Private ruling: Non-concessional contributions
Date of advice: 1 June 2016
Published: July 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Can an in-specie transfer of commercial property to your self-managed superannuation fund (SMSF) be made for no consideration for the purposes of capital gains tax (CGT)? | A1: No. | Q2: Can an in-specie transfer of commercial property at market value to your self-managed superannuation fund (SMSF) be excluded from non-concessional contributions in accordance with subsection 292-90(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No. | Q3: Can an individual over 55, utilise the small business CGT retirement exemption in section 152-305 of the ITAA 1997 in relation to the capital gain arising from the in-specie transfer of a commercial property to your SMSF? | A3: Yes. | Q4: Can an individual under 55, treat the in-specie transfer of a commercial property to their SMSF as the contribution required by paragraph 152-305(1)(b) of the ITAA 1997 and hence utilise the small business CGT retirement exemption in section 152-305 of the ITAA 1997 in relation to the capital gain arising from the transfer? | A4: No.

Relevant facts and circumstances: Member 1 and Member 2 own a commercial property (the property). Member 1 and Member 2 each have a 50% ownership interest in the property. Member 1 is over 55. Member 2 is under 55. Member 1 and Member 2 have been the majority shareholders of a business (the Business) from 200X-0X income year until the 2012-13 income year. The Business continuously based their operations from the property from the 200X-0X income year through to the 20XX-XX income year. The property is an active asset. The property has been vacant since the 20XX-XX income year and was offered for sale. The property is currently vacant and you will transfer it into the self-managed superannuation fund of Member 1 and Member 2 for no consideration. In the 2015-16 income year, Member 1 has made non-concessional contributions to the SMSF in their name.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 Section 292-100 | Income Tax Assessment Act 1997 Section 292-90

Reasons for decision: Summary: The market value substitution rule in section 116-30 of the ITAA 1997 will deem you to have received capital proceeds equal to the market value of the in-specie transfer of the property to the SMSF. The market value is also the contribution amount to the SMSF. | Detailed Reasoning - Detailed reasoning: For a CGT event, proceeds can be received in a number of different ways and the capital proceeds rules in Division 116 of the ITAA 1997 are relevant in calculating any capital gain that arises from the CGT event. As a result, capital proceeds can be money or the market value of the property the individual has received, or is entitled to receive, in respect of the event happening. If an asset is contributed to a complying superannuation fund by an individual for no consideration, the individual is taken to have received capital proceeds equal to the market value of that asset under section 116-30 of the ITAA 1997. | Summary: Member 1 and Member 2 will not be able to exclude the contribution of the property to the SMSF from being a non-concessional contribution pursuant to section 292-100 of the ITAA 1997. That is, the contribution cannot be a contribution under the CGT cap. | Detailed Reasoning - Detailed reasoning: Can a Transfer of Property be a Contribution? The term 'contribution' is not defined in the ITAA 1997. Taxation Ruling TR 2010/1 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. Under section 285-5 of the ITAA 1997, a transfer of property can be a contribution. Such a contribution is called an in-specie contribution. Paragraph 20 of TR 2010/1 states: A contribution by way of a transfer of an asset will be made when the superannuation provider obtains ownership of the asset from the contributor. The Commissioner accepts the superannuation provider obtains ownership of an asset when beneficial ownership of the asset is acquired and that beneficial ownership can be acquired earlier than legal ownership. Contributions made to a fund for or by a person may be included in the person's concessional contributions or non-concessional contributions. There are also situations where the contributions may not be included in the person's concessional contributions or non-concessional contributions. Non-Concessional Contributions Pursuant to subsection 292-90(1) of the ITAA 1997, the amount of non-concessional contributions for a financial year is the sum of each contribution covered by subsection 292-90(2) of the ITAA 1997; each amount covered by subsection 292-90(4) of the ITAA 1997; and the amount of an individual taxpayer's excess concessional contributions (if any) for the financial year. Will the Contribution be a Non-Concessional Contribution? The contribution will not be included in the assessable income of the SMSF pursuant to subsection 295-190(1) of the ITAA 1997. As such, it will be treated as a non-concessional contribution pursuant to paragraph 292-90(2)(b) of the ITAA 1997 unless it falls into one of the subparagraphs of paragraph 292-90(2)(c) of the ITAA 1997. Relevantly, subparagraph 292-90(2)(c)(iii) of the ITAA 1997 refers to a contribution covered under section 292-100 (certain CGT-related payments), to the extent that it does not exceed a taxpayer's CGT cap amount when it is made. As paragraph 292-100(1)(b) refers to meeting the requirements in either subsection 292-100(2), 292-100(4), 292-100(7) or 292-100(8) of the ITAA 1997, it is necessary to consider which of those subsections applies in the circumstances. Given that Member 1 and Member 2 intend to disregard the capital gain made as a result of the disposal of the property (the CGT event) under section 152-305 of the ITAA 1997, subsection 292-100(7) of the ITAA 1997 is the appropriate subsection to consider. Paragraph 292-100(7)(b) of the ITAA 1997 states that the contribution to the superannuation fund must be made on or before the later of the following days: (a) or the day you are required to lodge your income tax return for the income year in which the CGT event happened; or (b) 30 days after the day you receive the capital proceeds from the CGT event. It is clear that these paragraphs contemplate the CGT event and the payment to SMSF happening at separate times. | Detailed Reasoning - Application to your situation: Member 1 and Member 2 will not be able to exclude the contribution from being a non-concessional contribution pursuant to section 292-100 of the ITAA 1997. That is, the contribution cannot be a contribution under the CGT cap. This is because, section 292-100 of the ITAA 1997 makes it clear that a contribution made to the SMSF is made after the CGT event happened and/or the capital proceeds are received. | Summary: Member 1 is able to utilise the small business CGT retirement exemption in section 152-305 of the ITAA 1997 in relation to the capital gain arising from the in-specie transfer of the property to the SMSF | Detailed Reasoning - Detailed reasoning: The small business retirement exemption under Subdivision 152-D of Part 3-3 of the ITAA 1997 allows individuals the choice to disregard up to $500,000 in qualifying capital gains. An individual may choose to disregard all or part of a capital gain under the small business retirement exemption by satisfying the conditions outlined below: 1. A CGT event happens in relation to a CGT asset in an income year; 2. The event would have, apart from Division 152 of the ITAA 1997, resulted in a capital gain; 3. The basic conditions in Subdivision 152-A of Part 3-3 of the ITAA 1997 are met; and 4. A choice is made to disregard all or part of the capital gain under subsection 152-305(1) of the ITAA 1997. This disregarded amount is known as the asset's 'CGT exempt amount'. If the individual is aged 55 or older just before choosing the retirement exemption, they are not required to pay any amount into a superannuation fund. | Detailed Reasoning - Application to your circumstances: As Member 1 is over 55 and meets the basic conditions for the small business retirement exemption, Carl is able to choose all or part of their capital gain from the in-specie transfer to the SMSF to disregard, so long as they do not exceed their CGT retirement exemption limit, which is currently $500,000. This is because there is no requirement for an individual aged 55 or older to make a contribution to the superannuation fund in order to access the concession. | Summary: Member 2 cannot treat the in-specie transfer of a commercial property to your SMSF as the contribution required be paragraph 152-305(1)(b) of the ITAA 1997 and hence utilise the small business CGT retirement exemption in section 152-305 of the ITAA 1997 in relation to the capital gain arising from the transfer. Paragraph 152-305(1)(b) of the ITAA 1997 requires the contribution to occur after the happening of the CGT event which give rise to the capital gain. | Detailed Reasoning - Detailed reasoning: The small business retirement exemption under Subdivision 152-D of Part 3-3 of the ITAA 1997 allows individuals the choice to disregard up to $500,000 in qualifying capital gains. An individual may choose to disregard all or part of a capital gain under the small business retirement exemption by satisfying the conditions outlined below: 1. A CGT event happens in relation to a CGT asset in an income year; 2. The event would have, apart from Division 152 of the ITAA 1997, resulted in a capital gain; 3. The basic conditions in Subdivision 152-A of Part 3-3 of the ITAA 1997 are met; and 4. A choice is made to disregard all or part of the capital gain under subsection 152-305(1) of the ITAA 1997. This disregarded amount is known as the asset's 'CGT exempt amount'. If the individual is under the age of 55 just before the choice is made, a contribution must be made to that individual's complying superannuation fund (or retirement savings account). The contribution must be equal to the asset's CGT exempt amount and paid out of the capital proceeds before the later of when the choice is made and when the proceeds are received. Once the capital proceeds are calculated, the individual is able to calculate their capital gain and subsequently make the choice to disregard all or part of that capital gain. Subdivision152-D of Part 3-3 of the ITAA 1997 does not contemplate that the CGT event, choice and contribution of the CGT exempt amount can all take place simultaneously. The determination of the capital proceeds, the calculation of the capital gains and the making a choice under section 152-305 of the ITAA 1997 is the correct construction of the order required for the small business retirement exemption provisions. A necessary consequence of this ordering is that the contribution of the CGT exempt amount must be made at the later of when the choice is made and when the capital proceeds are received. | Detailed Reasoning - Application to your circumstances: Member 2 cannot reduce or disregard her capital gain made in respect of the capital gain arising from the in-specie transfer of the property in accordance with the small business CGT retirement exemption. This is because an individual under 55 must make a contribution to a complying superannuation fund within 2 years of the CGT event occurring. The legislation does not contemplate that the CGT event, choice and contribution of the CGT exempt amount can happen simultaneously. Rather, each of the relevant steps must happen sequentially, therefore, that initial transfer of the property cannot also be the final contribution required.