. The Trust is a discretionary trust established by a Deed of Settlement and a Trustee was appointed.

2. The Trust Deed provides the Trustee with powers to vest the whole or part of the capital of the Trust prior to the vesting date.

3. The Trustee acquired a property after 20 September 1985 (Property).

4. The Property is rented to a related entity and to third parties.

5. The related entity operates its business on the part of the Property rented from the Trust.

6. During the 20XX income year the Trustee obtained a valuation for the Property and entered into a Deed of Appointment of Property to appoint the Property to two beneficiaries, individuals A and B (First Deed).

7. Pursuant to the First Deed the Trustee vested A% interest in the Property to A and B as tenants-in-common in equal shares.

8. On the same date A and B sold their interests to X, a related entity.

9. Title to A% interest in the Property was transferred from the Trustee to X in June 20XX.

10. X holds A% interest in the Property as bare trustee for Y, a self-managed superannuation fund whose members include A and B.

11. During the 20YY income year the Trustee entered into a Deed of Appointment of Property to appoint B% interest in the Property to A and B as tenants-in-common in equal shares (Second Deed).

12. A and B transferred their B% interests to Y. Title to B% interest was transferred from the Trustee to Y two months after the time the Second Deed was entered into.

13. At no point in time was title to the Property held by A and B. Titles to A% interest and B% interest were transferred directly from the Trustee to X and Y respectively.

14. The Trustee made capital gains on the disposals of the Property. The capital gains were subject to 50% general discount and 50% active asset reduction. The balance of capital gain from the first disposal was claimed by the Trust as retirement exemption for individual A. The balance of capital gain from the second disposal was treated as retirement exemption for individual B.

15. Individual A is over 55 years of age and individual B is under 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 152-50

Income Tax Assessment Act 1997 Section 152-55

Income Tax Assessment Act 1997 Section 152-60

Income Tax Assessment Act 1997 Section 152-65

Income Tax Assessment Act 1997 Section 152-70

Income Tax Assessment Act 1997 Section 152-305

Income Tax Assessment Act 1997 Section 152-310

Income Tax Assessment Act 1997 Section 152-315

Income Tax Assessment Act 1997 Section 152-325

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Section 328-120

Income Tax Assessment Act 1997 Section 328-125

Reasons for decision

Question 1

Summary

The Trustee is not eligible to reduce any remaining capital gain made on disposal of the Property under the CGT retirement exemption concession in Division 152-D of the ITAA 1997.

Detailed reasoning

Section 104-85 of the ITAA 1997 provides that CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 of the ITAA 1997 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it in the trust capital. The time of CGT event E7 is when the asset is disposed of by the trustee to the beneficiary (subsection 104-85(2) of the ITAA 1997).

As objects of a discretionary trust, A and B do not have any income or capital right to the trust fund until the Trustee's discretion has been exercised in their favour.

The Trustee exercised its discretion to vest the Property in their favour by the execution of the First Deed and the Second Deed. Accordingly, A and B were taken to have a capital interest in the Trust at the time the First Deed and the Second Deed were executed.

A disposal of a CGT asset occurs when a change of ownership occurs (subsection 104-10(2) of the ITAA 1997). Although title to the Property was transferred by the Trustee to X as to A% interest and to Y as to B% interest, the transfers were made in satisfaction of A's and B's interests in the trust capital, arising as a result of the Trustee's appointments made under the First and Second Deeds.

The timing of CGT events E7 is, therefore, June 20XX (the time of the First Transfer) in relation to A% interest and October 20XX (the time of the Second Transfer) in relation to B% interest.

Subdivision 152-D - Small business retirement exemption

Under Subdivision 152-D of the ITAA 1997 a small business entity can choose to disregard a capital gain from a CGT event occurring in relation to a CGT asset of the business if the proceeds are used in connection with retirement.

Subsection 152-305(2) of the ITAA 1997 states that a company or trust can choose to disregard an amount of capital gain if:

a. The basic conditions under Subdivision 152-A of the ITAA 1997 are satisfied;

b. The significant individual test under section 152-50 of the ITAA 1997 is satisfied; and

c. The company or trust conditions under section 152-325 of the ITAA 1997 are satisfied.

Based on the facts submitted in the ruling application, the Trust would satisfy the basic conditions and the significant individual test.

Company or trust conditions under section 152-325 of the ITAA 1997:

Where the CGT event does not relate to events J2, J5, or J6, and the company or trust receives an amount of capital proceeds from the CGT event for which it makes a choice under Subdivision 152-D, subsection 152-325(1) requires that the company or trust must make a payment (whether directly or indirectly through one or more interposed entities) to at least one of its CGT concession stakeholders.

Individuals A and B are CGT concession stakeholders under paragraph 152-60(a) of the ITAA 1997as they are both significant individuals of the Trust.

Subsection 104-85(3) of the ITAA 1997 uses the market value of the transferred CGT asset at the time of the disposal as the basis for calculating any capital gain arising from CGT event E7. This market value is, therefore, 'capital proceeds' for the purpose of paragraph 152-325(1)(b) of the ITAA 1997.

'Payment' is defined under the Australian Law Dictionary as "consideration for the supply or on account of something made by a person to another person, reinvested, accumulated, capitalised or otherwise dealt with on behalf of the other person as the other person so directs".

Based on the above legal definition of a 'payment', a company or trust can satisfy its obligation to make a payment by transferring property to a superannuation fund.

However, Subdivision 152-D of the ITAA 1977 requires the following ordering:

1. A capital gain is made from the happening of a CGT event,

2. The time of the event is determined,

3. A choice is made to disregard all or part of the capital gain under subsection 152-305(2),

4. A payment is be made within 7 days of the making of the choice under 3 above (subsection 152-325(4)).

It is, therefore, necessary for a capital gain to arise from a CGT event prior to the choice and the payment.

In the present case, the transfers of the Property in order to satisfy the Trustee's obligations to make a payment are the same transactions that give rise to the capital gains the Trustee is choosing to disregard. Therefore, it is considered that the requirements in Subdivision 152-D are not met. The Trustee is not eligible to reduce any remaining capital gain made on disposal of the Property under the CGT retirement exemption concession in Division 152-D of the ITAA 1997.

Question 2

As the Trustee is not eligible for the CGT retirement exemption under Subdivision 152-D on the transfers of the Property it is not necessary to consider subsection 292-100(1) of the ITAA 1997.

Question 3

Subdivision 152-D of the ITAA 1997 does not contemplate that the CGT event, the decision to disregard the capital gain and the contribution of the Property can occur simultaneously. As stated above, it is necessary for a capital gain to arise from a CGT event prior to the choice and the payment.