Private ruling: Small business 15-year exemption
Published: August 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: For the purposes of satisfying the conditions for contributing a capital gain to superannuation under section 292-100 of the Income Tax Assessment Act 1997 (ITAA 1997), would the small business 15-year exemption in section 152-105 of the ITAA 1997 apply to allow you to disregard any capital gain from the sale of the goodwill of your business? | A1: Yes.

Relevant facts and circumstances: You purchased a business before 20 September 1985. You will be disposing of the goodwill of the business. You advise that the reason for the sale of the goodwill is that you are intending to retire. You are over 55 years old. It will be a condition of the purchaser that you work for a set period of time from the date of settlement of the contract. You plan to fully retire after this period. You currently work more than one day a week and will do so until the settlement date of the contract of sale. You advise that you satisfy the basic conditions for the small business concessions. You satisfy the maximum net asset value test and the partnership is also a small business entity.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 102-5, | Income Tax Assessment Act 1997 - Section 104-10, | Income Tax Assessment Act 1997 - Section 152-105, | Income Tax Assessment Act 1997 - Section 152-35, | Income Tax Assessment Act 1997 - Section 152-40 and | Income Tax Assessment Act 1997 - Section 292-100.

Reasons for decision: Summary: The framework for calculating a net capital gain is contained in section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Under that framework, only those capital gains that are not otherwise disregarded are taken into account under step 1 of that method statement. The relevant CGT event that will happen when you dispose of your goodwill will be an A1 event under section 104-10 of the ITAA 1997. Because you acquired this asset before 20 September 1985, any capital gain or capital loss made as a result of a CGT event will be immediately disregarded under paragraph 104-10(5)(a) of the ITAA 1997. It follows that this disregarded capital gain will not be taken into account at step 1 of the method statement in section 102-5 of the ITAA 1997, and there will be no requirement to reduce it further under the 15-year exemption provisions or any of the other CGT small business concessions. However, your eligibility for the small business 15-year exemption will still need to be considered to determine whether you satisfy the conditions for contributing a capital gain to superannuation under section 292-100 of the ITAA 1997, as subsection 292-100(5) of the ITAA 1997 treats the goodwill as a post-CGT asset for this purpose. | Detailed Reasoning - Small business 15 year exemption: Section 152-105 of the 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 goodwill 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 happened and (c) you are: (i) at least 55 years old at that time and the event happened in connection with your retirement or (ii) permanently incapacitated at the time. Because you advise that you satisfy both the maximum net asset value test and the active asset test, the basic conditions for the small business concessions are satisfied (a). As for the conditions specific to the 15-year exemption, condition (b) is satisfied because you have owned the asset for over 15 years. | Detailed Reasoning - Condition (c): Condition (c) of the 15 year exemption applies if when the CGT event happened: • you were permanently incapacitated, or • you were 55 years or older, and the event happened 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. | Detailed Reasoning - Application to your circumstances: You are over 55 years old. As part of the agreement to dispose of the goodwill of your business, you will be required to continue to work in the business for a set period of time subsequent to settlement of the contract. This will be a reduction in working hours compared to what you currently work. You advise that you will fully retire after this period. Accordingly, the disposal is considered to be in connection with your retirement. You satisfy all of the conditions for the small business 15-year exemption in section 152-105 of the ITAA 1997. The exemption would therefore apply to allow you to disregard any capital gain from the disposal of the goodwill for the purposes of satisfying the conditions for contributing a capital gain to superannuation.