Edited version of your written advice

Authorisation Number: 1051480898467

Date of advice: 28 March 2019

Ruling

Subject: In-specie CGT contribution

Question:

Will the in-specie contribution of Property by the Taxpayer be excluded from being a non-concessional contribution under subparagraph 292-90(2)(c)(iii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2019

Relevant facts and circumstances

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

● The Taxpayer is over 60 years of age.

● The Taxpayer owns farming Property (the Property).

● The Taxpayer has conducted a farming business on the Property for over 15 years under a family partnership structure.

● In mid-2018, the Taxpayer’s child took over the farming business through a discretionary trust with a corporate trustee. The child is the sole director of the corporate trustee and the Taxpayer is a beneficiary of the discretionary trust and is entitled to distributions.

● The Taxpayer still helps their child on the farming business on a casual basis. During harvest period the hours involved increase due to workloads otherwise it is random/minimal during the rest of the year.

● It is intended to transfer the Property into the Taxpayer’s SMSF. Upon the transfer the notional assessable capital gain attributable to the transfer will be entirely disregarded by application of the Small business 15 year exemption in Subdivision 152-B of the ITAA 1997.

Detailed reasoning

Capital Gains Tax – small business 15 year exemption

Subdivision 152-B of the ITAA 1997 provides that an individual can disregard a capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied,

(b) you continuously owned the CGT asset for the 15 year period ending just before the CGT event,

(c) if the CGT asset is a share in a company or an interest in a trust - the company or trust had a significant individual for a total of at least 15 years during which you owned the asset,

(d) either:

(i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement, or

(ii) you are permanently incapacitated at the time of the CGT event.

The basic conditions in Subdivision 152-A of the ITAA 1997 are contained in section 152-10 of the ITAA 1997. These conditions are:

(a) a CGT event happens in relation to a CGT asset of yours in an income year;

(b) the CGT event would otherwise have resulted in a capital gain;

(c) one or more of the conditions in paragraph 152-10(1)(c) of the ITAA 1997 applies; and

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

Where the CGT asset is a passively held asset used in a partnership business, paragraph 152-10(1)(c) of the ITAA 1997 requires the conditions in subsection 152-10(1B) of the ITAA 1997 to be met. That is:

(a) you are a partner in a partnership in the income year in which the CGT event happens;

(b) the partnership is a CGT small business entity for that income year;

(c) you do not carry on any other business in the income year;

(d) the relevant CGT asset is not an interest in a partnership asset; and

(e) the business you carry on as a partner in a partnership is the same business in which the asset is used for the purposes of the active asset test.

Additionally, in circumstances where a business is in the process of winding up, section 152-49 of the ITAA 1997 may have application.

Relevantly, section 152-49 of the ITAA 1997 applies to an entity that, in the year in which the CGT event happens, carried on a business in an earlier year and is now being wound up, and the asset had been used in the course of carrying on that business at the time the business stopped being carried on.

The effect of section 152-49 of the ITAA 1997 in this matter is, that for the purposes of the active asset test and the basic conditions in paragraphs 152-10(1B)(e), the entity can be taken to be carrying on the business at the time of the CGT event, and the asset can be taken to be used in the course of carrying on that business at that time.

Are the basic conditions in Subdivision 152-A met?

The first condition in section 152-10 of the ITAA 1997 is met because, when the in-specie transfer of the Property to the SMSF is made, CGT event A1 will happen.

The second condition in section 152-10 of the ITAA 1997 is met because the disposal of the Property to the SMSF will otherwise result in a capital gain.

The third condition requires one or more of the conditions in paragraph 152-10(1)(c) of the ITAA 1997 to apply. Relevantly the condition in subparagraph 152-10(1)(c)(iv) of the ITAA 1997 requires the satisfaction of conditions in subsection 152-10(1B), in relation to passively held assets used by partnerships. Through the operation of section 152-49 you are taken to be a partner in a partnership in the year in which the CGT event happens. The partnership is a CGT small business entity because its aggregated turnover is less than $2 million.

You do not carry on any business in your own right and the Property is not a partnership asset. The primary production business that you carried on as a partner in the partnership is the same business in which the Property was used for the purpose of the active asset test (see fourth condition below). Therefore the conditions in subsection 152-10(1B) of the ITAA 1997 are satisfied and the third condition in section 152-10 is met.

The fourth condition in section 152-10 of the ITAA 1997 requires the Property to be an active asset. Prior to 1 July 2018, the Property was used in the partnership’s primary production business. Therefore, up until that time it satisfied the requirements of an active asset in section 152-40, as it was an asset used in the course of carrying on a business that is carried on by a partnership that is connected to you.

However, in the 2019 income year, the partnership is in the process of being wound up, and is no longer carrying on the business being undertaken on the Property, which means that the requirements in section 152-40 of the ITAA 1997 are not met. Section 152-49, however, will apply and the partnership will be treated as if it was carrying on the business at the time that the CGT event happens. Therefore, the Property is an active asset, and the fourth condition is satisfied.

Accordingly, the basic conditions in Subdivision 152-A of the ITAA 1997 are met.

Subdivision 152-B conditions

You have continuously owned the Property since the early 1990s; therefore you have continually owned the Property for a period of greater than 15 years.

Until mid-2018, you have been actively involved in the partnership business, but since the farming business has been taken over by your child’s discretionary trust, you have significantly wound back your involvement in the farm. It is therefore accepted that the CGT event will happen in connection with your retirement, and you are over 55 years of age.

Accordingly, the requirements of Subdivision 152-B of the ITAA 1997 are met and you can choose to disregard any capital gain arising from the CGT event that happens when the Property is transferred to the SMSF.

Can an in-specie transfer of property be a contribution?

The term ‘contribution’ is not defined in the ITAA 1997. Taxation Ruling TR 2010/1: Income tax: superannuation contributions, 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.

Section 285-5 of the ITAA 1997 provides that a superannuation contribution can be made by transferring property to the superannuation provider (an in-specie contribution) providing the contribution is or includes the market value of the property.

Non-concessional contributions

Paragraph 292-90(2)(c) of the ITAA 1997 provides for certain types of contributions to be excluded from being considered a non-concessional contribution. One such contribution is a contribution covered under section 292-100 relating to certain CGT-related payments.

Subsection 292-100(1) of the ITAA 1997 states that a contribution is covered under this section if it is; a) a contribution made by an individual to a fund in respect of the individual; b) the requirement in subsections (2), (4), (7) or (8) are met; and c) the individual chooses to apply this section to an amount that is all or part of the contribution.

Where an individual intends to disregard any capital gain resulting from a CGT event under the 15 year exemption, subsection 292-100(2) is the appropriate subsection to consider. Paragraph 292-100(2)(b) requires an individual to make a contribution to their superannuation fund before the later of:

● the day they are required to lodge their income tax return for the income year in which the CGT event happened;

● 30 days after the day they receive the capital proceeds

In this instance, as you qualify for the small business 15 year exemption, the capital gain can be entirely disregarded. Accordingly, if you make an in-specie contribution of the Property to your SMSF in connection with your retirement, you are eligible to choose to exclude some or all of the contribution from being a non-concessional contribution, up to your CGT cap for that year.

The choice will only be valid if it is:

(a) made in the approved form; and

(b) given to the superannuation fund on or before the time the contribution is made.

With regard to the in-specie contribution, the legislation does not prevent the CGT event, choice and contribution of the 15 year exempt amount from happening simultaneously.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-49

Income Tax Assessment Act 1997 Section 285-5

Income Tax Assessment Act 1997 Section 292-90

Income Tax Assessment Act 1997 Section 292-100

We followed these ATO view documents

Taxation Ruling TR 2010/1: Income tax: superannuation contributions