Private ruling: Capital gains tax
Date of advice: 19 January 2017
Published: June 2017
Ruling period: Year ending 30 June 201Y
Date scheme commenced: 1 July 201X

Ruling: Q1: Is the sale of farming land considered to be in connection with your retirement in accordance with paragraph 152-105(d) of the Income Tax Assessment Act 1997 ? | A1: Yes.

Relevant facts and circumstances: In 19XX, you purchased a number of parcels of primary production land (the Land). You are over the age of 55. Farming operations have been conducted on the land through a company for the entire ownership period. The company is a small business entity. You are connected to the company. In 20XX you began planning for retirement. You hired multiple managers but they were not successful in maintaining their position. The employment of a long-term manager was to facilitate the ability for you to decrease your involvement in the operations. In 20XX you successfully hired a manager and you are currently increasing the manager's share of the day-to-day workings of the operations. You have remained heavily involved in the operations. You will sell the land to a family trust at full market value, which will be controlled by your spouse and children. The sale of the land will result in your spouse and children, along with the manager taking over the majority of your current activities. You have begun your transition to retirement by reducing physical aspects of work that you were previously involved in. You currently work approximately XX hours per week. Your current responsibilities and activities include: ● Strategic planning for the Operations; ● Liaising with Station Manager on day to day running of the Operations; ● Monitoring and managing livestock; ● Managing relationships with share farming contractors; ● The maintenance of plant and equipment, including sourcing parts and dealing with contractors; and ● Planning, organising and managing capital works programs. After the sale of the land you will be involved only with the high-level oversight of the operations and your hours will reduce to XX hours per week. This will continue to decrease as your spouse, children and manager further assume responsibility. Your full retirement to zero working hours is expected to occur within three years of the sale of the property. The capital proceeds from the sale of the land will provide funding for your retirement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 Section 152-105

Reasons for decision: Summary: Section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business 15-year exemption for individuals. Under this section, you could disregard the capital gain from the disposal of your land if you: (a) satisfy the basic conditions in subdivision 152-A of the ITAA 1997 for the small business CGT concessions; (b) continuously 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 CGT event; however whether a particular case satisfies the conditions depends very much on the facts of the case. In your case, you have reduced your working hours and activities undertaken significantly. Your working hours and responsibilities will be reduced further on the disposal of the land and you will be retiring completely in the next three years. You will be using the capital proceeds from the sale of the land to fund your retirement. It is considered that there will be a connection between the disposal of the land and your retirement. It is considered that the disposal of the land is important to your retirement plans. Accordingly, when you dispose of the land it is considered to happen in connection with your retirement in accordance with paragraph 152-105(d) of the ITAA 1997.