02/03/2011

This article deals with the strategies that may be available using a combination of the stamp duty concessions under section 62A of the Duties Act, NSW 1997 and the small business CGT retirement concessions under the Income Tax Assessment Act 1997 ("Tax Act") as well as the contribution caps. 

The strategies allow personal assets permitted to be transferred under superannuation law to be contributed to superannuation at nominal rates of stamp duty free from capital gains tax. 

They also allow individuals to maximise contributions by accessing the CGT cap and the superannuation retirement exemption limit, as well as a combination of caps.

Generally, there is legislation similar to section 62A in most other States with different requirements.

Requirements of Section 62A Duties Act, New South Wales
Section 62A provides stamp duty concession on the transfer of dutiable property in New South Wales from a person to a self managed superannuation fund if

1. the transferor is the only member of the fund or the property is held solely for the benefit of the transferor member; and
   
2. the property is used solely for the purpose of providing retirement benefit for the transferor member. 

The nominal duty on such a transfer is $50.

If the transfer is made to a custodian of the self managed superannuation fund who holds the property for the trustee, the stamp duty payable on the transfer is $500.

Procedurally, it is not sufficient to merely segregate member assets to meet the exclusive benefit test.  The New South Wales Office of State Revenue requires a deed of amendment to ensure the irrevocability of the exclusive benefit of the property for the member.

Dutiable properties
The dutiable properties that may be transferred must be assets that are permitted to be transferred in specie to SMSFs under section 66 of the Superannuation Industry (Supervision) Act 1993 (“SIS Act”). 

This limits the dutiable properties that may be acquired by the SMSF to:

1. business real property
2. in-house assets within the 5% limit under section 71 of the SIS Act (units in related private trusts and shares in related private companies - special income rules apply to dividends paid by private companies to SMSFs).

Strategies

1.    In specie transfer using the CGT Cap
The CGT cap for the 2010-11 income year is $1,155,000.  The CGT cap is indexed in line with AWOTE in increments of $5,000.

If an individual meets the 15 year small business CGT exemption criteria under Subdivision 152B of the Tax Act, the entire capital proceeds (not only the capital gains) can be transferred to superannuation using the CGT Cap.
Where the active asset is business real property, the Australian Taxation Office (“ATO”) has confirmed that in specie contribution of the business real property can be made to superannuation under the CGT cap, without having to dispose of the asset to a third party and subsequent contribution of the capital proceeds to superannuation.

CGT event C2 happens when the business real property is transferred to superannuation (Section 104-60 Tax Act) and the market substitution rule applies to deem the market value of the asset as the capital proceeds for the disposal (Section 116-30 Tax Act).

Using this strategy, any capital gains on the transfer is disregarded and the business real property can be transferred in specie to superannuation up to the CGT cap.  Nominal stamp duty of $50 is payable if the transfer is structured under section 62A of the Duties Act in New South Wales.

2.    In specie transfer using the CGT retirement exemption limit
The CGT retirement exemption limit is $500,000 for each person (Section 152.320 Tax Act).  It is a lifetime limit and is not indexed.

In ID 2010/217, the ATO confirmed that a contribution to superannuation under the CGT retirement exemption limit can be met by an in specie contribution of property allowable under section 66(2) of the SIS Act. A business real property will meet this requirement.  It is not mandatory to make the contribution in cash.

In ID 2010/217, an individual, aged less than 55, made a capital gain from the sale of an active asset.  The individual was able to use the capital proceeds from the sale of the asset to pay out a mortgage on a real property before making an in specie transfer of the real property to superannuation, using the CGT retirement exemption limit. 

An in specie contribution under the CGT retirement exemption limit will attract nominal stamp duty if it is made under Section 62A of the Duties Act.

3.    Combining caps
Where the capital proceeds or the contributions exceed the CGT Cap or the CGT retirement exemption limit, it is possible to treat the excess amount as non-concessional contribution, to be assessed under the non-concessional contribution cap or the bring forward non-concessional contribution cap, where applicable (ie up to $450,000).

4.    Gearing strategy
Where a SMSF borrows under Section 67A of the SIS Act to acquire a business real property from a member, if the transfer meets the requirements of Section 62A (3) of the Duties Act, nominal duty of $500 is payable (instead of full ad valorem stamp duty).  The holding trustee has to be a custodian within the meaning of section 62A (3) of the Duties Act and proper documentation will be required to meet the retirement of the NSW Office of State Revenue.

It is important proper documentation is put in place to meet the requirements of the different legislation for the implementation of these strategies. If you have any questions in regard to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.