Transfer property to Super Fund – not tax avoidance

According to information published by the Tax Office, an arrangement by a small business owner to transfer a commercial property owned by him to his super fund, treating the proceeds as an undeducted contribution, may not be considered a ‘scheme’ to which anti-tax avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply.

Tax Office Interpretive Decision (ATO ID 2003/505) entitled “CGT small business retirement exemption: sale proceeds credited to a superannuation fund – Part IVA” refers to a situation where a commercial property indirectly owned by a taxpayer is sold at market value to his super fund, and the CGT retirement exemption is claimed on the capital gain arising from the sale.

Part IVA provides general anti‑avoidance rules which are intended to prevent arrangements which have been contrived to obtain tax benefits.

One of the four capital gains tax concessions available to a small business, is the small business retirement exemption.

This CGT concession allows a small business owner to claim up to $500,000 (a lifetime limit) capital gains tax free on capital proceeds from disposal of the business which are used for retirement.

“Used for retirement” does not necessarily mean actual retirement at that point; the proceeds can be contributed to a super fund to meet the retirement purpose and if aged under 55 the CGT exempt amount will be required to be rolled over.

In the case being considered, instead of being paid in cash, the taxpayer had the proceeds of the property sale credited as an undeducted superannuation contribution in the fund which bought the property.

Is this a tax avoidance scheme, of the kind prohibited by the general anti-avoidance provisions of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936)?

The Tax Office says “no” – primarily on the basis that the dominant purpose of the arrangement was not tax avoidance, but a decision taken for “reasons of asset protection”.

The crediting of proceeds was explainable as a means of reducing banking and handling fees.

On the other hand it has been reported that the ATO considers the small business CGT cap cannot be accessed in the event of an in-specie transfer of an active asset into an SMSF, where the small business CGT exemption is applied for the same CGT event. The opinion has been reflected in a number of private binding rulings, and reported here.

Further reading:

• SMSFRB 2020/1 Self-managed superannuation funds and property development
• Property in an SMSF
• When can residential property meet the definition of business real property?
• Taxpayer Alert TA 2023/2 Diverting property development profits to an SMSF with non-arm’s length arrangements

This page was last modified 2023-06-17