Edited version of your written advice

Authorisation Number: 1013139540589

Date of advice: 15 December 2016

Ruling

Subject: Small business retirement exemption

Question

Can you utilise the small business capital gains tax (CGT) retirement exemption in relation to the capital gain arising from the in-specie transfer of a commercial property to your self-managed superannuation fund (SMSF)?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2017

The scheme commences on

1 July 2016

Relevant facts and circumstances

You are a partner in a partnership.

The partnership owns commercial property.

The property was purchased several years ago and used exclusively to run a business.

The turnover of the business is under $2 million.

You are under 55.

The property is an active asset.

You want to transfer the ownership of the property to a SMSF. You will make an in specie transfer with no proceeds received.

A capital gain will be made on the property transfer.

Relevant legislative provisions

Subdivision 152-D of the Income Tax Assessment Act 1997

Section 292-100 of the Income Tax Assessment Act 1997

Reasons for decision

Subdivision 152-D of the ITAA 1997 contains the small business retirement exemption. You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions.

The small business retirement exemption allows individuals the choice to disregard up to $500,000 in qualifying capital gains. To be entitled to the small business retirement exemption, an individual must satisfy the following conditions:

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 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 under the age of 55 just before the choice is made, a contribution must be made to that individual's complying superannuation fund (or retirement savings account). The contribution must be equal to the asset's CGT exempt amount and paid out of the capital proceeds before the later of when the choice is made and when the proceeds are received.

Once the capital proceeds are received, the individual is able to calculate their capital gain and subsequently make the choice to disregard all or part of that capital gain. Subdivision152-D of the ITAA 1997 does not contemplate that the CGT event, choice and contribution of the CGT exempt amount can all take place simultaneously.

This is also confirmed in paragraph 292-100(7)(b) of the ITAA 1997 which states that the contribution to the superannuation fund must be made on or before the later of the following days:

a) 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. That is, 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 determination of the capital proceeds, the calculation of the capital gains and the making a choice under section 152-305 of the ITAA 1997 is the correct construction of the order required for the small business retirement exemption provisions. A necessary consequence of this ordering is that the contribution of the CGT exempt amount must be made at the later of when the choice is made and when the capital proceeds are received.

In your case you cannot reduce or disregard your capital gain made in respect of the capital gain arising from the in-specie transfer of the property in accordance with the small business CGT retirement exemption. This is because an individual under 55 must make a contribution to a complying superannuation fund within 2 years of the CGT event occurring. 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.