Edited version of your written advice

Authorisation Number: 1013008906784

Date of advice: 6 May 2016

Ruling

Subject: Capital gains tax - In-specie transfer to Superannuation Fund

Issue 1

Question 1

Is the property an active asset for the purposes of section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Issue 2

Question 1

Will an in-specie contribution of real property made to a complying superannuation fund equal to all or part of each taxpayers proceeds from the capital gains tax (CGT) event for which they can disregard a capital gain under section 152-105 of the ITAA 1997 satisfy the requirements to be a contribution covered under paragraph 292-90(2)(c)(iii) of the ITAA 1997 to the extent that it does not exceed each taxpayers CGT cap amount when it is made?

Answer

No.

Question 2

Will an in-specie contribution of real property made to a complying superannuation fund equal to all or part of each taxpayers capital gain from a CGT event disregarded under subsection 152-305(1) of the ITAA 1997 satisfy the requirements to be a contribution covered under subsection 292-90(2)(c)(iii) of the ITAA 1997 to the extent it does not exceed each taxpayer's CGT cap amount when it is made?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 2016

The scheme commences on

1 July 2015

Person A and Person B are the owners of the property.

Each individual is aged over 55.

The property is owned in the following percentages:

Person A and Person B each own 50% of the issued shares in the company.

The property has been used in the short stay beachside accommodation business carried on by the company (a connected entity) for over 15 years.

There are a number of one bedroom cottages that are available for short term accommodation.

Each cottage comes with the following:

• One bedroom with a queen size bed;

• One sitting room containing a lounge, dining table and 2 chairs along with a TV and DVD player;

• Bathroom with either corner spa /overhead shower or large glass shower;

• A small kitchen with appliances and tea and coffee;

• Ceiling fans for cooling in summer and electric log fire for the cooler nights; and

• All cottages sharing a gas BBQ.

The services provided by the company include:

• The provision of washing and linen and towels;

• Cleaning of the cottages;

• Provisions and re-stocking of toiletries such as shampoo, conditioner, bath gel and tissues;

• General and preventative maintenance to buildings, contents and the grounds;

• Provision and re-stocking of tea, coffee and milk;

• Maintenance of the shared amenities such as guest laundry, BBQ area and courtyard.

The company also:

• Directs guests to facilities on site and to local attractions as well as organising charter sailing and eco cruises;

• Books restaurant reservations;

• Provides massage/beauty treatments in the room;

• Delivers hire equipment including sailboard, bike and SUP boards; and

• Picks up and returns guests to public transport where required.

The guests are provided with permission to occupy the property for holiday purposes and there is no intention to create a residential tenancy agreement.

Guest stays at the cottage range from 1 night to 2 weeks with the average stay being 3 nights.

Person A and Person B will make an in-specie contribution of their respective interests in the property to their self-managed superannuation fund (SMSF).

All the basic conditions to access the small business CGT concessions are satisfied, however, you are seeking clarification as to whether the property is an active asset.

All the conditions to access the small business 15 year exemption and the small business retirement exemption are satisfied.

Person A and Person B will make an in-specie contribution of their respective interest in the property to their complying SMSF.

An unrelated third party will lease the property so that Person A and Person B can retire.

Relevant legislative provisions

Subdivision 152-D of the Income Tax Assessment Act 1997

Section 292-100 of the Income Tax Assessment Act 1997

Section 292-90 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Question 1

Summary

The property is an active asset within the meaning of section 152-40 of the ITAA 1997.

Detailed reasoning

Active Asset

For the sale of the property to qualify for any of the small business CGT concessions, the CGT asset must also satisfy the active asset test in section 152-35 of the ITAA 1997.

In this case, the active asset test is satisfied if:

• You have owned the property for more than 15 years and the asset was an active asset of yours for at least 7.5 years during the test period.

The test period:

• begins when you acquired the asset;

• ends at the earlier of:

• the CGT event, and

• when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the Commissioner allows).

The meaning of an active asset is given in subsection 152-40(1) of the ITAA 1997. Paragraph 152-40(1)(a) states that a CGT asset is an active asset at a given time if at that time, you own it and:

• use it in the course of carrying on a business, or

• hold it ready for use in the course of carrying on a business by:

i. you; or

ii. your affiliate; or

iii. another entity that is connected with you

Subsection 152-40(4) of the ITAA 1997 lists a number of exceptions where CGT assets cannot be active assets. Relevantly, paragraph 152-40(4)(e) of the ITAA 1997 specifically excludes assets whose main use is to derive rent.

Accordingly, for the property in this case to be considered an active asset it must satisfy one of the above conditions and also not fall within the exceptions within subsection 152-40(4) of the ITAA 1997.

Taxation Determination (TD) 2006/78 examines the meaning of rent and describes it as follows:

• the amount payable by a tenant to a landlord for the use of the leased premises;

• a tenants periodical payment to an owner or landlord for the use of land or premises;

• recompense paid by the tenant to the landlord for the exclusive possession or corporeal hereditaments...the modern conception of rent is a payment which a tenant is bound by contract to make his landlord for the use of the property let.

Also relevant to the determination of whether the occupier is a tenant or only has a licence to occupy in addition to whether the occupier has a right to exclusive possession is the degree of control retained by the owner and the extent of any services provided by the owner such as room cleaning, provision of meals, supply of linen and shared amenities.

Application to your situation

In your case the services provided by Person A and Person B include:

• the provision and washing of linen and towels;

• the cleaning of the cottages;

• provision of toiletries such as shampoo, conditioner, bath gel and tissues;

• general and preventative maintenance;

• provision of tea, coffee and milk; and

• maintenance of shared facilities such as guest laundry, barbeque area and courtyard.

• General reception duties, such as directing guest to local attractions, booking restaurant reservations, pick-ups and returns guests to public transport and booking/organising massage treatments in the room.

The occupier's stays are short term, ranging between overnight and 2 week stays, with the average stay being 3 nights.

The facts indicate that the short term accommodation operated at the property is similar to that of a motel, and thus that the relationship between Person A and Person B and the occupiers of their cottages is not that of a landlord/tenant under a lease agreement. Accordingly, the income derived is not rent and therefore the paragraph 152-40(4)(e) of the ITAA 1997 does not apply.

Issue 2

Question 1 and 2

Summary

Where an individual aged over 55 who qualifies for the small business capital gains tax (CGT) concessions makes an in-specie contribution of their business real property to their self-managed super fund (SMSF) the individual can reduce or disregard their capital gain made in respect of that property in accordance with the small business CGT concession they have claimed.

However, the contribution of the business real property will be treated as a non-concessional contribution.

The market value substitution rule means the capital proceeds from the in-specie transfer will be the market value of the property at the time of the transfer.  The market value is also the contribution amount to the SMSF.

Detailed reasoning

Can a Transfer of Property be a Contribution?

The term 'contribution' is not defined in the ITAA 1997. Taxation Ruling TR 2010/1 sets out the Commissioner's view on the ordinary meaning of contribution, how a contribution can be made and when contributions are made for the purposes of the ITAA 1997. Under section 285-5 of the ITAA 1997, a transfer of property can be a contribution. Such a contribution is called an in-specie contribution.

Paragraph 20 of TR 2010/1 states:

A contribution by way of a transfer of an asset will be made when the superannuation provider obtains ownership of the asset from the contributor. The Commissioner accepts the superannuation provider obtains ownership of an asset when beneficial ownership of the asset is acquired and that beneficial ownership can be acquired earlier than legal ownership.

Contributions made to a fund for or by a person may be included in the person's concessional contributions or non-concessional contributions. There are also situations where the contributions may not be included in the person's concessional contributions or non-concessional contributions.

Non-Concessional Contributions

Pursuant to subsection 292-90(1) of the ITAA 1997, the amount of non-concessional contributions for a financial year is the sum of each contribution covered by subsection 292-90(2) of the ITAA 1997; each amount covered by subsection 292-90(4) of the ITAA 1997; and the amount of an individual taxpayer's excess concessional contributions (if any) for the financial year.

Will the Contribution be a Non-Concessional Contribution?

The contribution will not be included in the assessable income of the SMSF pursuant to subsection 295-190(1) of the ITAA 1997. As such, it will be treated as a non-concessional contribution pursuant to paragraph 292-90(2)(b) of the ITAA 1997 unless it falls into one of the subparagraphs of paragraph 292-90(2)(c) of the ITAA 1997.

Relevantly, subparagraph 292-90(2)(c)(iii) of the ITAA 1997 refers to a contribution covered under section 292-100 (certain CGT-related payments), to the extent that it does not exceed a taxpayer's CGT cap amount when it is made.

As paragraph 292-100(1)(b) refers to meeting the requirements in either subsection 292-100(2), 292-100(4), 292-100(7) or 292-100(8) of the ITAA 1997, it is necessary to consider which of those subsections applies in the circumstances.

Given that Person A and Person B intend to disregard the capital gain made as a result of the disposal of the property (the CGT event) under section 152-105 or section 152-305 of the ITAA 1997, subsections 292-100(2) and 292-100(7) of the ITAA 1997 are the appropriate subsections to consider.

Paragraph 292-100(2)(b) of the ITAA 1997 and 292-100(7)(b) of the ITAA 1997 both state that the contribution to the superannuation fund must be made:

a) or the day you are required to lodge your income tax return for the income year in which the CGT event happened; or

b) on or before 30 days after the day you receive the capital proceeds from the CGT event .

It is clear that these paragraphs contemplate the CGT event and the payment to SMSF happening at separate times.

Application to your situation

Person A and Person B will not be able to exclude the contribution from being a non-concessional contribution pursuant to section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997). That is, the contribution cannot be a contribution under the CGT cap. This is because, section 292-100 of the ITAA 1997 makes it clear that a contribution made to the SMSF is made after the CGT event happened and/or the capital proceeds are received.

The legislation does not contemplate that the CGT event, choice and contribution of the CGT exempt amount can happen simultaneously. Rather, each of the relevant steps must happen sequentially, therefore, that initial transfer of the property cannot also be the final contribution required under section 292-100. Person A and Person B will not be able to exclude the contribution from being a non-concessional contribution under paragraph 292-90(2)(c) of the ITAA 1997.

The contribution of the property, therefore, will be a non-concessional contribution which will occur at the market value of the individual's interest in the property at the time of the transfer.

ATO view documents

Tax Determination (TD) 2006/78

Taxation Ruling (TR) 2010/1

ATO ID 2003/503

ATO ID 2010/217