Private ruling: Capital gains tax concessions for small business and in-specie contributions
Date of advice: 18 May 2018
Published: July 2018
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the in-specie contribution by D and K of their 25% interest in Title 1 be a contribution covered by subsection 292-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997) such that it is not taken to be a non-concessional contribution by application of subparagraph 292-200(2)(c)(iii) of the ITAA 1997? | A1: No | Q2: Will the part of the in-specie contribution by D and K of their 25% interest in Title 2 be a contribution covered by subsection 292-100(1) of the ITAA 1997 such that it is not taken to be a non-concessional contribution by application of subparagraph 292-200(2)(c)(iii) of the ITAA 1997? | A2: No

Relevant facts and circumstances: The Trust acquired a 25% fractional interest in freehold title to land and buildings in December 20XX (Title 1). The Trust acquired a 25% fractional interest in freehold title to land and buildings in May 20XX (Title 2). Title 1 and Title 2 are adjoining titles. Title 1 and Title 2 contain land and buildings from which a business has historically been conducted. The business has recently been sold to another operator who now conducts its business from Title 1 and 2 pursuant to a lease arrangement. The Trust is also a partner in the partnership that previously operated the business. D and K are controllers and beneficiaries of the Trust. They both worked in the business for many years. As part of their retirement plan, D and K wish to transfer the ownership of the 25% interests in Title 1 and Title 2 to their complying Self-Managed Superannuation Fund (SMSF). In this regard, it is proposed that: a) The Trust will transfer their respective 25% interests in Title 1 and Title 2 to D and K individually. b) D and K will then immediately thereafter make an in-specie contribution of these interests to their SMSF. The transfer of the fractional interests in titles to D and K will give rise to a notional assessable capital gain to the Trust. The Trust satisfies the basic conditions to access the capital gains tax concessions for a small business. It is intend to entirely disregard the notional assessable capital gain attributable to the transfer of Title 1 to D and K by application of the “Small Business 15 Year Exemption” in Subdivision 152-B of the ITAA 97. It is intend to entirely disregard the notional assessable capital gain attributable to the transfer of Title 2 to D and K by application of the 50 percent General CGT discount under Division 115 of the ITAA 97 and the “Small Business Retirement Exemption” under Subdivision 152-D of the ITAA1997.

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 | 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 - Can an in-specie 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. 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 - Non-concessional contributions: Subsection 292-90(1) of the ITAA 1997 provides that the amount of a person’s non-concessional contributions for a year is the sum of each contribution covered under subsection 292-90(2); each amount covered under subsection 292-90(4); and the amount of the person’s excess concessional contributions. Subsection 292-90(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 not included in the assessable income of the superannuation provider in relation to the superannuation plan, …; and (c) it is not any of the following: … (iii) a contribution covered under section 292-100 (certain CGT-related payments), to the extent it does not exceed your CGT cap amount when it is made; To be covered under section 292-100 of the ITAA 1997 certain conditions must be met. Subsection 292-100(1) states: (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, 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 before the later of; (i) 2 years after the CGT event; and (ii) …; 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), 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). The requirements in section 152-325 we need to consider are: (1) A company or trust must make a payment (whether directly or indirectly through one or more interposed entities) to at least one of its CGT concession stakeholders if: (a) …; or (b) the company or trust receives an amount of capital proceeds from a CGT event for which it makes a choice under this Subdivision. … (4) The payment must be made by: (a) …; (b) otherwise – the later of; (i) 7 days after the company or trust makes the choice; and (ii) 7 days after the company or trust receives an amount of capital proceeds from the CGT event. | Detailed Reasoning - Application to your circumstances: It is proposed that the interests of the Trust in the property will be transferred to D and K. The 15 year exemption concession to disregard any capital gain made from the transfer will be applied to the interest in Title 1. The retirement exemption concession to disregard all or part of the capital gain will be applied to the interests in Title 2. 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) to the CGT concession stakeholders of the Trust being D and K. D and K then propose to contribute each of their interests in the property to the SMSF. It now needs to be established whether the contributions of the interests in the property to the SMSF by D and K satisfy the necessary requirements to have the majority (if not all) of the contributions count towards their respective superannuation CGT cap amounts rather than all of the contribution amounts being considered as non-concessional contributions. A personal contribution to a superannuation fund will be a non-concessional contribution unless the person claims a deduction under Subdivision 290-C of the ITAA 1997. There is no mention of either D or K claiming a deduction and the facts support the view no deduction will be claimed. Therefore, the contributions will not be included in the assessable income of the SMSF under subsection 295-190(1) of the ITAA 1997. As such, the contributions will be non-concessional contributions pursuant to subsection 292-90(2) of the ITAA 1997 unless excluded by 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 interest in the property (the CGT event) under section 152-110 of the ITAA 1997 or 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 contributions by D and K will be covered by section 292-100 of the ITAA 1997 if 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 contributions (paragraph 292-100(1)(c) of the ITAA 1997). As per subparagraph 292-90(2)(c)(iii) of the ITAA 1997, the contributions also must not exceed the CGT cap amount when they are 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 D and K each make a contribution to the SMSF on their own behalf in the 2017-18 financial year as detailed in the proposed arrangement. D and K 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 interest in 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 D and K within 2 years after the CGT event; the contribution D and K intend to make to the SMSF 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 D and K’s 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 D and K by the end of seven days after making the choice; the contribution D and K intend to make to the SMSF 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 D and K’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 D and K 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 SMSF 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 D and K for no consideration and then they contribute the interests in the property to the SMSF 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 D and K 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 as 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 D and K make an in-specie contribution of their interests in the property to the SMSF the full amount of the contributions would be treated as non-concessional contributions under the arrangement. This is because D and K do not satisfy the necessary requirements to allow them to exclude the value of the contributions of the property from their non-concessional contributions and have the amount count towards their respective CGT cap amounts instead.