Private ruling: CGT small business concession contribution
Date of advice: 11 February 2020
Published: March 2020
Ruling period: 1 July 20XX to 30 June 20XX

Ruling: Q1: Will the in-specie contribution of property to your self-managed superannuation fund qualify as a capital gains tax (CGT) small business concession contribution under section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: You are XX years of age. You intend to establish a self-managed superannuation fund (SMSF). You will be the sole member of the fund. You purchased property in 19XX and built premises to use in your business. The business began operating in 19XX with you as a sole trader. You continuously operated the business as a sole trader until the business was sold to an unrelated party in 20XX. You continued to work in the business as an employee until 20XX when the business was again sold to new owners. From that point you continued to work for the business as a sole practitioner under your own ABN. From 20XX you have received rental income from the lease of the property to the business owners. The property will be transferred in-specie to the SMSF at market value. The total net value of the CGT assets owned by you and your affiliates is less than $XXX. Your small business annual aggregated turnover for the 20XX income year is estimated to be less than $XXX. The in-specie transfer during the 20XX income year will coincide with your full retirement from working in the business.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 section 152-35 | Income Tax Assessment Act 1997 section 152-40 | Income Tax Assessment Act 1997 section 152-105 | Income Tax Assessment Act 1997 section 285-85 | Income Tax Assessment Act 1997 section 292-90 | Income Tax Assessment Act 1997 section 292-100 | Income Tax Assessment Act 1997 section 292-105 Other relevant documents | Taxation Ruling TR 2010/1: Income tax: superannuation contributions

Reasons for decision: Detailed Reasoning - Basic conditions for the small business CGT concessions: An entity may qualify for the CGT small business concessions under subdivision 152A of the ITAA 1997 if (as per section 152-10), a CGT event happens in relation to an asset of theirs in an income year and the asset satisfies the 'active asset test' and at least one of the following applies: · the entity is a CGT small business entity with an aggregate annual turnover of less than $2,000,000 · the net value of assets that the entity and related entities own does not exceed $6 million · the entity is a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership, or · the entity does not carry on a business (other than as a partner) and the asset is used in business by a CGT small business entity that is an affiliate or is connected with the entity (passively held assets). Under subsection 152-40(1) of the ITAA 1997, a CGT asset is an active asset if you own it and you use it, or hold it ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, an affiliate, or another entity connected to you. Paragraph 152-40(4)(e) of the ITAA 1997 excludes certain assets, which are generally regarded as being passive assets, from being active assets. An asset will not be an active asset where the asset's main use by the taxpayer is to derive interest, an annuity, rent, royalties or foreign exchange gains. In your case, the property was used in the course of carrying on your business from 19XX to 20XX - a period in excess of XX years. The property would not have met the definition of an active asset after 20XX as its main use was to derive rental income from an entity's business that is not affiliated to you. A CGT asset satisfies the 'active asset test' if you've owned it for more than 15 years and it was an active asset of yours for a total of at least XX years during the test period; or it was an active asset for at least half of the test period if you've owned it for 15 years or less (section 152-35 of the ITAA 1997). The test period begins when you acquired the asset, and ends at the earlier of: · the CGT event, and · when the business ceased, if the business in question ceased in the 12 months before the CGT event (or such longer time as the ATO allows). The test period in this case will be from 19XX to when the property is transferred to your SMSF in the 20XX income year. As your property was an active asset in excess of XX years during the test period, it will meet the active asset test. Based on the available information, you satisfy the basic conditions for relief under section 152-10 of the ITAA 1997 as: · a CGT event will happen in relation to your CGT asset during the 20XX income year; · the event will result in a gain; · you are a CGT small business entity with an aggregate annual turnover of less than $2,000,000 and the net value of assets that you and your related entities own does not exceed $6 million; · the CGT asset satisfies the active asset test. | Detailed Reasoning - 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 XX years of age you will meet the 15 year exemption when you retire and dispose of your property during the 20XX year of income. | Detailed Reasoning - 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. | Detailed Reasoning - 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. For the 20XX-XX income year, an individual's CGT cap amount is $ XXX 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.