Private ruling: Capital gains tax - small business concession - 15 year exemption
Date of advice: 8 March 2017
Published: April 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will the capital gain on the sale of the goodwill of the business of ‘A’ (The Company) be disregarded under the Small Business Capital Gains Tax 15-year exemption under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will a subsequent payment made to an individual after the relevant CGT event be disregarded provided all conditions under section 152-125 of the ITAA 1997 have been met? | A2: Yes. | Q3: Is the sale in connection with the retirement of ‘B’? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-B

Reasons for decision: Summary: Section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business 15-year exemption for companies and trusts. Under this section, you could disregard the capital gain from the disposal if you: (a) satisfy the basic conditions in subdivision 152-A of the ITAA 1997 for the small business CGT concessions; (b) the entity owned the asset for the 15-year period ending just before the CGT event; (c) where the CGT asset is a share in a company or an interest in a trust – the company or trust has a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which you owned the CGT asset; (d) either: (i) are at least 55 years old at that time and the event happened in connection with your retirement or (ii) are permanently incapacitated at the time. Your ruling application requests whether a CGT event happens in connection with your retirement. Whether a CGT event happens in connection with an individual’s retirement depends on the particular circumstances of each case. There needs to be at least a significant reduction in the number of hours that you work or a significant change in the nature of your present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce. The provisions relating to the small business 15-year exemption do not define what is meant by the phrase ‘in connection with a taxpayer’s retirement’, nor does it give any indication of the degree of retirement required in order to take advantage of this concession. The words ‘in connection with’ can also apply where the CGT event occurs sometime before or after retirement. The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 establishes that one of the considerations when determining if a CGT event is in connection with retirement is the use of the capital proceeds for a taxpayer’s retirement. The Advanced guide to capital gains tax concessions for small business 2015-16 provides that the retirement does not need to occur immediately following the event; however whether a particular case satisfies the conditions depends very much on the facts of the case. In your case, you have sold the business and the contract for sale required that ‘B’ may be contracted by the purchaser to give assistance in the day to day operation of the business. It is anticipated that the level of participation will be significantly reduced per week and will conclude by 30 June 2017. ‘B’ working hours and responsibilities have been reduced and will be finalised by 30 June 2017. You will be using the capital proceeds from the sale of the business to fund your retirement. It is considered that there will be a connection between the disposal of the business and your retirement. Accordingly, when you dispose of the asset it is considered to happen in connection with your retirement in accordance with paragraph 152-110 of the ITAA 1997. Under section 152-125 of the Income Tax Assessment Act 1997 (ITAA 1997) certain payments to the capital gains tax (CGT) concession stakeholders of a company or trust are not included in the taxable income of the CGT concession stakeholder up to certain limits. To obtain an exemption under section 152-125 of the ITAA 1997, one of a number of conditions must be satisfied. Of those is the requirement that a capital gain of a company or trust was disregarded under section 152-110 of the ITAA 1997.

Relevant facts: The Company commenced business after 20 September 1985. | The Company acquired and operated a business. | ‘B’ and ‘C’ are the only directors and equal shareholders. | ‘B’ and ‘C’ are significant individuals of the company and have been for a total of at least 15 years. | The company is disposing of an active asset, being the goodwill of the business. | ‘B’ and ‘C’ are both over 55 years of age. | The net assets of ‘B’ and ‘C’ and associated entities are less than $6 Million. | The Companies turnover is less than $2 Million. | ‘B’ has been engaged in employment with the business for a significant number of hours per week. | The sale of the business is in connection with ‘B’ retirement. | The contract for sale of the business provides that ‘B’ may be contracted by the purchaser to give assistance in the day to day operation of the business.