For a long time now, there has been uncertainty in the classification of in-specie contributions of business real property to super funds relating to capital gains disregarded under certain small business CGT concessions.
Subsection 292-90(2)(c)(iii) of the Income Tax Assessment Act 1997 allows certain CGT related payments covered under section 292-100 to be excluded from being a non-concessional contribution provided the contribution is less than the taxpayer’s CGT cap (currently $1,395,000 for the 2015-16 income year) when it is made. Such contributions are also referred to as “CGT cap” amounts.
The CGT related payments covered under section 292-100 are:
- the capital proceeds from a capital gain disregarded under the small business 15 year exemption;and
- part or all of a capital gain disregarded under the small business retirement exemption.
The contentious issue with in-specie contributions is the simultaneous nature of the CGT event, the choice to disregard the capital gain under the relevant small business CGT concession and the contribution to the SMSF.
Similar to the view they expressed in the June 2011 National Tax Liaison Group “NTLG” minutes, the ATO often (but not always) took the view in private rulings that the law in section 292-100 contemplated that the CGT event, the choice to disregard the capital gain under the relevant small business CGT concession and the contribution to the SMSF must occur sequentially (that is, one after the other) for the contribution to be excluded from being a non-concessional contribution. This meant that in-specie contributions relating to the above small business CGT concessions would not meet the conditions to be excluded from being non-concessional contributions under section 292-100 because the CGT event, the choice to disregard the capital gain and the contribution to the taxpayer’s super fund occurred at the same time. However, in other private rulings, the ATO has not had an issue with in-specie contributions and the CGT related payments covered under section 292-100 have been able to be treated as CGT cap amounts.
Due to the increasing number of private rulings being requested (because of the inconsistent approach applied by the ATO), Webb Martin Consulting understands that the ATO is finally going to issue a firm position in a taxation determination in the near future (don’t hold your breath), setting out once and for all how they will consistently interpret the law as applying to in-specie contributions of business real property.
Unfortunately for taxpayers, it is expected that the ATO’s view in the June 2011 NTLG minutes will be affirmed (that is, the CGT event, the choice to disregard the capital gain and the contribution to the taxpayer’s SMSF must occur separately and sequentially for the contribution to be treated as a CGT cap amount under subsection 292-90(2)(c)(iii)). This will mean that the in-specie contributions of business real property will be treated as non-concessional contributions.
It would seem that together with the recently announced non-concessional contribution lifetime cap of $500,000, taxpayers’ ability to make in specie-contributions of business real property to super funds is going to be difficult except for lower value property.
This will likely see more and more SMSFs relying on a limited recourse borrowing arrangement (LRBA) to acquire business real property.
This article was prepared by Webb Martin Consulting. If you have any questions, or wish to seek advice on matters referred to in this article, we can be contacted on (03) 8662 3200 or firstname.lastname@example.org.