Private ruling: Capital gains tax concessions for small business and in-specie contributions
Date of advice: 21 August 2015
Published: August 2015
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Will an in-specie transfer of the property from the Trust to A and B, be a 'payment' for the purposes of the small business retirement exemption? | A1: No | Q2: Will an in-specie contribution of the property to the X Superannuation Fund, by A and B, equal to the capital gain disregarded under the small business retirement exemption, satisfy the requirement to be included in the capital gains tax (CGT) cap amount in section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No | Q3: Will an in-specie transfer of the property from the Trust to A and B be a 'payment' for the purposes of the small business 15-year exemption? | A3: No | Q4: Will an in-specie contribution of the property to the X Superannuation Fund, by A and B, equal to the CGT concession stakeholder's participation percentage of the capital proceeds received under the 15-year exemption concession, satisfy the requirement to be included in the CGT cap amount in section 292-100 of the ITAA 1997? | A4: No

Relevant facts and circumstances: W as trustee for the Trust owns commercial property (the property). The property is used in the business of an entity 'connected with' the Trust. The property satisfies the business real property test. The Trust is contemplating making an in-specie distribution of 50% of the property to each of A and B as beneficiaries. The Trust will make a capital gain on the transfer of the property to A and B. The Trust wishes to disregard the capital gain made on the in-specie transfer of the property under the 15-year exemption concession or the retirement exemption concession. If the Trust chooses the retirement exemption to disregard the capital gain, it will specify in writing a CGT exempt amount of $500,000 or less for each of A and B. The Trust considers that the 'payment' of the CGT exempt amount that is required to be made to the CGT concession stakeholders as part of the retirement exemption concession will in fact be made as part of the in-specie transfer of that same property to A and B. If the Trust chooses the 15-year exemption, the Trust considers that a 'payment' of the CGT exempt amount to the CGT concession stakeholders as part of the 15-year exemption will in fact be made as part of the in-specie transfer of that same property to A and B. A and B, are then contemplating making an in-specie contribution of their respective 50% interest in the real property to the X Superannuation Fund. A and B intend to have the contribution included under the superannuation CGT cap instead of the non-concessional contributions cap. However, if the Trust chooses the retirement exemption, then any excess over the $500,000 will be contributed as a non-concessional contribution. A market value amount of $500,000 or less each will be contributed in-specie to the X Superannuation Fund by A and B as amounts disregarded under the retirement exemption, with the remainder of the property being contributed as a non-concessional contribution. A and B intend to make the contribution of the property to the X Superannuation Fund within 30 days of receiving the transfer of the property from the Trust. A and B, are both aged over 55. The Trust satisfies the basic conditions to access the capital gains tax concessions for small business. The Trust satisfies the necessary conditions to be able to access the 15-year exemption concession. The Trust satisfies the necessary conditions to be able to access the retirement exemption concession. A and B do not intend to claim a deduction for their contribution to their superannuation fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-125 | Income Tax Assessment Act 1997 Section 152-325 | Income Tax Assessment Act 1997 Section 103-5 | Income Tax Assessment Act 1997 Section 285-5 | Income Tax Assessment Act 1997 Section 116-30 | Superannuation Industry (Supervision) Act 1993 Subsection 66 | Income Tax Assessment Act 1997 Section 291-25 | Income Tax Assessment Act 1997 Section 292-90 | Income Tax Assessment Act 1997 Section 292-100 | Income Tax Assessment Act 1997 Section 292-105 | Income Tax Assessment Act 1997 Section 292-80 | Income Tax Assessment Act 1997 Section 292-85 | Income Tax Assessment Act 1997 Section 295-160 | Income Tax Assessment Act 1997 Section 295-190 | Income Tax Assessment Act 1997 Section 295-200

Reasons for decision: Detailed Reasoning - 15 year exemption and payment to CGT concession stakeholders: Section 152-125 explains that if a capital gain made by a company or trust is disregarded under the small business 15–year exemption, any distributions made by the company or trust of that exempt amount to a CGT concession stakeholder is: • not included in the assessable income of the CGT concession stakeholder, and • not deductible to the company or trust provided certain conditions are satisfied. The conditions are: • the company or trust must make a payment within two years after the CGT event that resulted in the capital gain • the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event, and • the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's control percentage by the exempt amount. Subsection 152-125(4) of the ITAA 1997 provides that the Commissioner may extend the two year time limit to make a payment to a CGT concession stakeholder. Importantly, there is no actual requirement to make a payment of an exempt amount to a significant individual for the 15 year exemption to be available to the Trust. | Detailed Reasoning - Retirement exemption and payment to CGT concession stakeholders: Section 152-325 explains that if a capital gain made by a company or trust is disregarded under the small business retirement exemption, any distributions made by the company or trust of that exempt amount to a CGT concession stakeholder is: • not included in the assessable income of the CGT concession stakeholder, and • not deductible to the company or trust provided certain conditions are satisfied. The conditions are: • you must make a payment to at least one of your CGT concession stakeholders worked out by reference to each individual's percentage of the exempt amount • the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less, and • the payment must be made by the later of • seven days after you choose to disregard the capital gain, and • seven days after you receive the capital proceeds from the CGT event Failure to make a payment by the end of seven days after making the choice (or receiving the capital proceeds) to a CGT concession stakeholder (if they are 55 years or older) will mean the conditions are not satisfied and the retirement exemption will not be available. Further the amount of the capital gain the company or trust chooses to disregard (that is, the CGT exempt amount) must not exceed the CGT retirement exemption limit of each CGT concession stakeholder receiving a payment. An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the CGT individual has disregarded under the retirement exemption. | Detailed Reasoning - Can an in-specie transfer of property be a payment?: ATO Interpretative Decision ATO ID 2010/217 discusses the transfer of real property to a superannuation fund to satisfy the payment of the CGT retirement exemption amount. While the CGT retirement exemption concession is a separate concession to the CGT 15-year exemption concession, it is considered that the Commissioner's view on the transfer of real property for the retirement exemption will also apply to the 15-year exemption. The note in ATO ID 2010/217 states: where a company or trust chooses the retirement exemption and a CGT concession stakeholder is under 55 just before a payment is made in relation to them, there is a similar requirement for the company or trust to contribute the payment to a complying superannuation fund or an RSA: s 152-325(7)(a). The Commissioner says his view that a transfer of real property to a complying superannuation fund can satisfy the requirement to make a contribution also applies to the requirement to make a contribution under s 152-325(7)(a). On this basis, a "payment" for CGT purposes may be defined to include "giving of property". In fact, section 103-5 of the ITAA 1997 provides that there are a number of provisions in the capital gains tax legislation that say that a payment, cost or expenditure can include giving property. The section also states that to the extent that such a provision does say that a payment, cost or expenditure can include giving property, use the market value of the property in working out the amount of the payment, cost or expenditure. | Detailed Reasoning - Can an in-specie transfer or 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. 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 payment is or includes the market value of the 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.) Subsection 66(1) of the Superannuation Industry (Supervision) Act 1993 (SISA) provides that subject to subsection (2), a trustee or an investment manager of a regulated superannuation fund must not intentionally acquire an asset from a related party of the fund. Subsection 66(2) of the SISA explains that subsection (1) does not prohibit a trustee or investment manager acquiring an asset from a related party of the fund if the fund is a superannuation fund with fewer than 5 members and the asset is business real property of the related party acquired at market value. Subsection 66(5) of the SISA explains that business real property, in relation to an entity, means: a) any freehold or leasehold interest of the entity in real property; or b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph - any interest belonging to that class that is held by the entity; where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate. 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. | Detailed Reasoning - Concessional and non-concessional contributions: Pursuant to section 291-25 of the ITAA 1997, the amount of 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. Subsection 291-25(2) of the ITAA 1997 states: A contribution is covered under this subsection if: (a) it is made in the financial year to a complying superannuation plan in respect of you; 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) (about successor funds) or subsection 290-170(6) (about MySuper products); and (c) it is not any of the following: (i) an amount mentioned in subsection 295-200(2); (ii) an amount mentioned in item 2 of the table in subsection 295-190(1); (iii) a contribution made to a constitutionally protected fund. Subsection 291-25(3) of the ITAA 1997 states that an amount in a complying superannuation plan is covered under this subsection if it is allocated by the superannuation provider in relation to the plan for you for the year in accordance with the conditions specified in the regulations. Subsection 292-90(1) of the ITAA 1997 provides that the amount of a taxpayer's non-concessional contributions for a financial year is the sum of: a) each contribution covered under subsection 292-90(2) b) each amount covered under subsection 292-90(4), and c) the amount of the taxpayer's excess concessional contributions (if any) for the financial year. Subsection 292-90(2) of the ITAA 1997 explains that a contribution is covered under this subsection if: a) it is made in the financial year to a complying superannuation plan in respect of you; 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 290-170(5) (about successor funds) or subsection 290-170(6) (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 (payments that relate to structured settlements or orders for personal injuries); iii. a contribution covered under section 292-100 (certain CGT-related payments), to the extent that it does not exceed your 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 your 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; vi. a contribution that is a roll-over superannuation benefit. Subsection 292-90(4) of the ITAA 1997 explains that an amount is covered under this subsection 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 you for the year in accordance with conditions specified in the regulations; b) the amount of any contribution made to that plan in respect of you in the year that is covered by a valid and acknowledged notice under section 290-170, to the extent that it is not allowable as a deduction for the person making the contribution; c) the sum of each contribution made to that plan in respect of you 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). Under section 292-80 of the ITAA 1997, a taxpayer is liable to pay excess non-concessional contributions tax imposed by the Superannuation (Excess Non-concessional Contributions Tax) Act 2007 if the taxpayer has excess non-concessional contributions for a financial year. Excess non-concessional contributions arise if, for a financial year, the amount of a taxpayer's non-concessional contributions for the year exceeds the non-concessional contributions cap for the year. The non-concessional contributions cap for the 2014-15 financial year (or later years) is $180,000 (subsection 292-85(2) of the ITAA 1997). A taxpayer 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. In order to determine whether the contribution that is to be made by the taxpayer will be treated as a non-concessional contribution, it is necessary to consider whether such a contribution would be treated as assessable income of the X Superannuation Fund (paragraph 292-90(2)(b) of the ITAA 1997) and if so, whether it falls into any of the subparagraphs in paragraph 292-90(2)(c) 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); and (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). | Detailed Reasoning - CGT Cap - exclusion from 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 when the contribution is made. The CGT cap amount for the 2014-15 financial year is $1,355,000 (section 292-105 of the ITAA 1997). For the 2015-16 financial year the amount of the cap is $1,395,000. 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: a) the contribution is made by you to a complying superannuation plan in respect of you in a financial year; and b) the requirement in subsection (2), (4), (7) or (8) is met; and c) 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(4) of the ITAA 1997 provides that the requirement in this subsection will be met if: a) just before a CGT event, you were a CGT concession stakeholder of an entity that could, under section 152-110 (about the 15-year exemption concession), 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); and b) the entity makes a payment to you within 2 years after the CGT event; and c) the contribution is equal to all or part of your stakeholder's participation percentage (within the meaning of subsection 152-125(2)) 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). Subsection 292-100(8) of the ITAA 1997 provides that the requirement in this subsection will be met if: a) just before a CGT event, you were a CGT concession stakeholder of an entity that could, under subsection 152-305(2) (about the retirement exemption concession), disregard all or part of a capital gain arising from the CGT event; and b) the entity makes a payment to you that satisfies the conditions in section 152-325; and c) the contribution is equal to all or part of the capital gain arising 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). 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: 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. | Detailed Reasoning - Application to your circumstances: The Trust proposes to transfer the property equally to A and B and claim either the 15 year exemption concession or retirement exemption concession to disregard any capital gain made from the transfer. The Trust proposes to treat the transfer of that same property as a payment in respect of the exempt amount (disregarded under the 15 year exemption or retirement concession) equally to the CGT concession stakeholders of the Trust being A and B. A and B then each propose to contribute their interest in the property to the X Superannuation Fund. It is proposed that for the retirement exemption, a market value amount of $500,000 or less will be contributed in-specie by each individual to the superannuation fund under the superannuation CGT cap, with the remainder of the property being contributed as a non-concessional contribution. It is proposed that for the 15-year exemption each of the individual's interests in the property (up to their participation percentage in the Trust) will be contributed to the X Superannuation Fund under the superannuation CGT cap. It is considered that the property satisfies the definition of 'business real property' under the SISA and therefore the in-specie contribution of the property to the X Superannuation Fund by A and B will be permissible. Further, it has already been established that the Trust satisfies the necessary conditions to be able to claim either the 15 year exemption concession or retirement exemption concession to disregard the capital gain made on the transfer of the property to A and B. It now needs to be established whether the contribution of the property to the X Superannuation Fund by A and B satisfies the necessary requirements to have the majority (if not all) of the contribution count towards their respective superannuation CGT cap amounts rather than all of the contribution amount being considered a non-concessional contribution. As A and B will not claim a deduction for the contribution they propose to make to the X Superannuation Fund under the proposed arrangement, then the contribution will not be included in the assessable income of the X Superannuation Fund 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. As the payment will not be a Government co-contribution; made as a result of a structured settlement or order for personal injury; made to a constitutionally protected fund; not included in assessable income because of a choice under section 295-180 of the ITAA 1997; and will not be a roll-over superannuation benefit, 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 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 the Trust intends to disregard the capital gain made as a result of the transfer of the property (the CGT event) under section 152-110 of the ITAA 1997or section 152-305 of the ITAA 1997, subsections 292-100(4) and 292-100(8) are the appropriate subsections to consider. As such, the intended contribution by A and B will be covered by section 292-100 of the ITAA 1997 if it is made by them to a complying superannuation fund in respect of themselves in a financial year (paragraph 292-100(1)(a) of the ITAA 1997); if the requirements in subsection 292-100(4) or subsection 292-100(8) of the ITAA 1997 are met (paragraph 292-100(1)(b) of the ITAA 1997); and if they choose to apply section 292-100 of the ITAA 1997 to an amount that is all or part of the contribution (paragraph 292-100(1)(c) of the ITAA 1997). As per subparagraph 292-90(2)(c)(iii) of the ITAA 1997, the contribution also must not exceed the CGT cap amount when it is made. It is clear from paragraph 292-100(1)(a) of the ITAA 1997 that the contribution must be made to a complying superannuation fund by the person in respect of whom the contribution is being made. As such, the requirement in paragraph 292-100(1)(a) of the ITAA 1997 will be met if A and B each made a contribution to the X Superannuation Fund on their own behalf in the 2015-16 financial year as detailed in the proposed arrangement. A and B, are currently CGT concession stakeholders of the Trust. The Trust could disregard the capital gain that will arise from that CGT event (i.e. the disposal of the property) under section 152-110 of the ITAA 1997 or section 152-305 of the ITAA 1997. If, for the 15-year exemption, the Trust makes a payment to A and B within 2 years after the CGT event; the contribution A and B intend to make to the X Superannuation Fund is equal to all or part of their stakeholder's participation percentage of the capital proceeds from the CGT event (but does not exceed the payment received from the Trust); and A and B contribution is made within 30 days after they receive the payment from the taxpayer then the requirements of subsection 292-100(4) of the ITAA 1997 and therefore paragraph 292-100(1)(b) of the ITAA 1997 will be satisfied. Or alternatively, for the retirement exemption, the Trust makes a payment to A and B by the end of seven days after making the choice; the contribution A and B intend to make to the X Superannuation Fund is equal to all or part of their stakeholder participation percentage of the capital proceeds or exempt amount from the CGT event, whichever is less, (but does not exceed the payment received from the Trust); and A and B's contribution is made within 30 days after they receive the payment from the taxpayer then the requirements of subsection 292-100(8) of the ITAA 1997 and therefore paragraph 292-100(1)(b) of the ITAA 1997 will be satisfied. If A and B then make the choice to apply section 292-100 of the ITAA 1997 to the contribution in the approved form and provide the approved form to the X Superannuation Fund on or before the time the contribution is made then paragraph 292-100(1)(c) of the ITAA 1997 will also be satisfied. On the basis that paragraphs 292-100(1)(a), 292-100(1)(b) and 292-100(1)(c) of the ITAA 1997 are satisfied, the contribution will be covered by section 292-100 of the ITAA 1997. However, as the Trust proposes to transfer the property to A and B for no consideration and then they contribute the property to the X Superannuation Fund on their behalf as an in-specie contribution, there would be issues with satisfying the requirements of subsection 292-100(4) of the ITAA 1997 and subsection 292-100(8) of the ITAA 1997 as the Trust would not be making a payment to A and B within 2 years after the event as required by paragraph 292-100(4)(b) of the ITAA 1997 or within 7 days after the choice is made to disregard the gain from the CGT event required by paragraph 292-100(8)(b) of the ITAA 1997. While a transfer of property can be treated as a payment, paragraph 292-100(4)(b) of the ITAA 1997 actually states that the payment should take place within 2 years after the CGT event so this paragraph contemplates the payment to the CGT concession holders and the CGT event happening at separate times, not simultaneously. Likewise, paragraph 292-100(8)(b) of the ITAA 1997 (by virtue of the trust conditions under section 152-325 of the ITAA 1997) also contemplates that the choice that the retirement exemption applies follows the happening of the CGT event, meaning that a gain must first be made, then a choice is made to disregard the gain and then a payment must be made to a CGT concession stakeholder 7 days after you choose to disregard it. It does not contemplate that the CGT event, the choice and the payment all take place simultaneously. Accordingly, the requirement to make a 'payment' of the CGT exempt amount at a time after the CGT event can never be satisfied by an entity treating the in-specie transfer of a property as the making of a payment of the CGT exempt amount that was disregarded from the transfer of that same property. As it is considered that they cannot all take place at the same time, paragraph 292-100(4)(b) and paragraph 292-100(8)(b) of the ITAA 1997 would not be satisfied. As such, if A and B make an in-specie contribution of the property to the X Superannuation Fund the full contribution would be treated as a non-concessional contribution under the arrangement. This is because A and B do not satisfy the necessary requirements to allow them to exclude the value of the contribution of the property from their non-concessional contributions and have the amount count towards their respective CGT cap amounts instead.