Private ruling: Small business CGT concessions (15-year exemption) and super contributions
Date of advice: 5 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Can Company A Pty Ltd apply the small business 15-year exemption to disregard the capital gain it makes if it transfers Commercial property A (the property) to Complying superannuation fund A on behalf of Individual 1 and Individual 2? | A1: Yes. | Q2: Will the proposed in-specie contribution of the property to Complying superannuation fund A by Company A Pty Ltd on behalf of Individual 1 and Individual 2 be excluded from being treated as a non-concessional contribution under subsection 292-90(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No. | Q3: If, under the alternative arrangement , Company A Pty Ltd disposes (sells) the property to complying super fund A can it apply the small business 15-year exemption to disregard the capital gain it makes if it disposes of the property? | A3: Yes. | Q4: Will the contributions that Individual 1 and Individual 2 make to complying superannuation fund A under the alternative arrangement, be excluded from being treated as non-concessional contributions under subsection 292-90(2) of the ITAA 1997? | A4: Yes.

Relevant facts and circumstances: Company A Pty Ltd acquired the property more than 15 years ago. The property was rented to Company B Pty Ltd, a related entity on an arm's length basis which used the property in its business. After this initial rental period the property has been and still is rented to an unrelated business. The directors of Company A Pty Ltd are Individual 1 and Individual 2, who are also equal (50%) shareholders. Individual 1 is the sole director of Company B Pty Ltd with Individual 1 and Individual 2 being equal (50%) shareholders. Individual 1 and Individual 2 are both at least 55 years old and are in the process of winding down their business operations in Company B Pty Ltd in anticipation of retirement. Individual 1 and Individual 2 are the sole members and trustees of Complying superannuation fund A. Company A Pty Ltd is considering making an in-specie transfer of the property to Complying superannuation fund A Fund in equal (50%) shares for Individual 1 and Individual 2 if: • it is able to apply the small business 15-year exemption to disregard the capital gain it makes on the transfer, and • the in-specie transfer will be excluded from being treated as a non-concessional contribution for Individual 1 and Individual 2 in accordance with subsection 292-90(2) of the ITAA 1997. The trustees of Complying superannuation fund A have been provided with specific advice that the property is business real property and can be acquired by the fund from Company A Pty Ltd. As an alternative to transferring the property to Complying superannuation fund A as an in-specie contribution, Company A Pty Ltd is considering selling the property to Complying superannuation fund A at market value. In that case, • Company A Pty Ltd will make a payment of the exempt amount to Individual 1 and Individual 2 within 2 years of disposing of the property to Complying superannuation fund A (the CGT event) • Individual 1 and Individual 2 will remain as CGT concession stakeholders just before the CGT event occurs • Individual 1 and Individual 2 will each contribute an amount equal to all or part of their (50%) participation percentage of the capital proceeds from the CGT event (that does not exceed the payment from Company A Pty Ltd) • the contributions will be made within 30 days after the payment is made to them by Company A Pty Ltd • Individual 1 and Individual 2 will make the choice to apply section 292-100 of the ITAA 1997 to their respective contributions in the approved form and give the approved form to Complying superannuation fund A on or before the time the contributions are made • Individual 1 and Individual 2 will not claim a deduction for their respective contributions, and • the contributions made by Individual 1 and Individual 2 will not exceed their respective CGT cap amounts. Company A Pty Ltd satisfies the basic conditions for the small business CGT concessions.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 103 | Income Tax Assessment Act 1997 section 103-5 | Income Tax Assessment Act 1997 section 103-10 | Income Tax Assessment Act 1997 section 103-15 | Income Tax Assessment Act 1997 section 116-30 | Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 subsection 152-125(2) | Income Tax Assessment Act 1997 section 285-5 | Income Tax Assessment Act 1997 subsection 291-25(2) | Income Tax Assessment Act 1997 section 291-15 | Income Tax Assessment Act 1997 subsection 292-90(2) | Income Tax Assessment Act 1997 paragraph 292-90(1)(b) | Income Tax Assessment Act 1997 paragraph 292-90(2)(b) | Income Tax Assessment Act 1997 paragraph 292-90(2)(c) | Income Tax Assessment Act 1997 subparagraph 292-90(2)(c)(iii) | Income Tax Assessment Act 1997 section 292-100 | Income Tax Assessment Act 1997 subsection 292-100(1) | Income Tax Assessment Act 1997 paragraph 292-100(1)(b) | Income Tax Assessment Act 1997 subsection 292-100(4) | Income Tax Assessment Act 1997 subsection 292-100(9) | Income Tax Assessment Act 1997 Subdivision 295-C | Income Tax Assessment Act 1997 section 295-160 | Income Tax Assessment Act 1997 section 295-190

Reasons for decision: Detailed Reasoning - Small business 15-year exemption: Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for companies (and trusts). Under this section, a company can disregard the capital gain it makes on the disposal of a CGT asset if: (a) the company satisfies the basic conditions for the small business CGT concessions in Subdivision 152-A of the ITAA 1997 (b) the company continuously owned the CGT asset for the 15-year period ending just before the CGT event (c) the company had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the company owned the CGT asset, and (d) an individual who was a significant individual of the company or trust just before the CGT event either: (i) was 55 or over at the time of the CGT event and the event happens in connection with the individual's retirement, or (ii) was permanently incapacitated at that time. In this case, Company A Pty Ltd satisfies the basic conditions for the small business CGT concessions contained in Subdivision 152-A of the ITAA 1997. In addition, • it will have continuously owned the property for the 15-year period ending just before the CGT event • it has had a significant individual for a total of at least 15 years of the whole period of ownership of the property, and • the individual who was a significant individual just before the CGT event will be at least 55 years old when Company A Pty Ltd transfers/disposes of the property, and the transfer/disposal will happen in connection with the retirement of Individual 1 and/or Individual 2. As such, Company A Pty Ltd will qualify for the small business 15-year exemption in section 152-110 of the ITAA 1997 in relation to the property. Company A Pty Ltd can disregard the capital gain it makes if it: • transfers the property to Complying superannuation fund A as an in-specie contribution on behalf of Individual 1 and Individual 2, or • sells the property to Complying superannuation fund A. | Detailed Reasoning - Superannuation contributions: Contributions made to a superannuation 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. | Detailed Reasoning - Concessional contributions: The amount of a person's concessional contributions for a financial year is the sum of: • each contribution covered under subsection 291-25(2) of the ITAA 1997, and • each amount covered under subsection 291-25(3) of the ITAA 1997 (section 291-25 of the ITAA 1997). A contribution is covered under subsection 291-25(2) of the ITAA 1997 if: (a) it is made in the financial year to a complying superannuation plan in respect of a person, and (b) it is included in the assessable income of the superannuation provider in relation to the plan, or, by way of a roll-over superannuation benefit, in the assessable income of a complying superannuation fund or RSA provider in the circumstances mentioned in subsection 290-170(5) of the ITAA 1997 (about successor funds) or subsection 290-170(6) of the ITAA 1997 (about MySuper products), and (c) it is not any of the following: (i) an amount mentioned in subsection 295-200(2) of the ITAA 1997 (ii) an amount mentioned in item 2 of the table in subsection 295-190(1) of the ITAA 1997, or (iii) a contribution made to a constitutionally protected fund. An amount in a complying superannuation plan is covered under subsection 291-25(3) of the ITAA 1997 if it is allocated by the superannuation provider in relation to the plan for a person for the year in accordance with the conditions specified in the regulations. An amount will ordinarily fall within subsection 291-25(3) of the ITAA 1997 where it is an assessable contribution of the fund under Subdivision 295-C of the ITAA 1997 and has been allocated under Division 7.2 of the Superannuation Industry (Supervision) Regulations 1994. | Detailed Reasoning - Non-concessional contributions: The amount of a person's 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 the person's excess concessional contributions (if any) for the financial year (subsection 292-90(1) of the ITAA 1997). A contribution is covered under subsection 292-90(2) of the ITAA 1997 if: (a) it is made in the financial year to a complying superannuation plan in respect of a person, and (b) it is not included in the assessable income of the superannuation provider in relation to the superannuation plan, or, by way of a roll-over superannuation benefit, in the assessable income of any complying superannuation fund or RSA provider in the circumstances mentioned in subsection 292-170(5) of the ITAA 1997 (about successor funds) or subsection 290-170(6) of the ITAA 1997 (about MySuper products), and (c) it is not any of the following: (i) a Government co-contribution made under the Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (ii) a contribution covered under section 292-95 of the ITAA 1997 (payments that relate to structured settlements or orders for personal injuries) (iii) a contribution covered under section 292-100 of the ITAA 1997 (certain CGT-related payments), to the extent that it does not exceed a person's CGT cap amount when it is made (iv) a contribution made to a constitutionally protected fund (other than a contribution included in the contributions segment of a person's superannuation interest in the fund) (v) contributions not included in the assessable income of the superannuation provider in relation to the superannuation plan because of a choice made under section 295-180 of the ITAA 1997, or (vi) a contribution that is a roll-over superannuation benefit. An amount is covered under subsection 292-90(4) of the ITAA 1997 if it is any of the following: (a) an amount in a complying superannuation plan that is allocated by the superannuation provider in relation to that plan for a person for the year in accordance with the conditions specified in the regulations (b) the amount of any contribution made to that plan in respect of a person in the year that is covered by a valid and acknowledged notice under section 290-170 of the ITAA 1997, to the extent that it is not allowable as a deduction for the person making the contribution, or (c) the sum of each contribution made to that plan in respect of a person at a time on or after 10 May 2006 when that plan was not a complying superannuation plan (other than a contribution covered under this paragraph in relation to a previous financial year). An amount that is not an assessable contribution under Subdivision 295-C of the ITAA 1997 and is allocated under Division 7.2 of the Superannuation Industry (Supervision) Regulations 1994 is to be treated as having been allocated for the purposes of subsection 292-90(4) of the ITAA 1997. | Detailed Reasoning - Excess concessional contributions: A person that has concessional contributions in excess of their concessional contributions cap for a financial year will have to include the excess in their assessable income and will receive a tax offset of 15% of their excess concessional contributions in the corresponding financial year (section 291-15 of the ITAA 1997). Excess concessional contributions arise for a financial year if the amount of the person's concessional contributions for the year exceeds the concessional contributions cap for the year (subsection 291-20(1) of the ITAA 1997). The concessional contributions cap for the 2015-16 financial year is $30,000. | Detailed Reasoning - Excess non-concessional contributions: A person is liable to pay excess non-concessional contributions tax imposed by the Superannuation (Excess Non-concessional Contributions Tax) Act 2007 if they have excess non-concessional contributions for a financial year (section 292-80 of the ITAA 1997). Excess non-concessional contributions arise for a financial year if the amount of the person's non-concessional contributions for the year exceeds the non-concessional contributions cap for the year (subsection 292-85(1) of the ITAA 1997). The non-concessional contributions cap for the 2015-16 financial year is $180,000. A person under 65 may be able to rely on the 'bring forward' rules in subsections 292-85(3) and 292-85(4) of the ITAA 1997 to increase the non-concessional contributions cap to 3 times the amount of the non-concessional contributions cap for the first year the 'bring forward' rules apply. Where the 'bring forward' rules apply, the non-concessional contributions cap will apply for 3 years and will be reduced by each non-concessional contribution made over the 3 years. For the 2015-16 financial year, the non-concessional cap over 3 years under the 'bring forward' rules is $540,000. | Detailed Reasoning - Consequences of Company A Pty Ltd transferring the property to Complying Superannuation Fund A as an in-specie contribution: If the property is transferred by Company A Pty Ltd to Complying superannuation fund A as an in-specie contribution on behalf of Individual 1 and Individual 2, then it will be treated as a contribution from Company A Pty Ltd and not as a contribution from Individual 1 and Individual 2. In order to determine whether the contribution is a concessional or non-concessional contribution (or neither) it is firstly necessary to consider whether or not it is assessable income of the Bond Superannuation Fund (see subsections 291-25(2) and 292-90(2) of the ITAA 1997). Contributions to a superannuation fund are not normally regarded as ordinary income of the fund under income tax law, as they are essentially receipts of capital. For that reason, Division 295 of the ITAA 1997 sets out special rules about the taxation of superannuation entities. Subdivision 295-C of the ITAA 1997 specifies the types of contributions that are included in the assessable income of a superannuation fund (assessable contributions). Under Subdivision 295-C of the ITAA 1997 there are basically 3 types of assessable contributions: (a) those made by the contributor on behalf of someone else (section 295-160 of the ITAA 1997) (b) those made on the contributor's own behalf for which the contributor is entitled to a deduction (section 295-190 of the ITAA 1997), and (c) those transferred from a foreign superannuation fund to an Australian superannuation fund (section 295-200 of the ITAA 1997). If Company A Pty Ltd makes a contribution to Complying Superannuation Fund A on behalf of Individual 1 and Individual 2 then pursuant to section 295-160 of the ITAA 1997 the amount of that contribution would be included in the assessable income of Complying Superannuation Fund A. As such, the contribution will not be covered under subsection 292-90(2) of the ITAA 1997 and therefore the exclusions in paragraph 292-90(2)(c) of the ITAA 1997 cannot apply to the contribution. In this situation the contribution will be a concessional contribution pursuant to subsection 291-25(2) of the ITAA 1997. As the concessional contributions cap for the 2015-16 financial year is $30,000 it is likely that Individual 1 and Individual 2 will have excess concessional contributions that would have to be included in their assessable income (section 291-15 of the ITAA 1997) and be included in their non-concessional contributions (paragraph 292-90(1)(b) of the ITAA 1997) for the 2015-16 financial year. Please note that even if the condition in paragraph 292-90(2)(b) of the ITAA 1997 had been met (that is, that the contribution was not included in the assessable income of Complying Superannuation Fund A) the contribution would not be covered by paragraph 292-100(1)(a) of the ITAA 1997 as it requires the contribution to have been made by the person in respect of whom the contribution is being made. As such, the exclusions in paragraph 292-90(2)(c) of the ITAA 1997 (including those covered by section 292-100 of the ITAA 1997) would not apply to the contribution. | Detailed Reasoning - Consequences of the alternative arrangement - Company A Pty Ltd sells the property to Complying Superannuation Fund A: If the alternative arrangement is undertaken where Company A Pty Ltd sells the property to Complying superannuation fund A, then the contributions to Complying superannuation fund A will be made by Individual 1 and Individual 2 on behalf of themselves (rather than by Company A Pty Ltd). It is noted that if Individual 1 and Individual 2 were to claim a deduction for the contributions they propose to make to Complying superannuation fund A under this alternative arrangement then the contributions would be assessable income of Complying superannuation fund A under section 295-190 of the ITAA 1997. As such, they would be treated as concessional contributions in accordance with subsection 291-25(2) of the ITAA 1997. However, if Individual 1 and Individual 2 do not claim a deduction for the contributions they propose to make to Complying superannuation fund A then the contributions will not be included in the assessable income of Complying superannuation fund A pursuant to section 295-190 of the ITAA 1997. As such, they will be treated as non-concessional contributions pursuant to paragraph 292-90(2)(b) of the ITAA 1997 unless they fall into one of the subparagraphs of paragraph 292-90(2)(c) of the ITAA 1997. As the contributions will not be: • Government co-contributions • made as a result of a structured settlement or order for personal injury • made to a constitutionally protected fund • contributions not included in the assessable income of the superannuation provider because of a choice made under section 295-180 of the ITAA 1997, or • roll-over superannuation benefits, the only relevant subparagraph to be considered is subparagraph 292-90(2)(c)(iii) of the ITAA 1997. 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 ($1,395,000 for the 2015-16 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. A contribution is covered under section 292-100 of the ITAA 1997 if: (a) the contribution is made by a CGT concession stakeholder to a complying superannuation plan in respect of themselves in a financial year (b) the requirements in subsection 292-100(2), 292-100(4), 292-100(7) or 292-100(8) of the ITAA 1997 are met, and (c) the CGT concession stakeholder chooses, in accordance with subsection 292-100(9) of the ITAA 1997, to apply section 292-100 of the ITAA 1997 to an amount that is all or part of the contribution (subsection 292-100(1) of the ITAA 1997). As Company A Pty Ltd intends to disregard the capital gain made as a result of the disposal of the property (the CGT event) under section 152-110 of the ITAA 1997, subsection 292-100(4) is the appropriate subsection to consider for the purposes of paragraph 292-100(1)(b) of the ITAA 1997. The requirements in subsection 292-100(4) of the ITAA 1997 are met if: (a) just before a CGT event, a person is a CGT concession stakeholder of an entity that could under section 152-110 of the ITAA 1997, disregard any capital gain arising from the CGT event (or would be able to do so assuming that a capital gain arose from the event) (b) the entity makes a payment to the CGT concession stakeholder within 2 years after the CGT event (c) the contribution is equal to all or part of the stakeholder's participation percentage (within the meaning of subsection 152-125(2) of the ITAA 1997) of the capital proceeds from the CGT event (but not exceeding the amount of the payment mentioned in paragraph (b)), and (d) the contribution is made within 30 days after the payment mentioned in paragraph (b). To make a choice for the purposes of paragraph 292-100(1)(c) of the ITAA 1997, the CGT concession stakeholder must: (a) make the choice in the approved form, and (b) give it to the superannuation provider in relation to the complying superannuation plan on or before the time when the contribution is made. Based on the above, the contributions that Individual 1 and Individual 2 will make to Complying Superannuation Fund A under the alternative arrangement will be excluded from being non-concessional contributions under paragraph 292-90(2)(c) of the ITAA 1997 because: • the contributions will be made by Individual 1 and Individual 2 (rather than Company A Pty Ltd) for themselves • Individual 1 and Individual 2 will be CGT concessions stakeholders just before the CGT event occurs • Company A Pty Ltd will make a payment of the exempt amount to Individual 1 and Individual 2 within 2 years of the CGT event • the contributions will be equal to all or part of Individual 1 and Individual 2's stakeholder participation percentages (50%) of the capital proceeds from the CGT event (but will not exceed the payment from Company A Pty Ltd) • the contributions will be made by Individual 1 and Individual 2 within 30 days after the payment is made to them by Company A Pty Ltd • Individual 1 and Individual 2 will make the choice to apply section 292-100 of the ITAA 1997 to their contributions in the approved form and give the approved form to Complying Superannuation Fund A on or before the time when their contributions are made • Individual 1 and Individual 2 will not claim a deduction for their respective contributions, and • the contributions will not exceed Individual 1 and Individual 2's CGT cap amounts when the contributions are made.