Private ruling: Small business retirement exemption and in-specie contribution to a superannuation fund
Date of advice: 4 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Can you disregard the capital gain on the transfer of property from your personal name into your self-managed superannuation fund (SMSF) under the Subdivision 152-D of the Income Tax Assessment Act 1997 (ITAA 1997) small business retirement exemption? | A1: Yes

Relevant facts and circumstances: X and Y (the taxpayers) hold two unencumbered properties. The properties are held as tenants in common. The taxpayers would like to progressively transfer the properties to their self-managed superannuation fund (SMSF) within contribution limits. The taxpayers propose to transfer one property to their SMSF in the 20BB-CC financial year as an in-specie non-concessional contribution being within the $180,000 cap for each taxpayer. The taxpayers propose to transfer the second property to their SMSF in the 20CC-DD financial year as an in-specie non-concessional contribution being within the $180,000 cap for each taxpayer (depending on the market valuation at that time). The council rates (20AA-BB) value the properties at $XXX. The taxpayers obtained an independent real estate agent's opinion that this is a reasonable valuation. The taxpayers have owned and operated a business, run through Company A, from the premises at all times. The business is a small business entity and is expected to remain a small business entity in 20BB-CC and 20CC-DD financial years. A Trust holds over 40% of the voting shares in Company A. Each class of share has the right to both dividends and voting. A Trust is a discretionary trust established by deed. Company B is the trustee, of which X and Y are the sole directors/shareholders. X and Y are also the principals/appointers of the trust. Distributions from A Trust are expected to be made % to X and % to Y. X and Y are both over 55 years of age. X and Y will not be claiming a deduction for the contributions to their SMSF. The properties being transferred are used exclusively by Company A to carry on their business and they satisfy the definition of business real property as defined in subsection 66(5) of the Superannuation Industry (Supervision) Act 1993 (SISA).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 152-15 | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-125 | Income Tax Assessment Act 1997 Section 152-305 | Income Tax Assessment Act 1997 Section 152-320 | 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 292-95 | Income Tax Assessment Act 1997 Section 292-100 | Income Tax Assessment Act 1997 Section 290-170 | Income Tax Assessment Act 1997 Section 295-180 | 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 - Basic conditions for the small business CGT concessions: Section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the basic conditions you must satisfy to be eligible for the small business CGT concessions. These conditions are: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would have resulted in the gain (c) at least one of the following applies: (i) you are a small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) 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 or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. | Detailed Reasoning - Active asset test: Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use by you, an affiliate of yours, or by another entity that is 'connected with' you, in the course of carrying on a business. Subsection 152-35(1) of the ITAA 1997 states that a CGT asset satisfies the active asset test if: • you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the period of ownership, or • you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7 and a half years. Importantly, subsection 152-40(4) of the ITAA 1997 provides that an asset whose main use is to derive rent cannot be an active asset. | Detailed Reasoning - An entity that is 'connected with' you: Subsection 328-125(1) of the ITAA 1997 explains that an entity is connected with another entity if: a) either entity controls the other entity in a way described in this section; or b) both entities are controlled in a way described in this section by the same third entity. Subsection 328-125(2) of the ITAA 1997 provides that an entity (the first entity) controls another entity if the first entity, its affiliates, or the first entity together with its affiliates: a) beneficially owns, or have the right to acquire the beneficial ownership of, interests in the other entity that give the right to receive a least 40% (the control percentage) of any distribution of income or capital by the other entity: or b) if the other entity is a company - beneficially owns, or has the right to acquire beneficial ownership of, equity interests in the company that give at least 40% of the voting power in the company. Subsection 328-125(3) of the ITAA 1997 explains that an entity (the first entity) controls a discretionary trust if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the first entity, its affiliates, or the first entity together with its affiliates. Subsection 328-125(4) of the ITAA 1997 provides that an entity (the first entity) controls a discretionary trust for an income year if, for any of the 4 income years before that year: a) the trustee of the trust paid to, or applied for the benefit of: i. the first entity; or ii. any of the first entity's affiliates; or iii. the first entity and any of its affiliates; any of the income or capital of the trust; and b) the percentage (the control percentage) of the income or capital paid or applied is at least 40% of the total amount of income or capital paid or applied by the trustee for that year. Subsection 328-125(7) states that the section applies to an entity (the first entity) that directly controls another entity (the second entity) as if the first entity also controlled any other entity that is directly, or indirectly by any other application or applications of this section, controlled by the second entity. Are you 'connected with' the A Trust? X and Y are the sole directors and shareholders of Company B, who is the trustee of A Trust. X and Y are also the appointors of the trust. Therefore, it is considered that the trustee of A Trust might reasonably be expected to act in accordance with the directions and wishes of X and Y and accordingly, A Trust would be an entity that is 'connected with' X and Y. Are you 'connected with' Company A? A Trust holds over 40% of the voting shares in Company A, therefore Company A is an entity that is 'connected with' A Trust. As X and Y control A Trust and A Trust controls Company A, then X and Y also control Company A. Accordingly, Company A is an entity that is 'connected with' X and Y. | Detailed Reasoning - Application to your circumstances: Based on the information provided: • you intend to dispose of two properties, which will result in a capital gain • the properties were used by Company A, an entity that is 'connected with' you, in the course of carrying on a business since you have owned the properties • the main use of the properties is not to derive rent • Company A is a small business entity. Accordingly, you satisfy the necessary conditions to be eligible for the CGT concessions for small business. | Detailed Reasoning - 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. If you are an individual who chooses the retirement exemption, you do not need to terminate any activity or cease business. This concession allows you to provide for your retirement. Subsection 152-305(1) of the ITAA 1997 explains that if you are an individual, you can choose to disregard all or part of a capital gain if: • you satisfy the basic conditions • you keep a written record of the amount you chose to disregard (the CGT exempt amount), and • if you are under 55 years old just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA). You must make the contribution: • when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or • when you made the choice to use the retirement exemption if the relevant event is CGT event J2, J5 or J6. If you are 55 years old or older when you make the choice to access the retirement exemption, there is no requirement to pay any amount to a complying superannuation fund or RSA even though you may have been under 55 years old when you received the capital proceeds. Subsection 152-320(1) of the ITAA 1997 provides that an individual's CGT retirement exemption limit at a time is $500,000 reduced by the CGT exempt amounts of CGT assets specified in choices previously made by or for the individual under this Subdivision. The consequences of applying the retirement exemption to your capital gain means that your lifetime limit of $500,000 for the retirement exemption will be reduced by the amount excluded under this exemption. The amount of any capital gain that exceeds the CGT exempt amount does not qualify for this exemption. | Detailed Reasoning - Application to your circumstances: In your case, you satisfy the basic conditions and you are over 55 years of age, therefore, provided you keep a written record of the amount you chose to disregard (the CGT exempt amount), and you do not exceed your CGT retirement exemption limit, you will satisfy all the conditions necessary to be eligible for the small business retirement exemption concession. | 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 20AA-BB 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 20BB-CC 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 taxpayer's SMSF (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 - Application to your circumstances: You propose to transfer two properties to your SMSF, one in 20BB-CC financial year and one in the 20CC-DD financial year. You propose to disregard any capital gain made from the transfers under the small business retirement exemption. You propose to contribute your interest in the properties, by way of an in-specie contribution, as a non-concessional contribution. It is considered that the property satisfies the definition of 'business real property' under the SISA and therefore the in-specie contribution of the properties to your SMSF will be permissible. Further, it has already been established that you satisfy the necessary conditions to be able to claim the small business retirement exemption to disregard the capital gain made on the transfer of the properties to your SMSF. As you will not be claiming a deduction for the contribution you propose to make to your SMSF under the proposed arrangement then the contribution will not be included in the assessable income of your SMSF 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; a contribution covered under section 292-100 (certain CGT-related payments); 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 contribution will be a non-concessional contribution. Accordingly, provided the contribution is or includes the market value of the property when it is transferred to your SMSF, the in-specie contribution you will make to your SMSF will be included as a non-concessional contribution and will count towards your non-concessional contributions cap.