Private ruling: Capital gains
Date of advice: 19 December 2016
Published: May 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Can you utilise the small business capital gains tax (CGT) retirement exemption in relation to the capital gain arising from the transfer of a commercial property to a superannuation fund? | A1: No.

Relevant facts and circumstances: You are under 55. You purchased commercial property several years ago and have owned the property continuously. The property is wholly used in your business. You want to contribute the property into a superannuation fund before you turn 55. No capital proceeds will be received as a result of the transfer. A capital gain will arise. You are a small business entity. The property is an active asset.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-D | Income Tax Assessment Act 1997 Section 292-100

Reasons for decision: Summary: Subdivision 152-D of the ITAA 1997 contains the small business retirement exemption. You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. The small business retirement exemption allows individuals the choice to disregard up to $500,000 in qualifying capital gains. To be entitled to the small business retirement exemption, an individual must satisfy the following conditions: 1. A CGT event happens in relation to a CGT asset in an income year; 2. The event would have, apart from Division 152 of the ITAA 1997, resulted in a capital gain; 3. The basic conditions in Subdivision 152-A of the ITAA 1997 are met; and 4. A choice is made to disregard all or part of the capital gain under subsection 152-305(1) of the ITAA 1997. This disregarded amount is known as the asset's 'CGT exempt amount'. If the individual is under the age of 55 just before the choice is made, a contribution must be made to that individual's complying superannuation fund (or retirement savings account). The contribution must be equal to the asset's CGT exempt amount and paid out of the capital proceeds before the later of when the choice is made and when the proceeds are received. Once the capital proceeds are received, the individual is able to calculate their capital gain and subsequently make the choice to disregard all or part of that capital gain. Subdivision152-D of the ITAA 1997 does not contemplate that the CGT event, choice and contribution of the CGT exempt amount can all take place simultaneously. This is also confirmed in paragraph 292-100(7)(b) of the ITAA 1997 which states that the contribution to the superannuation fund must be made on or before the later of the following days: a) the day you are required to lodge your income tax return for the income year in which the CGT event happened; or b) 30 days after the day you receive the capital proceeds from the CGT event. It is clear that these paragraphs contemplate the CGT event and the payment to the superannuation fund happening at separate times. That is, section 292-100 of the ITAA 1997 makes it clear that a contribution made to the superannuation fund is made after the CGT event happened and/or the capital proceeds are received. The determination of the capital proceeds, the calculation of the capital gains and the making a choice under section 152-305 of the ITAA 1997 is the correct construction of the order required for the small business retirement exemption provisions. A necessary consequence of this ordering is that the contribution of the CGT exempt amount must be made at the later of when the choice is made and when the capital proceeds are received. In your case you cannot reduce or disregard your capital gain made in respect of the capital gain arising from the transfer of the property in accordance with the small business CGT retirement exemption. This is because an individual under 55 must make a contribution to a complying superannuation fund within 2 years of the CGT event occurring. The legislation does not contemplate that the CGT event, choice and contribution of the CGT exempt amount can happen simultaneously. Rather, each of the relevant steps must happen sequentially, therefore, that initial transfer of the property cannot also be the final contribution required.