Edited version of private advice

Authorisation Number: 1051949579630

Date of advice: 30 March 2022

Ruling

Subject: CGT small business contribution - 15 year exemption

Question

Will a contribution to the 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 advice applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

You are over 67 years of age.

You and your spouse are the trustees and members of your self-managed superannuation fund (the Fund).

You own property that was used wholly in a primary production business of farming.

Your sole or principal business has been the business of primary production. You have satisfied the gainful employment test for the 20XX income year and are eligible to make contributions to your Fund.

You have obtained an independent valuation of the property during the 20XX income year.

You intend to transfer the property to the Fund as an in-specie contribution.

The trustees intend to allocate the contribution between you and your spouse.

You will provide the fund with a CGT cap election form at or prior to making the contribution.

Assumptions

You have met the conditions under section 152-105 of ITAA 1997 for the small business 15 year exemption.

You will obtain a current market valuation of the property prior to the transfer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 285-5

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 section 292-90

Income Tax Assessment Act 1997 section 292-100

Income Tax Assessment Act 1997 section 292-105

Superannuation Industry (Supervision) Regulations 1994 subregulation 7.04(1)

Superannuation Industry (Supervision) Act 1993 section 66

Other relevant documents

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

Reasons for Decision

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 20XX 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.

Section 66 of the Superannuation Industry (Supervision) Act 1993 prohibits the acquisition of an asset from a related party of a superannuation fund, unless it meets a specified exception.

A member is a related party of a fund.

One of the limited exceptions to this rule allows a fund trustee to acquire business real property from a related party at market value. Farming land used wholly and exclusively in a primary production business would generally meet the business real property definition.

Based on the information provided the Fund will acquire property that meets the definition of business real property at market value.

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 20XX-XX income year, an individual's CGT cap amount is $XXXX 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 20XX 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.

The CGT 15 year exemption and subsequent exclusion of some or all of the contribution from being a non-concessional contribution is only available to owner of the CGT asset.

Non-concessional contributions

Subregulation 7.04(1) of the Superannuation Industry (Supervision) Regulations 1994 states that where a member is between the ages of 67 and 75 they may only make a personal contribution to their superannuation fund where they have been 'gainfully employed' during the financial year in which the contributions are made.

Where you make a personal superannuation contribution using the capital proceeds under the 15 year CGT exemption, any amount which is not excluded under the election or exceeds the CGT lifetime cap, will be classed as a non-concessional contribution.

The non-concessional contribution cap for the 20XX-XX income year is $XXX.

As you are over 67 years of age on 1 July 20XX, you cannot access the bring-forward arrangement in the 20XX-XX income year.

If you exceed your non-concessional contribution cap for the year, you can withdraw the excess amount and 85 per cent of any earnings on that amount. The earnings amount will be included in your income tax return and taxed at your marginal tax rate. If you choose to leave your excess contributions in your Fund instead of withdrawing them, you will pay 47 per cent tax on the excess amount.