A final interesting point relates to whether business real property can be contributed to an SMSF where that contribution is made under the small business CGT concessions. In particular, whether the retirement exemption under Subdiv 152-D ITAA97 which allows a taxpayer to disregard a capital gain from a CGT event that occurs in respect of CGT assets of their small business where the capital proceeds of the event are used in connection with the taxpayer’s retirement.

Small business CGT concessions

In relation to the CGT retirement exemption:

• a taxpayer must meet the small business concession basic conditions for relief set out in Subdiv 152-A ITAA97;
• if the taxpayer is under 55 at the time of making the choice to use their retirement exemption to disregard a capital gain under Subdiv 152-D, s 152-305(1)(b) ITAA97 requires the individual to contribute an amount equal to the disregarded amount to a complying superannuation fund;
• a similar requirement exists where a company or trust has made the relevant capital gain and the individual taxpayer is a CGT concession stakeholder of the company or trust per s 152-325(7)(a) ITAA97;
• where the individual is over 55, they are not required to contribute to a complying superannuation fund. However, they may choose to contribute an amount that is disregarded under Subdiv 152-D to a complying superannuation fund;
• in ATO ID 2010/217, the Commissioner states that:

“… a superannuation contribution can be made in a number of ways including by transferring an asset to the superannuation provider (an in specie contribution: refer section 285-5 of the ITAA 1997, and paragraphs 4, 10, 18-25 and 151 of Taxation Ruling TR 2010/1). A superannuation provider may breach section 66 of the SISA when an asset is acquired from a related party of the fund, such as a member (refer
SMSFR 2010/1). Subsection 66(2) of the SISA does however provide an exception to the prohibition relating to the acquisition by a superannuation fund of assets from related parties where the asset is ‘business real property’ (as defined in subsection 66(5) of the SISA) and other conditions are satisfied. Accordingly, it is considered that a transfer of real property to a complying superannuation fund can satisfy the requirement of paragraph 152-305(1)(b) of the ITAA 1997 to contribute an amount if the transfer of the real property satisfies the relevant provisions of the SISA.”

• this means that a contribution may be satisfied by an in specie transfer. However, there is a potential timing issue that causes a problem:
• the National Tax Liaison Group Losses and CGT-Sub Committee, in its June 2011 meeting, contemplated the following:

“Can a capital gain made on the in-specie transfer of an asset be disregarded under Subdivision 152-D on the basis that the payment required to be made has in fact been made as part of the in specie transfer?”

• the response at the time was:

“[The retirement exemption] requires that the choice that the exemption apply follows the happening of the CGT event. The Subdivision does not contemplate that the CGT event, choice and payment can all take place simultaneously.”

• it follows that, in the view of the ATO, the following must occur:

• the CGT event occurs first;
• the choice occurs second; and
• the contribution occurs last;

• it may be possible that the choice in fact occurs before the CGT event and contribution, which of course occur together in the in specie contribution scenario. The relevant choice must be made “by the day [the taxpayer lodges] their income tax return for the year in which the relevant CGT event happened”. 31 The words “by the day” suggest that it may be possibleto make the choice before the CGT event. This view is supported by the following private binding rulings: PBR 1011277902229 and PBR 1011296278342;

• in the author’s view, we do not need to argue such a fine point or come within potential grey areas of ATO interpretation but instead can separate out the transaction as follows:

• step 1: trigger a CGT event by way of entering into a sale and purchase agreement;32
• step 2: a payment is made under the sale and purchase agreement by way of cash or promissory note;
• step 3: the cash or promissory note is passed to the member of the SMSF;
• step 4: the choice to contribute to the complying superannuation fund under Subdiv 152-D ITAA97 is made;
• step 5: the member contributes the cash or promissory note to the SMSF; and
• step 6: the SMSF pays for the business real property under a sale and purchase agreement using the cash or promissory note (if it hasn’t already under step 2);

• variations to the above can be whether there is a sale of a business that gives rise to Subdiv 152-D, whether there is a separate business that gives rise to Subdiv 152-D, or whether the business is of commercial property. That is to say, where you are not selling a business separately, this transaction can be done by way of making a sale of the business real property to the SMSF. In which case, the order will be slightly adjusted:

• step 1: the SMSF and the property owner enter into a sale and purchase agreement for the business real property;
• step 2: the taxpayer makes a choice to contribute, under Subdiv 152-D, the proceeds of sale to their SMSF;
• step 3: the SMSF draws a promissory note (or uses cash that it has) to the vendor of the business real property for the purchase price;
• step 4: the vendor receives the promissory note (or cash) and passes this on to the member; and
• step 5: the member contributes the promissory note (or cash) to the SMSF.

Promissory notes

The author makes the following comments about the use of promissory notes in these transactions:

• at para 25 of SMSFR 2010/1, the Commissioner sets out his view that there is no contravention of s 66(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) if funds are transferred by a related party to an SMSF by way of promissory note;
• where a promissory note is returned by presentment or endorsement to its maker, it is then extinguished (provided it is not a bearer note); and
• care should be taken if stamp duty is an issue as some states do not apply otherwise available exemptions for in specie distributions to SMSFs where there is a purchase. See, for example, Landfall Pty Ltd v Chief Commissioner of State Revenue33 where an SMSF, using the strategy as outlined above and in line with accepted practice for SMSF law, was unsuccessful in obtaining a duty exemption in New South Wales.34

Payment required in connection to the exempt amount

One matter that is unclear is whether the payment that is required to be made into the superannuation fund (as required in s 292-100(4)(b) ITAA97) has to be made in connection with the exempt amount in s 152-125 ITAA97.

One interpretation is that there simply has to be a payment and that that payment does not have to be from proceeds from the CGT event. Therefore, although the in specie distribution cannot, in the view of the Commissioner, be the payment, so long as there is some other amount paid, the requirement is satisfied.

If the above view is accepted, care should be taken not to excessively exercise the power of the trustee of the trust making an in specie distribution and make a further payment for no valid reason.


This Article Was Created By.

Adrian Cartland

Principal Solicitor at Cartland Law
Adrian Cartland, the 2017 Young Lawyer of the Year, has worked as a tax lawyer in top tier law firms as well as boutique tax practices. He has helped people overcome harsh tax laws, advised on and designed tax efficient transactions and structures, and has successfully resolved a number of difficult tax disputes against the ATO and against State Revenue departments. Adrian is known for his innovative advice and ideas and also for his entertaining and insightful professional speeches.