Private ruling: CGT - Small business retirement exemption
Published: July 2013
Ruling period: 1 July 2012 to 30 June 2014

Ruling: Question and answer | Can you apply the small business retirement exemption under subdivision 152-D of the Income Tax Assessment Act 1997 ? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are the sole member and director of a super fund. For less than 15 years you have owned a business property, post Capital Gains Tax (CGT). You instructed the property to be transferred into your self managed super fund (SMSF). The property is used wholly for business purposes and has been for more than half of the ownership period. You have had the property valued. You in-specie transferred the property to your SMSF at the market value in a single transfer; no proceeds received. The in-specie transfer comprises of the following; ● Non-concessional contribution ● CGT Small business retirement exemption Both contributions are made within the individual limit set by the regulations. The transaction gave rise to a capital gain. You state your business has a turn over of less than $2 million and satisfies the definition of a small business entity. The property was held for more than 12 months and you intend to claim the 50% discount. You intend to apply the CGT Small business retirement exemption to the remaining capital gain. You have put in a written request to claim an amount of the retirement exemption. You are less than 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 103-10(1) | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 subsection 116-30(1) | Income Tax Assessment Act 1997 subsection 152-305(1) | Income Tax Assessment Act 1997 subsection 152-315(4) | Income Tax Assessment Act 1997 subsection 152-320(1) | Income Tax Assessment Act 1997 Section 285-5 | Income Tax Assessment Act 1997 subsection 328-110(b)

Reasons for decision: Summary: Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business retirement exemption as part of the Capital Gains Tax (CGT) small business relief provisions. Under subsection 152-305(1) of the ITAA 1997 an individual can choose the retirement exemption and disregard all or part of a capital gain if: a) the basic conditions in Subdivision 152-A are satisfied, and b) if the individual was under 55 just before making the choice, an amount equal to the asset's CGT exempt amount is rolled over into a complying superannuation fund or a retirement savings account (RSA), and c) the contribution is made; i. if the relevant CGT event is CGT event J2, J5 or J6 - when you made the choice; or ii. otherwise - at the later of when you made the choice and when you received the proceeds. Under section 152-10 of the ITAA 1997 the basic conditions to be satisfied for small business relief are: (a) CGT event happens in relation to a CGT asset of yours in an income year, and (b) the event would (apart from Division 152 of the ITAA 1997) have resulted in the gain, and (c) at least one of the following applies ● you are a small business entity, or ● you satisfy the maximum net asset value test, or ● 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, and (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Subsection 152-320(1) of the ITAA 1997 states that an individual's CGT retirement exemption limit is $500,000. This is the total of all amounts that can be disregarded under the small business retirement exemption in an individual's lifetime. Under subsection 152-315(4) of the ITAA 1997 you must specify the amount in writing that you wish to disregard. Generally, the trustee of a SMSF is prohibited from acquiring assets from related parties. However, certain exceptions to that prohibition exist, including circumstances where the assets transferred are business real property. Section 285-5 of the ITAA 1997 provides that superannuation contributions can include transfers of property. Subsection 116-30(1) of the ITAA 1997 provides that if you received no capital proceeds from a CGT event, you are taken to have received the market value of the CGT asset that is the subject of the event (the market value is worked out as at the time of the event). Where an individual has directed that the proceeds from the disposal of the property to their superannuation fund be credited to their member account in the superannuation fund, they are taken to have received money or other property if it has been applied for their benefit or as they direct (subsection 103-10(1) of the ITAA 1997). | Detailed Reasoning - Choosing the exemption: Requirement (a) | Detailed Reasoning - Basic condition (a): This condition requires a CGT event to happen in relation to your CGT asset. A CGT asset includes any kind of property or legal or equitable right. The relevant CGT event would be the disposal of the asset which would trigger a CGT event A1. The CGT event A1 occurred when you transferred the business property to your SMSF. Therefore this condition has been satisfied | Detailed Reasoning - Basic condition (b): You state the transfer of the business property to your SMSF has resulted in a capital gain. Therefore this condition has been satisfied. | Detailed Reasoning - Basic condition (c): You state the business is a small business entity as set out in subsection 328-110(b) of the ITAA 1997 and its turn over is less than $2 million. Therefore, as you satisfy one of the requirements, this condition is satisfied. | Detailed Reasoning - Basic condition (d): This condition requires the active asset test in section 152-35 of the ITAA 1997 be satisfied in relation to the asset. You satisfy the active asset test if you have owned the asset for 15 years or less and the asset was an active asset for a total of at least half of the period. You have owned the property for less than 15 years and it has been wholly used as a business for more than half of your ownership period. This condition has been satisfied. You have satisfied all the basic conditions under section 152-10 of the ITAA 1997. | Detailed Reasoning - Requirement b: As you are under the age of 55 you must contribute an amount equal to the amount that you wish to disregard into a complying superannuation fund. You satisfied this requirement when you made an in-specie contribution to your SMSF of the business property. | Detailed Reasoning - Requirement c: You have made an in-specie contribution of property to your SMSF with no proceeds received. Requirement c (ii) has been met as set out by subsection 103-10(1) of the ITAA 1997. | Detailed Reasoning - Conclusion: You have satisfied all the requirements under subsection 152-305(1) of the ITAA 1997 to choose the retirement exemption and disregard all or part of the capital gain. Accordingly you may apply the CGT - Small business retirement exemption.

This notice must not be taken to imply anything about: | ● the binding nature of the private advice issued to the applicant | ● the correctness of other edited versions. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not considered the application of Part IVA to the arrangement you asked us to rule on.