Edited version of private advice

Authorisation number: 5010102298268

Date of advice: 30 April 2024

Ruling

Subject: CGT - small business contribution 15 year exemption

Question

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

Answer

Yes.

This advice applies for the following period

1 July 2023 to 30 June 20YY

Relevant facts and circumstances

You are over 55 years of age.

You are the sole registered proprietor of the Property.

You inherited the Property from your parent more than 25 years ago.

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

From the acquisition date until now you have operated a partnership farming business on the Property with your spouse. You have worked full time in the farming business.

You are in the process of decreasing your work commitments towards retirement as a primary producer and have sold some of the land, leased some of the land to a 3^rd party, significantly reducing livestock numbers and changed the business enterprise to just cattle on the remaining land due to the lower level of management input required.

Assumptions

You intend to transfer the Property to the Fund, at market value, as an in specie contribution during the 20YY-YY income year.

You satisfy the basic conditions to access the small business CGT concessions under Subdivision 152-A of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 285-5

Income Tax Assessment Act 1997 Subdivision 152-A

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) Act 1993 section 66

Reasons for decision

Small business 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 as per Subdivision 152A

•         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.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with a taxpayer's retirement, nor does it give any indication of the degree of retirement required in order to take advantage of this concession. 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.

In your case the Property's use was an integral part of your farming business and it is reasonable to conclude that it always formed part of your retirement plan. The fact that the CGT event will occur during your path to retirement from the business will not break this connection.

You satisfy 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 due to retirement when you dispose of your Property during the 20YY 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. Where a property of the member is being used wholly and exclusively in a farming business at the time of transfer, it will 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 SMSF 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.

An individual's lifetime CGT contribution cap is $1,705,000 for the 20YY-YY year of income and it operates separately from the non-concessional contribution 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) 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 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

You have indicated that you are eligible for the small business CGT concessions relating to the sale of the Property, as per section 152-105 of the ITAA 1997.

Where a member is eligible for the 15-year exemption, they may contribute all or part of the capital proceeds from the sale of the Property provided they are made within the legislated timeframe.

The choice to exclude the contribution from being a non-concessional contribution will only be valid if it is made in the approved form and given to the 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.