Private ruling: Capital gains tax small business concessions
Published: November 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the proposed contribution made to a complying superannuation fund arising from the disposal of a pre-capital gains tax (CGT) asset be covered by the exclusion in section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: You own real property (the land). You received the land as beneficiary under the will of the deceased who died on in the 2011-12 financial year. The deceased was over 55 at the time of their death. The deceased acquired the land prior to 1985 and used the property to carry on a business activity. The land was used by the deceased to carry on a business activity until the time of their death. Since the date of the deceased's death, the land has been used for primary production purposes by you, in your capacity as executor of the deceased estate, and then subsequently in your own capacity. The annual turnover of the deceased's business activity was less than $2 million, and the deceased did not conduct any other business activities. You state, for the purposes of this application, that the basic conditions in subdivision 152-A of the ITAA 1997 are satisfied. The land was transferred to you, under the terms of the will of the deceased, in the 2011-12 financial year. You have made no previous contributions to superannuation that were covered by section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997). You intend to sell the land and contribute the lesser of the capital proceeds of the sale and your CGT cap amount (as calculated under section 292-105 of the ITAA 1997), to a complying superannuation fund within 30 days of receiving the capital proceeds. You estimate that the capital proceeds will be in excess of the CGT cap amount for the 2012-13 financial year of $1,255,000. Therefore, you expect that your proposed contribution will be the CGT cap amount for the relevant financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Subsection 104-10(5) | Income Tax Assessment Act 1997 Section 102-23 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 152-105 | Income Tax Assessment Act 1997 Section 292-100 | Income Tax Assessment Act 1997 Section 292-80 | Income Tax Assessment Act 1997 Section 152-80 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Subsection 152-10(1A) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 292-90 | Income Tax Assessment Act 1997 Subsection 292-100(1) | Income Tax Assessment Act 1997 Subsection 292-100(2) | Income Tax Assessment Act 1997 Subsection 292-100(5) | Income Tax Assessment Act 1997 Subsection 292-100(9)

Reasons for decision: Summary: You will be entitled to disregard any capital gain made on the disposal of the property you acquired as beneficiary of the deceased estate under the small business 15-year exemption concession. This is because: · the deceased individual would have been able to access the 15-year exemption concession had they disposed of the property immediately before their death; and · you intend to dispose of a property you received from the estate within two years of the date of the deceased's death. As you intend to contribute the capital proceeds from the disposal of the property to your complying superannuation fund within the relevant timeframe, the contribution will be excluded from the non-concessional contributions cap. Accordingly, the contribution to your superannuation fund that is within the capital gains tax (CGT) lifetime cap limit, will not attract a liability for excess contributions tax. | Detailed Reasoning - Detailed reasoning: You intend to dispose of a property you inherited under the will of the deceased. You expect to make a capital gain on the disposal. You wish to disregard the capital gain you will make on the disposal under the capital gains tax (CGT) small business 15-year exemption concession (section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997)). This is because an amount of capital proceeds disregarded under the 15-year exemption is excluded from the non-concessional contributions cap in your superannuation fund (section 292-100 of the ITAA 1997) thereby not attracting a liability for excess contributions tax under section 292-80 of the ITAA 1997. Therefore, in order to take advantage of the exclusion under section 292-100 of the ITAA 1997, it needs to be established whether you meet the necessary conditions to be able to access the CGT concessions for small business. | Detailed Reasoning - Death and the small business CGT concessions: Section 152-80 of the ITAA 1997 provides that you may be eligible for the CGT concessions for small business if you make a capital gain on an asset that is or was part of that deceased individual's estate, and you are a: · beneficiary of the deceased estate · legal personal representatives (LPR), or · trustee or beneficiary of the testamentary trust (trusts created by a will). The LPR or beneficiary of the deceased estate will be eligible for the small business CGT concessions where: · the asset is disposed of within two years of the date of death, and · the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his or her death. In your case, you are the beneficiary under a will of the deceased. Under the terms of the will the property in question was transferred to you in the 2011-12 financial year. Therefore, as you intend to dispose of the property within two years of the date of the deceased's death, it will need to be determined whether the asset would have qualified for the small business CGT concessions immediately before the deceased's death. | Detailed Reasoning - Small business CGT concession eligibility and the active asset test: Section 152-10 of the ITAA 1997 contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: · a CGT event happens in relation to a CGT asset in an income year. · the event would have resulted in the gain · at least one of the following applies: · you are a small business entity for the income year · you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 · you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or · the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. · the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss as a result of a capital gains tax (CGT) event happening to an asset in which you have an ownership interest. The relevant CGT event, in your case, will be when you dispose of the property. Section 104-10 of the ITAA 1997 provides that CGT event A1 occurs when your ownership in a CGT asset (the property) is transferred to another entity. Subsection 104-10(5) of the ITAA 1997 explains that a capital gain or capital loss will be disregarded if the asset was acquired before 20 September 1985. Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. Section 152-35 of the ITAA 1997 explains that an asset will be an active asset if you have owned the asset for more than 15 years and it was an active asset for a total of at least 7 ½ years from the time when you acquired the asset until the CGT event. In your case, the property was owned by the deceased since prior to 1985 and has always been used in the course of carrying on a business by the deceased until the deceased's death, therefore, the asset will be an active asset. The annual turnover of the deceased's business was less than $2 million and they did not conduct any other business activities, therefore they are considered a small business entity. Had the deceased disposed of the property immediately before their death, a CGT event would have occurred and the event would have resulted in a capital gain. Although, as the asset was acquired by the deceased prior to 20 September 1985, the asset is a pre-CGT asset and therefore any capital gain that the deceased may have made on disposal of the asset would ordinarily be disregarded. However, you state that your intention is to contribute the proceeds received from the disposal of the property to your complying superannuation fund under section 292-100 of the ITAA 1997. Importantly, to meet the conditions for contributing a capital gain to superannuation under section 292-100 of the ITAA 1997 you treat a pre-CGT asset as a post-CGT asset (subsection 292-100(5) of the ITAA 1997). As a pre-CGT asset is treated as a post-CGT asset for the purposes of section 292-100 of the ITAA 1997, the capital proceeds received from the disposal of the property may be treated as proceeds that can be disregarded under section 152-105 of the ITAA 1997 (relating to the small business15-year exemption concession). As such, the event would have resulted in a capital gain, and therefore, the deceased would have satisfied all the basic conditions required to be eligible for the small business CGT concessions. It now needs to be determined whether the deceased would have met the extra requirements necessary to be eligible for the small business 15-year exemption. | Detailed Reasoning - Small business 15-year exemption: Subsection 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied: · you satisfy the basic conditions · you continuously owned the CGT asset for the 15-year period ending just before the CGT event · you are either: · 55 or over at the time of the CGT event and the event happens in connection with your retirement; or · permanently incapacitated at the time of the CGT event. You will be eligible for the 15-year exemption to the same extent that the deceased would have been just prior to their death, except that: · the CGT event does not need to be in connection with the retirement of the deceased · the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event. In your case: · the deceased satisfied the basic conditions · the deceased owned the asset for over 15 years · the deceased was over the age of 55 immediately before their death Based on the information provided, the deceased would have been eligible for the 15-year exemption. Accordingly, you may also utilise the small business 15-year exemption concession to disregard any capital gain made on disposal of the property that passed to you on the death of the deceased, providing the property is disposed of within two years of the date of the deceased's death. | Detailed Reasoning - Exclusion from the non-concessional contributions cap: Section 292-90 of the ITAA 1997 explains that some contributions are specifically excluded from being non-concessional contributions. One of the contributions that is excluded is a contribution covered under section 292-100 of the ITAA 1997 (certain CGT related payments) to the extent that it does not exceed the CGT cap amount ($1,255,000 for the 2012-13 financial year) when the contribution is made The CGT cap is a lifetime limit which is indexed annually. The CGT cap is reduced by the amount of each contribution that a person has elected to be covered by the exemption from the non-concessional contributions cap under section 292-100 of the ITAA 1997. To qualify for the CGT concession under subsection 292-100(1) of the ITAA 1997 certain conditions must be met. These are: · the contribution is made by you to a complying superannuation plan in respect of you in a financial year; and · the requirement in subsection (2), (4), (7) or (8) is met; and · you choose, in accordance with subsection (9), to apply this section to an amount that is all or part of the contribution Subsection 292-100(2) of the ITAA 1997 provides that the requirement in this subsection will be met if: · the contribution is equal to all or part of the capital proceeds from a CGT event for which you can disregard any capital gain under section 152-105 (or would be able to do so, assuming that a capital gain arose from the event); and, · the contribution is made on or before the later of the following days: · the day you are required to lodge your income tax return for the income year in which the CGT event happened; · 30 days after the day you receive the capital proceeds Subsection 292-100(5) states that in determining whether the conditions in subsection (2) are satisfied for a CGT event in relation to a pre-CGT asset, treat the asset as a post-CGT asset. Subsection 292-100(9) of the ITAA 1997 explains that to make a choice for the purposes of paragraph 292-100(1)(c), you must: · make the choice in the approved form; and · give it to the superannuation provider in relation to the complying superannuation plan on or before the time when the contribution is made. In your case, you intend to make a contribution, up to the CGT cap amount, to your complying superannuation fund within 30 days of receiving the capital proceeds from the sale of the property. The proceeds from the sale of property will be part of the capital proceeds that you can disregard under the small business 15-year exemption concession (section 152-105 of the ITAA 1997). Further, as subsection 292-100(5) of the ITAA 1997 allows you to treat the CGT asset in question as a post-CGT asset for the purposes of subsection 292-100(2) of the ITAA 1997, you will have met conditions a) and b) of subsection 292-100(1) of the ITAA 1997. Therefore, provided your choice to apply this section is made on the approved form and given to your superannuation provider on or before the contribution is made (subsection 292-100(9) of the ITAA 1997), you will meet all the conditions necessary under subsection 292-100(1) of the ITAA 1997 and the proposed contribution made from a capital gain arising from the disposal of a pre-CGT asset will be excluded from your non-concessional contributions for the 2012-13 financial year.

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