Edited version of private advice

Authorisation Number: 1052195777350

Date of advice: 18 December 2023

Ruling

Subject: 15-year retirement concession

Question 1

Would the Taxpayer satisfy the requirements in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the 15-year exemption with respect to his 100% interest in the Property in relation to the sale of the Property?

Answer

Yes.

Question 2

Would the Contributions to New SMSF satisfy the requirements in section 292-100 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Taxpayer acquired 100% of the interest in the Property on XXXX.

The acquisition price of the Property was approximately $X.

The Taxpayer has continuously held their 100% interest in the Property since acquisition date.

The current estimated market value of the Property is approximately $X.

The Company was incorporated on XXXX with two ordinary shares on issue.

Since incorporation, the Taxpayer and their ex-spouse each beneficially held one ordinary share in the Company, i.e. 50% of the Company's shares.

The Taxpayer's ex-spouse transferred their one ordinary share in the Company to the Taxpayer on XXXX. This was in consequence of a relationship breakdown between the Taxpayer and their ex-spouse.

Since XXXX, the Taxpayer has beneficially held 100% of the Company's shares as follows:

Table 1: Share acquisition date

The Taxpayer is the sole Director, Secretary and Public Officer of the Company.

The Company has carried on the Business since incorporation.

Since the Property's acquisition date, it has been continuously used in the Business.

The Business paid rent to the Taxpayer for use of the Property until around the time the COVID-19 pandemic started, when it temporarily ceased doing so.

The Taxpayer in their capacity as owner of the Property and the Company entered into a X-year (plus options to renew) commercial lease agreement in respect of the Property effective XXXX, with rent at market rates.

The turnover of the Business for the XXXX income year was $X. The aggregated turnover of the Business for the X income year is expected to be less than $2 million.

The Taxpayer is employed by the Business, and they do not carry on a business in their personal capacity.

The Taxpayer intends to retire during the XXXX income year, i.e. on or around 30 June XXXX. The exact timing is subject to the extent to which he will be able to dispose of the Business to a third party (as set out below).

Based on advice from their financial planner, the Taxpayer wishes to retain and utilise the Property as part of their retirement planning. That is, for a newly established self-managed superannuation fund (New SMSF) to hold the Property and use the potential income generated from the asset to help fund the Taxpayer's retirement (by way of an income stream from New SMSF).

New SMSF will be a complying superannuation plan for the purposes of paragraph 292-100(1)(a) of the ITAA 1997.

As part of their retirement plans, the Taxpayer intends to dispose of 100% of their interest in the Property (sale of the Property) to New SMSF during the XXXX income year, at the market value of the Property at that time.

The Taxpayer intends to be the sole member of New SMSF.

It is expected the Trustee of New SMSF would make investment decisions in accordance with the investment strategy, and generally would not require the consent of the member of the fund in making any investment decisions.

The Taxpayer currently has a superannuation balance of approximately $X held in an industry superannuation fund.

Prior to executing on the disposal of the Property, the Taxpayer intends to roll-over 100% of their superannuation balance in the industry superannuation fund to New SMSF.

In summary, it is intended that the following will happen all within a X period within the X income year:

•         New SMSF pays four cash instalments (of equal value of $X) to the Taxpayer.

•         The Taxpayer uses each of these four cash instalments to make superannuation contributions to New SMSF under the small business 15-year exemption (the Contributions).

•         All payments by New SMSF are expected to be made to the Taxpayer within the X income year.

•         All superannuation contributions by the Taxpayer to New SMSF under the small business 15- year exemption are expected to be made within 30 days of each instalment.

The Taxpayer will make the choice by completing the ATO form 'Capital gains tax cap election' (NAT 71161), in respect of each of the four superannuation contribution instalments under the small business 15-year exemption.

The Taxpayer will give the completed ATO form (NAT 71161) to New SMSF on or before the time when each of the four superannuation contribution instalments under the small business 15-year exemption are made.

The funding structure outlined above has been proposed because it is expected New SMSF will not have sufficient assets to fund 100% of the consideration payable as a lump sum (i.e. the market value of the Property).

The Taxpayer will obtain a third party market valuation report on the Property prior to proceeding with the disposal of the Property, and this valuation will be used to determine the market value consideration for disposal of the Property.

As part of planning for this disposal transaction, the Taxpayer considered another funding option for New SMSF to acquire the Property, namely a short-term bridging loan via a limited recourse borrowing arrangement structure. To this end, the Taxpayer obtained a quote for a bridging loan from Funding.com.au and the Taxpayer considers this option prohibitively expensive to consider pursuing any further.

The Taxpayer is also looking to sell the Business to an unrelated third party, and possibly within the XXXX income year.

In this regard, several parties have expressed initial interest in acquiring the Business, although the Taxpayer has not received any offers to date.

The Taxpayer's date of birth is XXXX (i.e. they are currently over 55 years old).

The Taxpayer's most recent income tax return lodged was for the year ended 30 June XXXX.

As at 30 June XXXX, the Taxpayer had no carry forward revenue or capital losses.

Apart from the XXXX income tax return discussed below, the Taxpayer is up to date with their Australian income tax return lodgments

The lodgment due date for the Taxpayer's XXXX income tax return is XXXX, and he intends to lodge this income tax return on or before the lodgment due date.

The Taxpayer's total superannuation balance is currently less than $X.

The Taxpayer has not used the small business capital gains tax concessions in the past.

The Taxpayer and the Company are currently residents of Australia for income tax purposes and are expected to remain residents for the period of the ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-60

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-105

Income Tax Assessment Act 1997 section 292-100

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 328-130

Reasons for decision

Question 1

Would the Taxpayer satisfy the requirements in section 152-105 of the ITAA 1997 to apply the 15-year exemption with respect to their 100% interest in the Property in relation to the sale of the Property?

Summary

As the requirements in section 152-105 of the ITAA 1997 will be satisfied, the capital gain from the sale of the Property to New SMSF can be disregarded for the purposes of Subdivision 152-B of the ITAA 1997.

Detailed reasoning

Small business 15-year exemption for individuals

Subdivision 152-B of the ITAA 1997 allows a CGT small business entity to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met.

Relevantly, for an individual, section 152-105 of the ITAA 1997 provides:

152-105 15-year exemption for individuals

If you are an individual, you can disregard any *capital gain arising from a *CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain;

(b) you continuously owned the *CGT asset for the 15-year period ending just before the CGT event;

...

(d) either:

(i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

(ii) you are permanently incapacitated at the time of the CGT event.

Basic conditions in Subdivision 152-A of the ITAA 1997

Subsection 152-10(1) of the ITAA 1997 sets out the basic conditions. Relevantly:

A *capital gain (except a capital gain from *CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(a) a *CGT event happens in relation to a *CGT asset of yours in an income year;

Note: This condition does not apply in the case of CGT event D1: see section 152-12 .

(b) the event would (apart from this Division) have resulted in the gain;

(c) at least one of the following applies:

....

...

...

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

(d) the CGT asset satisfies the active asset test (see section 152-35).

CGT event giving rise to a capital gain

Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss is made if a CGT event happens to a CGT asset.

The Property is a CGT asset (section 108-5 of the ITAA 1997).

Relevantly, under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset.

Under subsection 104-10(2) of the ITAA 1997, you dispose of a CGT asset when a change of ownership occurs from you to another entity.

The effect of CGT event A1 happening is that you make a capital gain if the capital proceeds from the disposal are more than the asset's costs base or a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(5) of the ITAA 1997). The time of the event is when you enter into the contract for the disposal, or, if there is no contract, when the change occurs (subsection 104-10(3) of the ITAA 1997).

It is noted that CGT event E2 under section 104-60 of the ITAA 1997 happens if you transfer a CGT asset to an existing trust. In broad terms, a self-managed superannuation fund is a type of trust. The time of the event is when the asset is transferred (i.e. when ownership of the asset changes). You make a capital gain if the capital proceeds from the transfer are more than the asset's costs base.

Subsection 104-60(5) of the ITAA 1997 provides that CGT event E2 does not happen if you are the sole beneficiary of the trust, and you are absolutely entitled to the asset as against the trustee and the trust is not a unit trust (see e.g. ATO Interpretative Decision ATO ID 2003/559: Income tax: Disposal of a CGT asset to a trust: application of CGT event A1 or CGT event E2).

Relevantly, the trustee's power to sell trust property without beneficiary consent is inconsistent with a beneficiary being absolutely entitled to an asset of the trust as against the trustee (see e.g. Decision Impact Statement for Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242).

Section 102-25 of the ITAA 1997 provides that where more than one event can happen, the one you use is the one that is most specific to your situation. CGT event E2 is the more specific event if an asset is transferred to a trust of which the transferor or an associate is a beneficiary or object.

Passively held assets - affiliates and entities connected with you

152-10(1A) of the ITAA 1997 provides that the conditions in this subsection are satisfied in relation to the CGT asset in the income year if:

1. your affiliate, or an entity that is connected with you, is a *CGT small business entity for the income year; and
2. you do not carry on a business in the income year (other than in partnership); and
3. if you carry on a business in partnership - the CGT asset is not an interest in an asset of the partnership; and
4. in any case - the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b) ) in relation to the CGT asset.

Where you do not carry on a business in your personal capacity, it is necessary to consider if the property is used in a business carried on by your affiliate, or an entity that is connected with you.

Connected with

Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if:

• either entity controls the other entity, or
• both entities are controlled by the same third entity in a manner described in the section.

Control may be direct or indirect.

Relevantly, subsection 328-125(7) of the ITAA 1997 sets of an indirect control test, which is designed to look through business structures that include interposed entities. This test applies to all entities, including discretionary trusts.

Broadly, an entity is taken to indirectly control a third entity where:

• the entity directly controls a second entity (the interposed entity); and
• the interposed entity controls (whether directly or indirectly) the third entity.

In other words, if Entity A controls Entity B and Entity B controls C, Entity A is also taken to control Entity C.

The tests to determine control are applied in respect of each entity. The direct control rules in subsections 328-125(2) to 328-125(6) of the ITAA 1997 apply to determine whether the first entity controls the interposed entity. Either the direct or indirect control rules can apply to determine whether the interposed entity controls the third entity.

Section 328-125 of the ITAA 1997 sets out the various ways an entity is taken to control another entity.

Relevantly, subsection 328-125(2) of the ITAA 1997 sets out the direct control of an entity other than a discretionary trust:

• except if the other entity is a discretionary trust, Entity A controls Entity B if Entity A, its affiliates, or Entity A together with its affiliates own, or have the right to acquire the ownership of, interests in Entity B that carry between them the right to receive at least 40% (the control percentage) of any income or capital distribution by entity B (general control test) pursuant to paragraph 328-125(2)(a); or
• Entity A also controls Entity B that is a company if Entity A, its affiliates, or Entity A together with its affiliates own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, at least 40% of the voting power in the company (voting control test) pursuant to paragraph 328-125(2)(b).

The control tests in this context focus on legal ownership, rather than beneficial ownership.

Affiliates

Affiliate is defined in subsection 328-130(1) of the ITAA 1997 as an individual or company that acts, or could reasonably be expected to act, in accordance with the entity's directions or wishes, or in concert with the taxpayer, in relation to the business affairs of that individual or company.

An individual or company is not automatically an affiliate merely because of the legal nature of a business relationship: subsection 328-130(2) of the ITAA 1997. For example, a company and its directors are not affiliates by reason only of the nature of the business relationship they share.

Small business entity

Pursuant to subsection 152-10(1AA) of the ITAA 1997:

You are a CGT small business entity for an income year if:

a.    you are a small business entity for the income year; and

b.    you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

As defined in section 995-1 of the ITAA 1997, a small business entity has the meaning given by subsection 328-110(1) of the ITAA 1997, as follows:

You are a small business entity for an income year (the current year) if:

a.    you carry on a business in the current year; and

b.    one or both of the following applies:

                      I.        you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

                    II.        your aggregated turnover for the current year is likely to be less than $10 million.

Relevantly, Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? in setting out the principles that determine whether a company is carrying on a business, explains that the temporary cessation of activities will not amount to the cessation of the business where there is an intention to resume them:

55. Whether a company ceases to carry on any business requires careful consideration of all the facts. A company that becomes dormant and where there is no further activity or no intention to resume its former or any other business, may cease to carry on a business. This is not likely to be the case where its activities are simply limited in nature (see paragraph 39 of this Ruling). It is also not likely if activities are paused, even for a lengthy period, where there is an intention to resume them. As with starting a business, care needs to be taken to distinguish situations where the company has ceased a particular business, from the situation where the company has ceased carrying on any business. For example, a company may cease trading operations permanently but retain some investments. For this reason, it may still be carrying on a business in the general sense.

Active asset test

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

1. 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 test period, or
2. 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 7½ years during the test period.

Under subsection 152-35(2) of the of the ITAA 1997 the period:

1. begins when you acquired the asset; and
2. ends at the earlier of:

                      I.        the CGT event; and

                    II.        if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time 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 by you, or your affiliate, or another entity that is connected with you.

Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if:

• either entity controls the other entity; or
• both entities are controlled by the same third entity.

For the purposes of section 152-40 of the ITAA 1997 it is the use of the asset in the business, and not by the taxpayer who owns it, that is relevant. Where the taxpayer treats any use by their affiliate, or an entity that is connected with them, as their use, it is that entity's use of the property in their business that is relevant in this context. As such, the property would not be excluded on the basis that it is a rental property in the hands of the taxpayer.

Continuously owned

The Commissioner explains in Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? that, generally for CGT purposes, ownership in relation to the disposal of property is determined with reference to settlement:

3. However, a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs. Settlement effects a change of ownership and a disposal (subsection 160M(1)) which then triggers the operation of subsection 160U(3). When settlement occurs, the taxpayer is then required to include any capital gain or loss in the year of income in which the contract was made (subsection 160U(3)). If an assessment has already been made for that year of income, the taxpayer may need to have that assessment amended.

However, whether an entity has continuously owned the CGT asset for the 15-year period set out in paragraph 152-105(b) of the ITAA 1997 is determined with reference to when the CGT asset commences to be owned by the entity to just before the CGT event.

In connection with retirement

This phrase 'in connection with their retirement'has no statutory definition.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with their retirement', nor does it give any indication of the degree of retirement for the purposes of this concession.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case.

The Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession:

Requirement to be permanently incapacitated or retiring

1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.

The legislation does not provide a specific definition of the word 'retirement' for the purpose of subparagraph 152-105(d)(i) of the ITAA 1997. Consequently, it takes its ordinary meaning.

The Macquarie Dictionary (Macmillan Publishers Australia, The Macquarie Dictionary online, accessed 18 December 2023)defines 'retirement' to mean 'removal or retiring from service, office, or business, especially in reaching the end of one's working life'.

The phrase 'in connection with' has been judicially considered in numerous cases.

In Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 (Pozzolanic), it was stated by the Full Court of the Federal Court that:

The words 'connected with' are capable of describing a spectrum of relationships ranging from the direct and immediate to the tenuous and remote. As Sheppard and Burchett JJ observed in Australian National Railways Commission v Collector of Customs (SA) [(1985) 69 ALR 367 at 377-378; 8 FCR 264, at 265] the meaning of the word 'connection' is wide and imprecise, one of its common meanings being 'relation between things one of which is bound up with, or involved in, another': Shorter Oxford English Dictionary.

Given the potential width of the words 'in connection with', the question remains in a particular case what kind of relationship will suffice to establish the connection contemplated by the statute. This in turn will require a value judgment about the range of the statute: see e.g. Pozzolanic at 289 and Taciak v Commissioner of Australian Federal Police (1995) 59 FCR 285 at 295.

Wilcox J of the Federal Court considered the meaning of the phrase 'in connection with the retirement' in Claremont Petroleum NL v Cummings (1992) 110 ALR 239 (Claremont). The case concerned the application of provisions within the Queensland Companies Code and in particular, whether payments made were in connection with the retirement of certain individuals. Wilcox J made the following observations on the phrase 'in connection with':

The phrase "in connection with" is one of wide import, as I had occasion to observe in a different context in Our Town FM Pty Ltd v Australian Broadcasting Tribunal (1987) 16 FCR 465 at p479-80; 77 ALR 577 at pages 591-2:

The words 'in connexion with'...do not necessarily require a causal relationship between the two things: see Commissioner for Superannuation v Miller (1985)8 FCR 153 at 154, 160, 163; 63 ALR 237at 238, 244, 247. They may be used to describe a relationship with a contemplated future event: see Koppen v Commissioner for Community Relations (1986) 11 FCR 360 at 364, Johnson v Johnson [1952] P 47 at 50-1. In the latter case the United Kingdom Court of Appeal applied a decision of the British Columbia Court of Appeal, Re Nanaimo Community Hotel Ltd [1945] 3 DLR 225, in which the question was whether a particular court, which was given 'jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act', had jurisdiction to deal with a matter which preceded the issue of an assessment. The trial judge held that it did, that the phrase 'in connection with' covered matters leading up to, or which might lead up to an assessment. He said...: 'One of the very generally accepted meanings of "connection" is "relation between things one of which is bound up with or involved in another"; or, again "having to do with". The words include matters occurring prior to as well as subsequent to or consequent upon so long as they are related to the principal thing. The phrase "having to do with" perhaps gives as good a suggestion of the meaning as could be had.'

Having regard to the context of subparagraph 152-105(d)(i) of the ITAA 1997, the Commissioner considers that it would be reasonable to adopt the meaning given to the phrase 'in connection with' in Claremont such that it is not necessary for there to be a permanent and everlasting retirement from the workforce; however, there would need to be at least a significant reduction in the number of hours worked or a significant change in the nature of the activities to be regarded as a retirement for the purposes of paragraph 152-105(d)(i).

Similarly, the words 'in connection with' can apply where the CGT event occurs sometime after retirement. Again, this would depend on the particular facts, and would need to be considered on a case-by-case basis.

Application in these circumstances

Relevantly in this case:

•         The basic conditions for relief in Subdivision 152-A of the ITAA 1997 would be satisfied as follows.

• The sale of the Property to New SMSF will result in a capital gain for the purpose of CGT event E2. As it is expected that the Trustee of New SMSF will make investment decisions in a manner that does not require the consent of the member of the fund in making any investment decisions, which includes the ability to sell the CGT asset, the Taxpayer would not be absolutely entitled to the Property as against the Trustee of New SMSF. Consequently, CGT event E2 would apply in preference to CGT Event A1. The conditions in paragraphs 152-10(1)(a) and 152-10(1)(b) of the ITAA 1997 are satisfied.
• The Property is a passively held asset used in the business of an affiliate or an entity connected with the Taxpayer for the purposes of subsection 152-10(1A) of the ITAA 1997. The condition in subparagraph 152-10(1)(c)(iv) of the ITAA 1997 is satisfied.

The Company is connected with and/or an affiliate of the Taxpayer. The Taxpayer has held at least 50% of the shares in the Company at all times. Consequently, the Company would be connected with the Taxpayer for the purposes of section 328-125 of the ITAA 1997 for all of the relevant period. Furthermore, the Taxpayer has been the sole director of the Company at all times (noting that they were a joint shareholder until XXXX and the sole shareholder from XXXX). Consequently, the Company would be an affiliate of the Taxpayer for the purposes of section 328-130 of the ITAA 1997 for all of the relevant period.

The Company is carrying on a business and its aggregated turnover is less than $2 million for the purposes of section 328-110 of the ITAA 1997 for the relevant income years.

The Taxpayer has never carried on a business in their own right.

• The Property satisfies the active asset test as it would have been used in a business by an entity that was connected with or was an affiliate of the Taxpayer for the purposes of section 152-40 of the ITAA 1997 (for the reasons set out above) for the period specified in subsection 152-35(2) of the ITAA 1997. The condition in paragraph 152-10(d) of the ITAA 1997 is satisfied.

•         The Taxpayer would have continuously owned the CGT asset (i.e. the Property) for the 15-year period ending just before the CGT event - i.e. from the acquisition of the Property in XXXX to the proposed future transfer of the Property with reference to their proposed retirement in XXXX.

•         The Taxpayer is over 55 years of age and seeking to retire.

As such, the Commissioner is satisfied that in these circumstances the sale of the Property by the Taxpayer would be in connection with their retirement for the purpose of subparagraph 152-105(d)(i) of the ITAA 1997. As all the conditions in section 152-105 of the ITAA 1997 will be satisfied, the capital gain from the sale of the Property can be disregarded under Subdivision 152-B with respect to the Taxpayer's interest in the Property.

Question 2

Would the Contributions to New SMSF satisfy the requirements in section 292-100 of the ITAA 1997?

Summary

In this instance, as the Taxpayer would qualify for the small business 15 year exemption, the capital gain can be entirely disregarded. Accordingly, if New SMSF acquires the Property for its market value and he makes contributions of the capital proceeds to the Fund in connection with their retirement, they will be eligible to choose to exclude some or all of the contribution from being a non-concessional contribution, up to his CGT cap for the income year.

Detailed reasoning

Non-concessional contributions

Paragraph 292-90(2)(c) of the ITAA 1997 excluded certain types of contributions from being non-concessional contributions.

One such contribution is a contribution covered under section 292-100 of the ITAA 1997 relating to certain CGT-related payments.

292-100(1)

A contribution is covered under this section if:

(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.

A contribution must be made by an individual to a complying superannuation fund in respect of the individual in financial year, being a period of 12 months beginning on 1 July (section 995-1 of the ITAA 1997).

Relevantly, subsection 292-100(2) of the ITAA 1997 provides:

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.

Generally, the capital proceeds from a CGT event comprise the sum of the money you have received, or are entitled to receive, in respect of the event happening, and the market value of any other property you have received, or are entitled to receive, in respect of the event happening (section 116-20 of the ITAA 1997).

The money the seller is entitled to receive in respect of the event happening (paragraph 116-20(1)(a) of the ITAA 1997) is limited to the known or ascertainable amounts that are receivable in respect of the CGT event. This includes any fixed amounts which the seller is entitled to receive at a later time (section 103-10 of the ITAA 1997).

The term 'receive' would take its ordinary meaning in this context - broadly, it relates to being given, presented with, or paid (see e.g. Macmillan Publishers Australia, The Macquarie Dictionary online, accessed 18 December 2023).

The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 explains the operation of the timing rules with respect to capital proceeds received in instalments:

1.103 Where the person has the CGT event, the contribution must be made no later than the day the person is required to lodge their tax return for the financial year in which the CGT event occurred or 30 days after the day the person received the capital proceeds, whichever is later. Where the capital proceeds are received and contributed in instalments, each instalment is a separate contribution which must be made within the above timeframes. [ Schedule 1, item 1, paragraphs 292 - 100(2 )( b ) and ( 7 )( b )]

For the purposes of paragraph 292-100(1)(c) of the ITAA 1997, the individual must make the choice in the approved form and give it to their superannuation fund before, or when, the contribution is made (section 292-100(9) of the ITAA 1997).

CGT cap amount

Relevantly, contributions allowed under a taxpayer's CGT cap amount include capital proceeds from the disposal of active assets that qualify for the small business 15-year exemption in Subdivision 152-B of the ITAA 1997.

An individual's CGT cap amount is reduced by the amount of contributions that have previously been excluded from being treated as non-concessional contributions (subsection 292-105(2) of the ITAA 1997.

The CGT cap amount is indexed at the start of each income year (subsections 292-105(3) and (4) of the ITAA 1997).

Application in these circumstances

Relevantly in this case, the conditions in section 292-100 of the ITAA 1997 would be satisfied as follows.

The Taxpayer will make contributions to New SMSF in respect of themself in the 12 month period commencing on 1 July 2023. The requirement in paragraph 292-100(1)(a) of the ITAA 1997 would be satisfied.

The Taxpayer would qualify for the small business 15-year exemption with respect to the sale of the Property. The capital proceeds from transfer of the Property will be received and contributed in instalments. All contributions will be made before 30 June XXXX. As all contributions will be made within 30 days of each instalment amount and before 30 June XXXX, each contribution will be made in a relevant time to satisfy the requirements in subsection 292-100(2) and paragraph 292-100(1)(b) of the ITAA 1997.

The Taxpayer will make the choice to exclude each contribution from being a non-concessional contribution in the approved form and giving it to New SMSF on or before the time the contribution is made. The requirements in subsection 292-100(9) and paragraph 292-100(1)(c) of the ITAA 1997 would be satisfied.

Accordingly, the Taxpayer would be eligible to choose to exclude some or all of the contributions from being non-concessional contributions, up to their CGT cap. Whether they can exclude the whole of the capital proceeds that comprise the contributions will depend on the market value of the Property at the time of the CGT event being equal to or less than their available CGT cap amount.

It is noted that that the Taxpayer has not previously chosen to apply an amount against section 292-100 of the ITAA 1997. As such, the full CGT cap amount for the XXXX income year will be available in respect of contributions equal to all or part of the capital proceeds for which they may disregard any capital gain under section 152-105 of the ITAA 1997.

Note

The ruling does not consider whether the arrangement may cause the SMSF to derive non-arm's length income for the purposes of section 295-550 of the ITAA 1997 (as the instalment payment arrangement may be considered an interest free loan and if the Property were not transferred for market value - see e.g. Law Companion Ruling LCR 2021/2: Non-arm's length income - expenditure incurred under a non-arm's length arrangement).

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