Private ruling: CGT - in connection with retirement
Date of advice: 21 May 2026
Published: 10 August 2026
Ruling period: Income year ending 30 June 20YY | Income year ending 30 June 20YY | Income year ending 30 June 20YY
Date scheme commenced: 1 July 20YY

Ruling: Q1: Does the Commissioner agree that the disposal of the business assets by the Taxpayer to the purchaser qualify as Capital Gains Tax assets, pursuant to section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: If the answer to question 1 is yes, will the proceeds be assessed on capital account? | A2: Yes. | Q3: If the answer to question 1 is yes, does the Commissioner agree that the disposal of the business assets happens in connection with the Taxpayer's retirement, for the purposes of sub-paragraph 152-105(d)(i) of the ITAA 1997? | A3: Yes.

Relevant facts and circumstances: 1. The Taxpayer is over X years of age. 2. The Taxpayer bought a share in a practice becoming a partner of the practice, in respect of which they became the sole practitioner on retirement of the partner. 3. The Taxpayer entered into a contract for the sale and purchase of a business (the Contract), through which they sold the practice's business assets and agreed to a restraint of trade. 4. A reasonable apportionment of the purchase price will be made in relation to the assets purchased. 5. The Taxpayer will work for the Purchaser following the sale with a view to winding down the hours they work and retiring. 6. The Taxpayer was not incapacitated when they entered into the Contract.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 152-105

Reasons for decision: Summary: Detailed reasoning Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the meaning of CGT asset: (1) A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. (2) To avoid doubt, these are CGT assets: (a) Part of, or an interest in, an asset referred to in subsection (1); (b) goodwill or an interest in it; (c) an interest in an asset of a partnership; (d) an interest in a partnership that is not covered by paragraph (c). The meaning of property was considered in Hepples v FC of T 90 ATC 4497 ( Hepples ), where the Full Federal Court considered whether the right to work was an asset for the purpose of Part IIIA of the Income Tax Assessment Act 1936 (the former CGT provisions). According to the Full Federal Court the essential characteristic of an item of property is that it can in some way be assigned, transmitted or turned to account with a third party ( Hepples was appealed to the High Court; Hepples v Federal Commissioner of Taxation (1991) 173 CLR 492, but in that case there was limited analysis of the meaning of asset). The business assets can all be transmitted, assigned or turned to account and are property, and CGT assets, for the purposes of section 108-5 of the ITAA 1997. A restraint of trade (or restrictive covenant) is an agreement between two or more parties to refrain from doing some act or thing. One or more of the parties agrees to give up some freedom they would otherwise have. The restraint usually protects an interest in property, typically the goodwill of a business (see Taxation Ruling 95/3 Capital gains: application of subsections 160M(6) and 160M(7) to restrictive covenants and trade ties ). Under the Contract, the Vendor (the Taxpayer) agrees to the restraint of trade. The restraint of trade creates a legal right between the parties to the Contract in favour of the Purchaser and is a CGT asset under section 108-5 of the ITAA 1997. Detailed reasoning Subsection 6-5(1) of the ITAA 1997 states 'your assessable income includes income according to ordinary concepts, which is called ordinary income'. Subsection 6-5(2) of the ITAA 1997 states that 'if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year'. Subsection 6-10(2) of the ITAA 1997 states 'amounts that are not ordinary income, but are in included in your assessable income by provisions about assessable income, are called statutory income'. Subsection 6-10(4) of the ITAA 1997 states that 'if you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia'. Section 10-5 of the ITAA 1997 provides a list of provisions that cause amounts that are not ordinary income to be included in assessable income (statutory income), and includes capital gains (section 102-5 of the ITAA 1997). Taxation Ruling TR 2006/3 Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business states the following about the meaning of ordinary income: 84. 'Ordinary income' includes income according to ordinary concepts. Income according to ordinary concepts is not defined in the taxation legislation. The characteristics of ordinary income have been developed by case law and generally fall into three categories: • income from providing personal services; • income from property; or • income from carrying on a business. 85. Case law has established the following guidelines to assist in determining the nature of a receipt: • the nature of a payment is determined by examining the character of the payment in the hands of the recipient; • regard must be given to all facts, as such a broad view must be taken of a taxpayer's situation and it is necessary to consider the total situation of the taxpayer; • it is necessary to apply 'a business conception to the facts of the case'; • the test in determining if a payment is income or capital is an objective test; • the question is not decided by determining whether the expenditure by the payer is revenue or capital in nature; • the question is not decided by determining whether any expenditure the recipient is required to make is revenue or capital in nature; • the question is not decided by determining the nature of the measure used to calculate the payment; • where a recipient provides consideration for a payment, the nature of that consideration is generally taken to be the nature of the payment; • a payment that is provided for a purpose which is not part of the recipient's business will not be income in nature; • periodicity, regularity or recurrence may show a payment to be income; • a payment paid in consideration for the performance of services is generally income; • calculation of a payment by reference to expected profits made, or not made by the recipient but that would ordinarily have been expected to have been made, is a factor supporting a conclusion of income; • a payment provided for a particular revenue expense is a factor supporting a conclusion of income; • a payment from an isolated transaction entered into with an intention to profit may still be income; • a payment in a lump sum does not require a conclusion that the payment is capital; • a payment made to compensate for the restriction of a person's capacity to perform services or to carry on a business may be a capital payment; • a payment by gift or subsidy to replenish or augment the recipient's capital is not income under ordinary concepts as it is not a product or incident of the recipient's income producing activity; • a payment for the sterilisation of a capital asset of a business is a capital receipt; and • a payment for surrender of part of the profit earning structure is a capital receipt. Under the Contract, the Vendor (the Taxpayer) sells the business assets of the practice to the Purchaser. The Taxpayer is disposing of the profit earning structure of the practice and the amount from the sale in respect of these assets will be on capital account. In respect of the restraint of trade, generally, it is accepted that a payment for entering into a restrictive covenant (restraint of trade) is of a capital nature (see Dickenson v Federal Commissioner of Taxation (1958) 98 CLR 460 and Hepples v Federal Commissioner of Taxation (1991) 173 CLR 492). Subsection 104-10(1) of the ITAA 1997 states that 'CGT event A1 happens if you dispose of a CGT asset'. Subsection 104-10(2) of the ITAA 1997 provides that 'you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner'. Subsection 104-10(3) of the ITAA 1997 relevantly provides that the time of the CGT event is when you enter into the contract for the disposal. CGT event A1 happened when the Taxpayer (the Vendor) entered into the contract to sell the business assets to the Purchaser. Subsection 104-35(1) of the ITAA 1997 states that 'CGT Event D1 happens if you create a contractual right or other legal or equitable right in another entity'. Subsection 104-35(1) of the ITAA 1997 provides the following example: • You enter into a contract with the purchaser of your business not to operate a similar business in the same town. The contract states that $20,000 was paid for this. • You have created a contractual right in favour of the purchaser. If you breach the contract, the purchaser can enforce the right. Subsection 104-35(2) of the ITAA 1997 states that the 'time of the event is when you enter into the contract or create the other right'. Subsection 104-35(5) of the ITAA 1997 sets out exceptions to CGT event D1 happening: (5) CGT event D1 does not happen if: (a) you created the right by borrowing money or obtaining credit from another entity; or (b) the right requires you to do something that is another CGT event that happens to you; or (c) a company issues or allots equity interests or non-equity shares in the company; or (d) the trustee of a unit trust issues units in the trust; or (e) a company grants an option to acquire equity interests, non-equity shares or debentures in the company; or (f) the trustee of a unit trust grants an option to acquire units or debentures in the trust; or (g) you created the right by creating in another entity a right to receive an exploration benefit under a farm-in farm-out arrangement. Under the Contract, the Vendor (the Taxpayer) created contractual rights in favour of the Purchaser (the restraint of trade). As such, CGT event D1 happened when the Contract was entered into. None of the exceptions in subsection 104-35(5) of the ITAA 1997 will apply to prevent the D1 event from happening. Detailed reasoning Section 152-105 of the ITAA 1997 sets out the requirements for applying the small business 15-year exemption for individuals, which allows an individual to disregard any capital gain arising from a CGT event that happens to a CGT asset owned for at least 15 years. Relevantly paragraph 152-105(d) of the ITAA 1997 requires: either: (i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or (ii) you are permanently incapacitated at the time of the CGT event. The Taxpayer was not incapacitated at the time of the CGT event and was over 55 years of age. The expression 'in connection with your retirement' is not defined in the tax law and takes its ordinary meaning. The Explanatory Memorandum to New Business Tax System (Capital Gains Tax) Bill 1999 (which inserted section 152-105 into the ITAA 1997) states the following about the requirement to be permanently incapacitated or retiring: 1.68 One of the requirements of this concession for an individual small business taxpayer is that they must be either permanently incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement. The Commissioner has provided the following general guidance on whether a CGT event happens in connection with retirement (see QC 52288 on www.ato.gov.au): A CGT event happening in connection with an individual's retirement depends on the circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in their present activities to be regarded as a retirement. The timing may precede or proceed actual retirement. It is not necessary for there to be a permanent and everlasting retirement from the workforce ( Advanced guide to capital gains tax concessions for small business : NAT 3359 (archived from 1 July 2013)). Under the Contract the Taxpayer has sold their practice (the business assets of the practice) to the Purchaser and agreed to work for the Purchaser, with a view to winding down their work hours and retiring. In the circumstances, there has been a significant change in the nature of the Taxpayer's work activities. The Taxpayer has gone from being self-employed and operating a business to working for the Purchaser, with a view to winding down their working hours until they retire. It is considered that the sale of the business assets (CGT event A1) happened in connection with the Taxpayer's retirement for the purposes of paragraph 152-105(d) of the ITAA 1997.