Edited version of your written advice

Authorisation Number: 1013021531190

Date of advice: 19 May 2016

Ruling

Subject: Transfer of commercial property to self-managed superannuation fund - Small Business capital gains tax (CGT) Concessions

Question 1

Can you utilise the capital gains tax (CGT) small business retirement exemption pursuant to section 152-305 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the capital gain from the in-specie transfer of your aggregated property to your self-managed superannuation fund (SMSF)?

Answer

Yes.

Question 2

Will any part of the proposed in-specie contribution to the SMSF treated as being under the CGT cap amount?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 2016

The scheme commences on

1 July 19XX.

Relevant facts and circumstances

You own a property comprised of lots (the aggregate property).

You are over 55 years of age.

The SMSF is a regulated & complying fund. You, and your spouse, are the trustees & members.

The aggregate property has been modified to appear as one big retail shop.

You lease the aggregate property to a retail business (of which your spouse is a partner in partnership with one other unrelated individual.

You will transfer the aggregate property to the SMSF pursuant to the Market Value Assessment obtained from a Certified Practising Valuer. The $XXX,000 sale price will be apportioned to each lot on a pro-rata square metre basis.

The total gross capital gain will be $XXX,000.

You have previously used a small amount of your CGT small business retirement exemption lifetime limit of $500,000.

The net value of your CGT assets plus that of any entities connected with you (of which there aren't any) plus that of any affiliates of the taxpayer (being your spouse), does not exceed the maximum $6,000,000 allowable.

You have owned the aggregate property for all of the respective ownership periods, and the asset has been used or held ready for use in a business carried on (whether alone or in partnership) by the your affiliate (being your spouse in their business).

You have met the basic conditions of subdivision 152-10 of the ITAA 1997 in respect of the small business CGT concessions.

You will make a written election in respect of adopting the CGT small business exemption, at least by the day of lodgement of their 2016 income tax return (in accordance with section 103-25).

The SMSF will adopt the Market Value Assessment amount in accordance with the market value substitution rule, by way of an in specie contribution from you.

Relevant legislative provisions

Section 103-25 of the Income Tax Assessment Act 1997

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

Question 1

Summary

You are able to utilise the small business CGT retirement exemption in section 152-305 of the ITAA 1997 in relation to the capital gain arising from the in-specie transfer of a commercial property to their SMSF

Detailed reasoning

The small business retirement exemption under Subdivision 152-D of Part 3-3 of the ITAA 1997 allows individuals the choice to disregard up to $500,000 in qualifying capital gains. An individual may choose to disregard all or part of a capital gain under the small business retirement exemption by satisfying the conditions outlined below:

1. A CGT event happens in relation to a CGT asset in an income year;

2. The event would have, apart from Division 152 of the ITAA 1997, resulted in a capital gain;

3. The basic conditions in Subdivision 152-A of Part 3-3 of the ITAA 1997 are met; and

4. A choice is made to disregard all or part of the capital gain under subsection 152-305(1) of the ITAA 1997. This disregarded amount is known as the asset's 'CGT exempt amount'.

If the individual is aged 55 or older just before choosing the retirement exemption, they are not required to pay any amount into a superannuation fund.

Application to your circumstances

As you are over 55 and meet the basic conditions for the small business retirement exemption, you are able to choose all or part of your capital gain from the in-specie transfer to the SMSF to disregard, so long as you do not exceed your CGT retirement exemption limit, which is currently $500,000 less the amount you have already utilised. This is because there is no requirement for an individual aged 55 or older to make a contribution to the superannuation fund in order to access the concession.

Question 2

Summary

You will not be able to exclude the contribution of the property to the SMSF from being a non-concessional contribution pursuant to section 292-100 of the ITAA 1997. That is, the contribution cannot be a contribution under the CGT cap.

The market value substitution rule in section 116-30 of the ITAA 1997 will deem you to have received capital proceeds equal to the market value of the in-specie transfer of the property to the SMSF. 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 you intend to disregard the capital gain made as a result of the disposal of the property (the CGT event) under section 152-305 of the ITAA 1997, subsection 292-100(7) of the ITAA 1997 is the appropriate subsection to consider.

Paragraph 292-100(7)(b) of the ITAA 1997 states that the contribution to the superannuation fund must be made on or before the later of the following days:

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) 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

You 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. 

ATO view documents

Tax Determination (TD) 2006/78

Taxation Ruling (TR) 2010/1

ATO ID 2003/503

ATO ID 2010/217