Edited version of your written advice

Authorisation Number: 1012918643539

Date of advice: 1 December 2015

Ruling

Subject: Small businesss capital gains tax concessions

Question 1

Would you qualify for the small business capital gains tax (CGT) concessions contained in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) had the property sold been a post-CGT asset?

Answer

Yes.

Question 2

Will the contribution you make to your complying superannuation fund, in respect of the sale of the property be a non-concessional contribution for the 20ZZ-AA income year under section 292-90 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2015

Year ending 30 June 2016

The scheme commences on

1 July 2014

Relevant facts and circumstances

You operated a business for over 30 years until 20XX when the business was sold.

The business operated as a small business entity.

You purchased the business premises ('the property') over 30 years ago and it remained the business premises until 20XX.

The property was rented from 20XX until 20YY.

A contract to sell the property was entered into on during the 20YY-ZZ financial year with settlement occurring in the 20ZZ-AA financial year.

You commenced a primary production business after selling the business.

The primary production business operated as a small business entity.

You have decided to cease the primary production business during the 20ZZ-AA financial year and retire.

You are over 55 years of age.

Proceeds from the sale of the property will be contributed to a complying superannuation fund during the 20ZZ-AA financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-10(5)

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

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

Income Tax Assessment Act 1997 Section 292-90

Income Tax Assessment Act 1997 Section 292-100

Income Tax Assessment Act 1997 Section 292-105

Taxation Administration Act 1953 Schedule 1 Section 357-55

Taxation Administration Act 1953 Schedule 1 Section 359-5

Reasons for decision

Question 1

Detailed reasoning

Generally, any capital gain made on the disposal of an asset that was acquired prior to 20 September 1985 is disregarded under paragraph 104-10(5)(a) of the ITAA 1997. However, some sections of the legislation operate to treat a pre-CGT asset as a post-CGT asset for the purposes of determining eligibility for the operation of that part of the legislation.

Small business CGT concessions - basic conditions

The basic conditions for the small business CGT concessions are outlined in subsection 152-10(1) of the ITAA 1997:

(a) a CGT event happens in relation to an asset that you own

(b) the event would have resulted in a gain

(c) the CGT asset satisfies the active asset test

(d) 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

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

(iv) you do not carry on a business but your CGT asset is used in a business carried on by a small business entity that is your affiliate or an entity connected to you.

CGT event A1 occurred when you entered into the contract to sell the property and will result in a gain. It is accepted that both the business and the primary production business were small business entities.

Active asset test

The active asset test is contained in section 152-35 of the ITAA 1997. The active asset test is satisfied 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 test period detailed below, 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 7.5 years during the test period.

The test period is from when the asset is acquired until the CGT event.

A CGT asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you.

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 cannot be an active asset unless the main use for deriving rent was only temporary.

The test period for the property is more than 15 years calculated from its purchase to entering the sale contract. During this period it was used in the business for over 30 years and to derive rent for less than 7 years. It is considered that the period in which the property was used to derive rent is minor compared to the total test period. Therefore the property is considered to be an active asset for the purposes of the active asset test.

The basic conditions for the small business CGT concessions have been met.

Small business 15 year exemption

You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you:

• satisfy the basic conditions for the small business CGT concessions

• continuously owned the CGT asset for the 15 year period ending before the CGT event happened, and

• when the CGT event happened:

• you were 55 years or older and the event happened in connection with your retirement, or

• you were permanently incapacitated.

A CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement.

You continuously owned the property for 15 years prior to entering into the sale contract and were aged 55 years or older at that time. It is considered that the selling of the property and the ceasing of the primary production business are related stages which have occurred in connection with your retirement.

If the property had been a post-CGT asset you would be able to disregard any capital resulting from the sale of the property as the conditions for the 15 year exemption small business CGT concession contained within Division 152 of the ITAA 1997 have been met.

Question 2

Detailed reasoning

Private Rulings

In your application, you asked for a private ruling concerning legislative provisions dealing with whether a contribution to a complying superannuation fund will be a non-concessional contribution under section 292-90 of the ITAA 1997 for the purposes of the excess non-concessional contributions tax.

Section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that the Commissioner may, on application, make a written ruling on the way in which a relevant provision applies, or would apply, to an entity in relation to a specified scheme.

A provision of an Act or regulation of which the Commissioner has the general power of administration is relevant for ruling only if it is about any of the matters set out in section 357-55 of Schedule 1 to the TAA.

None of the paragraphs in section 357-55 of Schedule 1 to the TAA allow a private ruling to be given in relation to excess non-concessional contributions tax. Paragraph 357-55(a) of Schedule 1 to the TAA allows a ruling to be given on 'tax'. However, according to section 995-1 of the ITAA 1997 'tax' means:

a) income tax imposed by the Income Tax Act 1986 as assessed under this Act; or

b) income tax imposed as such by any other Act, as assessed under this Act.

Excess non-concessional contributions tax is assessed under the Superannuation (Excess Non-Concessional Contributions Tax) Act 2007 (S(ENCCT)A) and not the ITAA 1997, therefore, the Commissioner cannot make a written ruling under Division 359 of the TAA concerning non-concessional contributions.

However, in the interests of sound administration, the ATO's practice has been to provide administratively binding advice (ABA) in a limited range of circumstances in response to a taxpayer's request for advice. One such circumstance is advice on superannuation, excise or any other law administered by the Commissioner under which the extent of liability is worked out.

Accordingly, the following ABA is given in response to your application concerning non-concessional contributions.

Please refer to Practice Statement Law Administration PS LA 2008/3 Provision of advice and guidance by the Australian Taxation Office (PS LA 2008/3) which provides an explanation on providing of ABA by the Commissioner. Paragraph 199 of PS LA 2008/3 states:

Administratively binding advice is not legally binding on the Commissioner. When the time comes to assess liability to tax, the law as it then exists must be applied to the facts as established at that time. However, the ATO will stand by what is said in such advice and will not depart from it unless:

• there have been legislative changes since the advice was given

• a tribunal or court decision has affected our interpretation of the law since the advice was given, or

• for other reasons, the advice is no longer considered appropriate. For example, if the advice has been exploited in an abusive and unintended way.

Non concessional contributions

Non-concessional contributions made to a complying superannuation fund are subject to an annual cap. In accordance with section 292-80 of the ITAA 1997, non-concessional contributions in excess of the relevant cap amount for the financial year, are subject to excess non-concessional contributions tax at the rate of 47% (section 5 the S(ENCCT)A).

Subsection 292-90(1) of the ITAA 1997 sets out the amount of a taxpayer's non-concessional contributions for a financial year as the sum of:

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

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

(c) the amount of the taxpayer's excess concessional contributions (if any) for the financial year.

Under subsection 292-90(2) of the ITAA 1997, certain contributions are excluded from the definition of non-concessional contributions for a financial year. Relevantly, subparagraph 292-90(2)(c)(iii) of the ITAA 1997 excludes a contribution covered under section 292-100 of the ITAA 1997 to the extent that it does not exceed the taxpayer's CGT cap amount when it is made.

Subsection 292-105(2) of the ITAA 1997 provides that where a taxpayer makes a choice under section 292-100 of the ITAA 1997 for contributions to come under their CGT cap, the CGT cap amount is reduced just after the time the contribution is made. If the contribution is less than the CGT cap amount at that time, the CGT cap amount is reduced by the contribution. It is reduced to nil if the contribution equals the CGT cap amount.

The CGT cap amount, which is indexed at the start of each financial year after 2007-08 financial year (subsections 292-105(3) and (4) of the ITAA 1997) is $1,395,000 in the 20ZZ-AA financial year.

Application of the above provisions to the Taxpayer's circumstances

In the 20ZZ-AA financial year, you can make a contribution from the proceeds of the sale of the property of up to $1,395,000 which will not count towards your non-concessional contributions cap for that financial year if:

• the contribution is made to a complying superannuation fund;

• the contribution is made within the timeframe specified in paragraph 292-100(2)(b) of the ITAA 1997;

• the choice to make the contribution is made in the approved form under subsection 292-100(9) of the ITAA 1997;

• the form is given to the superannuation fund on or before the contribution is made; and

• the contribution from the sale of the property does not exceed $1,395,000.