Edited version of your written advice

Authorisation Number: 1051349841926

Date of advice: 15 March 2018

Ruling

Subject: Capital Gains Tax Concessions

Question

Can the partners in the partnership elect to use the small business CGT concessions, being the active asset reduction concession, and the retirement exemption concession, on the disposal of the commercial property to their self-managed superannuation fund (SMSF)?

Answer

Yes

This ruling applies for the following period:

1 July 2017 – 30 June 2016

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Taxpayers own a commercial property 50/50 in their own names under a partnership agreement/arrangement.

The partnership is carrying on the business of renting commercial property.

The partners own the asset in line with their respective interests as specified in the partnership agreement.

The partnership has owned the asset since DD MMM YYYY.

One taxpayer is aged XX and the other is aged XX.

The partners are not retiring nor are they permanently incapacitated they are simply looking at reducing their working hours. These hours are yet to be determined.

The commercial property was rented to a related party.

The commercial property was rented by this company from MMM YYYY until the sale of the retail business in MMM YYYY. Since this time the commercial property has been rented to the new business owner who is a non-related third party.

The taxpayers want to sell the commercial property to their self-managed superannuation fund (SMSF).

The taxpayer states the meet the criteria to be a small business entity for the purposes of CGT concessions.

The commercial property is an active asset as stated by the taxpayers.

The SMSF is going to purchase the asset using a Limited Recourse Borrowing Arrangement.

The SMSF will continue to rent the property to the non-related third party.

Relevant legislative provisions

Subdivision 152-A of the Income Tax Assessment Act 1997

Section 152-205 of the Income Tax Assessment Act 1997

Section 152-35 of the Income Tax Assessment Act 1997

Section 152-40 of the Income Tax Assessment Act 1997

Subdivision 152-D of the Income Tax Assessment Act 1997

Subsection 152-305(1) of the Income Tax Assessment Act 1997

Paragraph 152-305(1)(b) of the Income Tax Assessment Act 1997

Paragraph 152-305(1)(c) of the Income Tax Assessment Act 1997

Paragraph 292-100(7)(b) of the Income Tax Assessment Act 1997

Section 292-100 of the Income Tax Assessment Act 1997

Reasons for decision

A capital gain that you make may be reduced or disregarded by the CGT small business concessions provided that a CGT event has happened to a CGT asset of yours in an income year.

In addition to the CGT exemptions and rollovers that are available, there are four concessions that allow you to disregard or defer some or all of a capital gain from an active asset used in a small business. The four available small business concessions include:-

● the 15-year exemption

● the 50% active asset reduction

● the retirement exemption

● the roll-over

A partner in a partnership that is a small business entity may access the small business concessions where the basic conditions for relief are met.

These basic conditions are outlined in subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997). In summary and as set out in the Master Tax Guide 2018 at paragraph 7-120 these conditions are as follows:-

(1) a CGT event happens in relation to an asset that the taxpayer owns

(2) the event would otherwise have resulted in a capital gain

(3) one or more of the following applies:-

● the taxpayer satisfies the maximum net asset test

● the taxpayer is a CGT small business entity for the year

● the asset is an interest in an asset of a partnership which is a CGT small business entity for the income year, and the taxpayer is a partner in that partnership; or

● the special conditions for passively held assets are satisfied

(4) the asset is an active asset

(5) if the CGT asset is a share in a company or an interest in a trust, either:

● the taxpayer is a CGT concession stakeholder in the company or trust, or

● CGT concession stakeholders in the company or trust have a small business participation percentage in the taxpayer of at least 90%.

In your application and through correspondence with us you have informed us that you are a small business entity and that the asset being sold is an active asset.

Therefore the partnership has satisfied the basic conditions for the CGT concessions.

The two concessions you are considering is the 50% active asset test and the retirement exemption.

50% Active Asset Test

Section 152-205 of the ITAA 1997 provides that you are entitled to apply the small business 50% reduction and reduce your capital gain by 50 percent if the basic conditions in subdivision 152-A of the ITAA 1997 are satisfied.

Primarily, the CGT asset must satisfy:

(a) the active asset test.

Where the CGT asset satisfies the active asset test then, for your particular circumstances, you must satisfy at least one of the following additional tests:

(i) the small business entity test; or

(ii) the maximum net asset value test.

As per section 152-35 of the ITAA 1997 a CGT asset satisfies the active asset test provided it was an active asset for at least half of the period:

(i) commencing when you acquired the asset, and

(ii) ending at the earlier of the CGT event or, where the business ceased in the last 12 months, at that time.

The term active asset is defined in section 152-40 of the ITAA 1997. It includes CGT assets used or held ready for use in the carrying on of a business either by:

(i) you; or

(ii) an affiliate of yours; or

(iii) another entity that is connected with you

You have informed as a matter of fact that you meet the active asset test.

From 1 July 2016, you are a small business entity if you are a sole trader, partnership, company or trust that:

● operates a business for all or part of the income year, and

● has an aggregated turnover less than $10 million (the turnover threshold).

Again you have informed us that you meet the requirements of this test and are a small business entity for the purposes of the CGT concessions.

Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you chose for it not to apply.

In your case, you satisfy the basic conditions and the small business 50% active asset reduction will apply.

The Retirement Exemption

Subdivision 152-D of the ITAA 1997 contains the small business retirement exemption. This exemption allows a taxpayer to disregard a capital gain from a CGT event happening to a CGT asset of their small business if the capital proceeds from the event are used in connection with the taxpayer’s retirement.

To apply the CGT retirement exemption, a taxpayer must meet the small business concessions basic conditions for relief as outlined in Subdivision 152-A of the ITAA 1997. If these conditions are met, the way that the retirement exemption can be used hinges on whether the taxpayer is aged 55 or under.

Subsection 152-305(1) of the ITAA 1997 outlines the conditions for this exemption.

If you are an individual, you can choose to disregard all or part of a *capital gain if:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain; and

(b) if you are under 55 just before you make the choice - you contribute an amount equal to the asset's *CGT exempt amount to a *complying superannuation fund or an *RSA; and

(c) the contribution is made:

(i) if the relevant CGT event is CGT event J2, J5 or J6 – when you made the choice; or

(ii) otherwise – at the later of which you made the choice and when you received the proceeds.

The amount of the capital gain that you choose to disregard (that is the CGT exempt amount) must not exceed your CGT retirement exemption limit. You must keep a written record of the amount you chose to disregard (the CGT exempt amount).

An individual’s lifetime CGT retirement exemption limit is $500,000 reduced by any previous CGT exempt amounts the individual had disregarded under the retirement exemption. This includes amounts disregarded under former (repealed) retirement exemption provisions. This is set out in section 152-320 of the ITAA 1997.

You are not required to discontinue your employment to be eligible for the small business retirement exemption. This concession allows you to provide for your retirement.

If the taxpayer is under 55 years of age at the time of making the choice to use the exemption to disregard a capital gain as outlined in paragraph 152-305(1)(b) of the ITAA 1997, it requires the individual to contribute an amount equal to the disregarded amount to a complying superannuation fund.

As outlined in paragraph 152-305(1)(c) you must make the contribution:

● when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or

● when you made the choice to use the retirement exemption if the relevant event is CGT event J2, J5 or J6.

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.

If you choose the retirement exemption after you've received the capital proceeds (for example, when you lodge your income tax return), you're not required to make the contribution until you make the choice. Accordingly, you may use the capital proceeds for other purposes before making the choice. However, once you make the choice, you must immediately make a contribution of an amount equal to the exempt amount if you were less than 55 years old just before you made the choice.

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.

To satisfy this requirement, you must pay the amount into a complying super fund or RSA by the relevant date. This is an important requirement. Failure to immediately contribute the amount will mean the conditions are not satisfied, and the retirement exemption will not be available.

If you're 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying super fund or RSA, even though you may have been under 55 years old when you received the capital proceeds.

The amount of any capital gain that exceeds the CGT exempt amount does not qualify for this exemption.

As discussed above, you satisfy the basic conditions. As the taxpayer aged 49 is under the 55 year old age limit she does not meet the age requirement and will be required to contribute an amount equal to the exempt amount to a complying superannuation fund or RSA. The other taxpayer who is currently 54, may be entitled to the retirement exemption depending on when he chooses to access the exemption even though he may be 54 at the time he receives the capital proceeds. If he chooses not to utilize the exemption until he is 55 (if appropriate) he will not be required to contribute an amount equal to the exempt amount to a complying superannuation fund or RSA.