Edited version of private advice

Authorisation Number: 1051613568285

Date of advice: 27 November 2019

Ruling

Subject: CGT small business contribution - 15 year exemption

Question

Will the in-specie contribution of property to your self-managed superannuation fund qualify as a capital gains tax (CGT) small business contribution under 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

1 July 2019 to 30 June 2020

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.

You are over 60 years of age.

You are a member of a self-managed superannuation fund (the fund).

You have been actively employed by a business run by a company.

Your spouse is the sole director and shareholder of the employer company.

You own real property.

The property has been leased to the company business since the purchase date.

The company's annual aggregated turnover for the 2020 income year is estimated to be less than $2 million.

The total net value of the CGT assets owned by you and your affiliates is less than $6 million.

You intend to retire during the 2020 income year.

The property will be transferred in-specie to the fund at market value.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 152-147

Income Tax Assessment Act 1997 section 285-85

Income Tax Assessment Act 1997 section 292-90

Income Tax Assessment Act 1997 section 292-100

Income Tax Assessment Act 1997 section 292-105

Other relevant documents

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

Reasons for decision

Detailed reasoning

Basic conditions for the small business CGT concessions

An entity may qualify for the CGT small business concessions under subdivision 152A of the ITAA 1997 if a CGT event happens in relation to an asset of theirs in an income year and the asset satisfies the active asset test and at least one of the following applies:

·        the entity is a CGT small business entity with an aggregate annual turnover of less than $2,000,000

·        the net value of assets that the entity and related entities own does not exceed $6 million

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

·        the entity does not carry on a business (other than as a partner) and the asset is used in business by a CGT small business entity that is an affiliate or is connected with the entity (passively held assets).

The active asset test is satisfied the asset is used or held ready for use in the course of carrying on a business and was an active asset of yours for a total of at least 7½ years during the test period, if you've owned it for more than 15 years; or for at least half of the test period, if you've owned it for 15 years or less (section 152-35 of the ITAA 1997).

In this case, a CGT event will happen to a CGT asset of yours during the 2020 year of income. Your spouse is an affiliate and the company is connected to you, as your property is used in a business carried on by the company they control (section 152-147 of the ITAA 1997). The company has an annual turnover of less than $2,000,000. The net value of assets that you and your related entities own does not exceed $6 million. The property has been used in a business continuously for more than 15 years.

Based on the available information, you satisfy the basic conditions for relief under subdivision 152-A of the ITAA 1997.

15 year exemption

In accordance with section 152-105 of the ITAA 1997 you can disregard a capital gain from a CGT event happening to a CGT asset if you:

·        satisfy the basic conditions for the CGT small business concessions

·        continuously owned the CGT asset for the 15-year period ending just before the CGT event happened.

If you are an individual, you must have been:

·        at least 55 years old and the CGT event happened in connection with your retirement, or

·        permanently incapacitated at the time of the CGT event.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce.

You have met the basic conditions for the CGT small business concessions and have owned the asset continuously for more than 15 years. As you are over 55 years of age you will meet the 15 year exemption when you retire and dispose of your property during the 2020 year of income.

In-specie contribution

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

CGT lifetime cap

If an individual makes an in-specie contribution of an asset to their self-managed superannuation fund with the intent of disregarding all or part of the capital gain under the CGT small business concessions, they may also be eligible to exclude all or part of that contribution from counting against their non-concessional cap and instead be counted against their CGT cap under section 292-105 of the ITAA 1997.

For the 2019-20 income year, an individual's CGT cap amount is $1,515,000 reduced by any amount of contributions previously applied against the cap.

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, to the extent that it does not exceed your CGT cap amount when it is made.

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) is 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 section 152-105 of the ITAA 1997 (15 year exemption for individuals), 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

As you will qualify for the small business 15 year exemption when you retire during the 2020 income year, the capital gain can be entirely disregarded. Accordingly, if you make an in-specie contribution of the property to your fund 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.

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.