Edited version of private advice

Authorisation Number: 1051672747395

Date of advice: 08 May 2020

Ruling

Subject: In-specie contribution and capital gains tax exemptions

Question

Will the in-specie contribution of the properties 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:

Financial year ended 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

·   The Fund is a complying self-managed superannuation fund.

·   The trustee of the Fund is a corporate trustee. The director is the Taxpayer.

·   The Taxpayer is the only member of the Fund.

·   The Taxpayer owns a company which has leased property under a commercial leaser (the Property).

·   A valuation has been made on the Property.

·   The Property has been used by the Taxpayer in their company for a period in excess of 15 years.

·   The Taxpayer has previously used some of their lifetime capital gains tax cap. The Taxpayer intends to use up the remaining balance with the transfer of the Property into the Fund

·   It is intended to transfer the Property into the Fund. 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.

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

Reasons for decision

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.

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. From the facts it is determined that the Taxpayer is a CGT small business entity for the income year, and the maximum net asset value of the Property is less than $6m.

The fourth condition in section 152-10 of the ITAA 1997 requires the Property to be an active asset. The Property is currently being used and is being commercially leased. Therefore, up until that time it satisfied the requirements of an active asset in section 152-40 of the ITAA 1997, as it was an asset used in the course of carrying on a business that is carried on by an entity that is connected to the Taxpayer.

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

Subdivision 152-B conditions

The Taxpayer has owned the Property for longer than 15 years; therefore they have continually owned the Property for a period of greater than 15 years.

The Taxpayer is still running the company. It is therefore accepted that the CGT event will happen in connection with their retirement.

Accordingly, the requirements of Subdivision 152-B of the ITAA 1997 are met and the Taxpayer 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 of the ITAA 1997 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) of the ITAA 1997 is the appropriate subsection to consider.

Paragraph 292-100(2)(b) of the ITAA 1997 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 the Taxpayer qualifies for the small business 15 year exemption, the capital gain can be entirely disregarded. Accordingly, if they make an in-specie contribution of the Property to the Fund in connection with their retirement, they will be eligible to choose to exclude some or all of the contribution from being a non-concessional contribution, up to their 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.