Edited version of your written advice

Authorisation Number: 1012979109698

Date of advice: 10 March 2016

Ruling

Subject: Non concessional contributions

Question

For the purposes of section 292-90 of the Income Tax Assessment Act 1997 (ITAA 1997), will the contribution to be made by the Taxpayer to their complying superannuation fund be excluded as a non-concessional contribution covered under section 292-100 of the ITAA 1997?

Advice

Yes, provided the contribution does not exceed the Taxpayer's CGT cap amount.

This advice applies for the following periods:

Year ended 30 June 2015

Year ending 30 June 2016

The arrangement commences on:

1 July 2014

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

The Taxpayer is over 65 years of age.

The Taxpayer's spouse is over 65 years of age.

The Taxpayer and their spouse are partners in a partnership.

The partnership was formed several years ago.

The partnership is not associated with any other entity.

The partnership is a small business entity.

Several years ago, the Partnership purchased Property A. Property A:

a) is X acres in area;

b) Includes a dwelling which the Taxpayer and their spouse occupied as the main residence;

c) Includes vacant land which the Partnership has used to carry on a business of primary production several years ago.

 Several years ago, the Taxpayer's spouse purchased Property B. Property B:

a) is Y acres in area;

b) includes two dwellings which have been leased to unrelated residential tenants; and

c) includes vacant land which the Partnership has used to carry on a business of primary production several years ago.

The Taxpayer and their spouse have worked fulltime  in the primary production business (up to 40 hours per week) carried on by the Partnership on Property A several years ago and on Property B several years ago.

During the 2014-15 income year, the Partnership received notice that a Minister under an Act (the Minister) will be compulsory acquiring Property A.

The Partnership decided that once Property A was compulsory acquired by the Minister, the primary production business will be substantially reduced in size and scale. The Taxpayer's spouse will continue to work in the primary production business for about 20 hours per week and the Taxpayer would substantially reduce the hours that they work , only supporting their spouse during peak periods (2 to 3 months per year) for about 10 hours a week.

Due to the Taxpayer's spouse's age, they will likely retire in the next few years and the Partnership will cease trading.

During the 2014-15 income year, Property A was compulsory acquired by the Minister.

Property A was acquired for an amount.

The disposal of the property resulted in a capital gain made by partnership.

The primary production business has since substantially reduced in size and scale and is only carried on from Property B. The Taxpayer's spouse has continued to work in the primary production business (for about 20 hours per week) and the Taxpayer has substantially reduced the hours that they work and intends to only support their spouse during peak periods in the primary production business (2 to 3 months per year) for about 10 hours a week.

The Taxpayer intends to contribute capital proceeds from the disposal of the Property A to their complying superannuation fund (the Fund).

The Taxpayer wishes to make contributions to their complying superannuation fund:

a) Up to their CGT cap amount for the 2016 year;

b) Up to their non-concessional cap contribution amount in the 2016 and future years;

c) Up to their concessional contribution cap amount in the 2016 and future years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Paragraph 108-5(1)(a)

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 152-105

Income Tax Assessment Act 1997 Section 292-90

Income Tax Assessment Act 1997 Section 292-100

Income Tax Assessment Act 1997 Section 292-105

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.03(1)

Superannuation Industry (Supervision) Regulations 1994 Subregulation 7.01(3)

Superannuation Industry (Supervision) Regulations 1994 Regulation 7.04

Taxation Administration Act 1953 Schedule 1 Section 357-55

Taxation Administration Act 1953 Schedule 1 Section 359-5

Reasons for decision

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.

Summary

For the purposes of section 292-90 of the Income Tax Assessment Act 1997 (ITAA 1997), the contribution to be made by the Taxpayer to their complying superannuation fund will not be a non-concessional contribution covered under section 292-100 of the ITAA 1997 provided that the contribution does not exceed their CGT cap amount

Detailed reasoning

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 under section 292-100(2) of the ITAA 1997 when it is made.

The requirements under subsection 292-100(2) must be met before the contributions are excluded from the definition of non-concessional contributions under subparagraph 292-90(2)(c)(iii) of the ITAA 1997 of the ITAA 1997.

A requirement under paragraph 292-100(2)(a) is that 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 of the TAA 1997.

Disregarding any capital gain arising from the disposal of property under section 152-105 of the ITAA 1997

Based on the information the Taxpayer has provided, they meet the basic conditions for the small business capital gains tax (CGT) concessions. The Taxpayer also meets the additional conditions for the small business 15 year exemption as they owned the property for more than 15 years and its disposal was in connection with their retirement. Therefore, the Taxpayer would be able to disregard any capital gain arising from the disposal of the property under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) if the property had been a post-CGT asset.

Small Business Concessions

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 a 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.

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

Basic condition a)

This condition requires a CGT event to happen in relation to your CGT asset in an income year. The asset in question is real estate (the property). A CGT asset includes any kind of property (paragraph 108-5(1)(a) of the ITAA 1997) and therefore the property is a CGT asset. The relevant CGT event will be the disposal of the property, which will cause CGT event A1 to happen (section 104-10 of the ITAA 1997).

As the CGT event has happened in relation to a CGT asset of the taxpayer in the income year, this condition is satisfied.

Basic condition b)

The disposal of Property A, that is, the CGT event, resulted in a capital gain, and therefore this condition is satisfied.

Basic condition c) 

The Taxpayer is a partner in a partnership and Property A is an asset of the partnership which is a small business entity. Therefore this condition is satisfied.

Basic condition d) 

This condition requires that the active asset test in section 152-35 of the ITAA 1997 is satisfied. The active asset test requires the CGT asset that gave rise to the capital gain to be an active asset for at least half the time of ownership or for 7 and 1/2 years if the asset is owned for more than 15 years.

Active Asset

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997, it must firstly satisfy one of the positive tests in subsection 152-40(1) of the ITAA 1997, and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under subsection 152-40(1) of the ITAA 1997 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.

In this case, Property A was purchased several years ago and disposed of during the 2014-15 income year, triggering CGT event A1. In considering whether Property A was an active asset of the partnership we need to consider the use of the property over the period of time the property was held.

Property A was used to carry on a business of primary production and as such is an active asset unless excluded under subsection 152-40(4) of the ITAA 1997. In this case none of the exclusions apply to the property.

The property was an active asset since its purchase in 1970 - that is for more than 7 1/2 years (paragraph 152-35(1)(b) of the ITAA 1997), therefore basic condition (d) is satisfied.

Additional Conditions to be eligible for the small business 15 year exemption

In addition to the basic conditions, to access the small business 15 year exemption under section 152-105 of the ITAA 1997, you must also satisfy another two conditions.

Firstly, you must have owned the active asset for a period of at least 15 years. The Taxpayer owned the property several years ago until they disposed of it in 2015, a period of more than 15 years. The Taxpayer therefore satisfies this condition.

Secondly, you must be either over 55 years of age and the CGT event happens in connection with your retirement or permanently incapacitated at the time of the CGT event.

At the time of the CGT event the Taxpayer was over 55 years of age. 

The Advanced guide to capital gains tax concessions for small business states that whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce. 

The Taxpayer previously worked full time in the partnership and after the disposal of Property A hey have significantly reduced the number of hours they work from 40 hours a week to 10 hours per week during a 2 to 3 month period of the year to support their spouse at Property B. It is accepted that the disposal of the property happened in connection with the Taxpayer's retirement.

Based on the information the Taxpayer has provided, they meet the basic conditions for the small business capital gains tax (CGT) concessions. The Taxpayer also meets the additional conditions for the small business 15 year exemption as they owned the property for more than 15 years and its disposal was in connection with their retirement. Therefore, the Taxpayer would be able to disregard any capital gain arising from the disposal of the property under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) if the property had been a post-CGT asset.

Based on the facts noted above, the Taxpayer satisfies all the conditions and therefore would be able to disregard any capital gain arising from the disposal of Property A under section 152-105 of the ITAA 1997 if the property had been a post-CGT asset.

The taxpayer must also meet the requirements under subsection 292-100(2)(b) of the ITAA 1997 before the contributions are excluded from the definition of non-concessional contributions under subparagraph 292-90(2)(c)(iii) of the ITAA 1997 which states:

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 292-105(2) of the ITAA 1997 also 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 2015-16 financial year.

Application of the above provisions to the Taxpayer's circumstances

In the 2015-16 financial year, the Taxpayer can make a contribution from the proceeds of the sale Property A of up to $1,395,000 which will not count towards their 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.

Further issues for you to consider

Gainfully employed

A regulated superannuation fund may accept contributions only in accordance with regulation 7.04 of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

In accordance with subregulation 7.04(1) of the SISR, where a person is age 65 and over but under 75, a regulated superannuation fund may accept member contributions made by the member if the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made, and the contributions are received on or before the 28th day after the end of the month in which the member turns 75.

In this case, the Taxpayer is over 65 and under 75 years old. Therefore, the Fund Trustee may accept the Taxpayer's contribution only if the Taxpayer is 'gainfully employed' on at least a part-time basis during the financial year in which the contribution is made.

Subregulation 1.03(1) of the SISR states that 'gainfully employed' means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. Gain or reward is the receipt of remuneration such as wages, business income, bonuses and commissions, in return for personal exertion in these activities.

In accordance with subregulation 7.01(3) of the SISR, a person is gainfully employed on a part-time basis during a financial year if the person was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that financial year.

It is stated that the Taxpayer and their spouse have worked fulltime  in the primary production business (up to 40 hours per week) carried on by the Partnership on Property A for several years0 and on Property B for several years. As such, income received from the Partnership activities is considered to be gain or reward in return for the Taxpayer's personal exertion in these activities.

You have also advised that during the 2015-16 income year the Taxpayer has substantially reduced the hours that they work and intends to only support their spouse during peak periods in the primary production business (2 to 3 months per year) for about 10 hours a week. That is the Taxpayer is engaged in the primary production business for at least 40 hours on a period of not more than 30 consecutive days during the 2015-16 income year. Therefore, the Taxpayer is considered to be gainfully employment on at least a part-time basis during the 2015-16 income year.

As a result, the Fund Trustee may accept member contributions made by the Taxpayer in 2015-16 financial year.