Contributed by Stephen Gethin, Director, Fortuna Legal Pty Ltd 1
As readers will be aware, a taxpayer who applies the 15-year CGT exemption to the disposal of an asset may contribute the capital proceeds of the disposal to superannuation2, up to the CGT cap of $1.515m3 (CGT Cap Contribution). A CGT Cap Contribution is neither concessional nor non-concessional and is therefore not assessed against the respective caps on those types of contributions. A CGT Cap Contribution may be made even if the member’s total superannuation balance is above, or the contribution would take it above, the $1.6m transfer balance cap. A large CGT Cap contribution on exiting a business can thus often be an important part of retirement planning for many SME owners, particularly where they have been unable to make sufficient contributions over their working lives.
The question arises of whether a super fund member who conducts a business can contribute an asset to their fund in specie and treat it as both the CGT disposal entitling them to claim the 15-year exemption and the CGT Cap Contribution which they make out of the capital proceeds of that event. This article puts forward that the answer is “yes”, despite the ATO taking the contrary view in various private rulings, and details the basis for that conclusion.
The asset contributed to superannuation must, of course, be one which the fund is permitted to acquire from a member, under an exception to the general prohibition on related party acquisitions in s 66 of the Superannuation Industry (Supervision) Act 1993. The principal type of asset exempt from the prohibition is business real property acquired at market value4 .
In order to qualify for the 15-year CGT exemption, the asset must also pass the “active asset test”5 . The definition of active asset is, so far as it is relevant to the example considered here, one where: “You own the asset … and it is used, or held ready for use, in the course of carrying on a *business that is carried on (whether alone or in partnership) by…you”6 . To pass the active asset test, the asset must have been an active asset for at least 7.5 years of the 15-year or longer period for which the taxpayer held it7 .
This article considers a scenario where a self-managed super fund member contributes real estate they owned which they use in their business into their fund. A later article will consider the case where the property is owned by a trust related to the fund member, not by the member themselves.
Prior to 2015, the ATO issued several private rulings stating that an in-specie superannuation contribution could be both the 15-year exemption CGT event and the CGT Cap Contribution which the member was permitted to make in relation to that disposal8 . In various private rulings issued subsequently, however, the ATO has taken the contrary view9 .
The ATO takes the same position in relation to a super contribution equal to the portion of a capital gain that is exempted by the retirement exemption in ITAA 97 Subdiv 152-D10 . It is submitted that the ATO’s position on that question is also incorrect, for the same reason as it is incorrect in relation to the 15-year exemption.
The ATO’s reasoning in the latter rulings is: “This is because section 292-100 of the ITAA 1997 makes it clear that a contribution made to the SMSF is made after the CGT event happened and/or the capital proceeds are received”.
The text of s 292-100(2) is set out in full below:
“(2) The requirement in this subsection is met if:
(a) the contribution is equal to all or part of the *capital proceeds from a *CGT event for which you can disregard any *capital gain under section 152-105 (or would be able to do so, assuming that a capital gain arose from the event); and
(b) the contribution is made on or before the later of the following days:
(i) the day you are required to lodge your *income tax return for the income year in which the CGT event happened;
(ii) 30 days after the day you receive the capital proceeds.”
It is artificial to read that provision as requiring the CGT event and the contribution to occur at different times, as pointed out by Andrew Henshaw in 201711 . The argument in this article that the ATO’s position is incorrect does not rely on that interpretation of the section, however. In my view, the ATO’s conclusion is incorrect because, while the CGT event and the superannuation contribution appear to be the same transaction, in strict legal terms they are (at least usually) in fact two different events which occur at different times. Therefore, if structured in the ordinary way, these transactions do in fact satisfy the (albeit incorrect) ATO requirement that the CGT Cap Contribution must happen after the CGT event.
The writer is unaware of any ruling addressing whether the disposal of the asset and the super contribution are in fact one transaction or two separate transactions for the purposes of ITAA 97. The later private rulings referenced above proceed on the basis that the CGT event and the super contribution are the same event, despite the language in ITAA 97 and a public ruling to the contrary.
According to the later private rulings, the super contribution must be made after both:
• the CGT event which gave rise to the entitlement to the 15-year exemption, and
• the receipt of the capital proceeds from that event.
The grounds on which each of those requirements are in fact satisfied in this case are considered in turn below.
The CGT Event
If the in-specie contribution is documented in the way in which any ordinary property sale between arm’s length parties would normally be done, it is clear from the wording of the relevant provision of the ITAA 97 and TR 2010/1 Income Tax: Superannuation Contributions that the CGT event and the contribution are not the same event and will not necessarily occur at the same time.
The disposal of business real property to a self-managed superannuation fund would ordinarily be effected by a two-stage process:
• a contract of sale, and
• a transfer of land, which is registered at the land titles registry of the relevant State. The transfer will almost always be signed and registered on a date after the contract is signed.
The contract of sale is the disposal which constitutes CGT event A1 to which the 15-year exemption is applied. The time of that event is when the taxpayer enters into the contract for the disposal12 .
The superannuation contribution does not occur at that time, however. The contribution only occurs when: “…the [superannuation] provider obtains possession of a properly executed transfer that is in registrable form, together with any title deeds or other documents necessary to procure registration of the superannuation provider as the legal owner of the land”13 .
(With electronic conveyancing now common across Australia, the above comments should be taken to be replaced with a reference to the electronic equivalent of that scenario having occurred. This would be the time when the conveyancer(s) give final sign-off to the transaction on PEXA for submission to the relevant State’s Land Titles Office for registration.)
The CGT event and the super contribution are therefore different physical and legal events which — at least if the transaction is structured in the ordinary way — would occur on different days.
Receipt of capital proceeds
Although the super fund will not pay the member for the contribution, it is still necessary to prepare a contract of sale. An in-specie asset transfer to a superannuation fund must be done at an arm’s length value14 . The contract would thus still specify an arm’s length purchase price. The contract would also provide, however, that the super fund would recognise a contribution from the member equal to the purchase price of the property instead of paying them the price in cash15 .
Capital proceeds is defined as:16
“The capital proceeds from a *CGT event are the total of:
(a) the money you have received or are entitled to receive in respect of the event happening; and
(b) the *market value of any property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event)”.
In the case considered here the transferor will receive no money or property for selling the land. Therefore, the transferor is deemed to receive capital proceeds equal to the value of the asset under ITAA s 116-30(1). That section reads:
“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.)”
The question then becomes: “At what time is the taxpayer deemed to receive those proceeds?” The only conclusion that can sensibly be drawn is that the proceeds are deemed received at the time the CGT event occurs. The words: “The market value is worked out as at the time of the event” make that interpretation practically certain. It could be argued that sentence only specifies when the value is to be determined, not when it is deemed to be received. But if the time of the deemed receipt of the proceeds is not the time of the CGT event, at what other time could that deemed receipt occur? There is no other suitable point at which the proceeds could be deemed to be received. Further, it would not seem appropriate to deem a taxpayer to have received on one day the market value of an asset as determined on a different day, as the value may have changed between the day of valuation and the day of deemed receipt.
As with the question of the timing of the CGT event itself (which is also the time of entry into the sale contract), the time of receipt of the capital proceeds will thus also be before the super contribution in an ordinary case of this kind.
1 Fortuna Legal (www.fortunalegal.com.au) is a business and tax law practice in Perth.
2 Income Tax Assessment Act 1997 (ITAA 97) s 292-100.
3 For the 2019/20 financial year.
4 Superannuation Industry (Supervision) Act 1993 (SIS Act) s 66(2).
5 ITAA 97 s 152-35.
6 ITAA 97 s 152-40(1)(a). Under other aspects of the definition, the asset could instead be used or held ready for use in a business by the taxpayer’s affiliate or an entity connected with the taxpayer, however those cases are beyond the scope of this article. They will be considered in a later article.
7 ITAA 97 s 152-35.
8 See ATO private rulings 1012503008540, 1011666020276, 1012130816581 and 1012410418121. These rulings are no longer available on the ATO website, however, they are referenced in: Beware: ATO U-turn on In-Specie Contributions, Henshaw, 2017, available at http://www.wolterskluwercentral.com.au/tax/superannuation/beware-ato-u-turn-specie-contributions/.
9 See private rulings 1012862148885 (21/8/15), 1013008906784 (2/5/16) and 1013054081138 (15/7/16). These rulings are currently available on the ATO website.
10 See for example private ruling 1013054081138.
11 See the article referenced in note 8.
12 ITAA 97 s 104-10(3)(a).
13 TR 2010/1 Income Tax: Superannuation Contributions, at para 200.
14 SIS Act s 66(2).
16 ITAA 97 s 116-20(1).