Private ruling: CGT - SBC - 15 year exemption - in connection with retirement
Date of advice: 25 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Does the capital gains tax (CGT) event happen in connection with X’s retirement in accordance with paragraph 152-110(1)(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Entity T operated a business, holding active assets. X is a YY% shareholder in the Proprietary Limited Company which wholly owns Entity T. Entity T disposed of 2 active assets. Each disposal resulted in a capital gain. Each of the disposed assets had been held by Entity T for over 15 years. X is over 55 years of age and has been a significant individual of Entity T for over 15 years, during the time Entity T owned the assets. X has been transitioning toward retirement prior to the sale of the assets, reducing duties undertaken in the business. After the sale of the assets X’s involvement in the business ceased entirely. The capital proceeds attributable to X from the sale of the assets will provide funding for X’s retirement. You state you satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-A | Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 paragraph 152-110(1)(d)(i)

Reasons for decision: Summary: Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for companies and trusts. Under this section, a company can disregard the capital gain from the disposal of a CGT asset if: (a) the company satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions, (b) the company continuously owned the CGT asset for the 15-year period ending just before the CGT event happened, (c) the company had 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 the entity owned the CGT asset, and (d) an individual who was a significant individual of the entity just before the CGT event was either: ● at least 55 years old at that time and the event happened in connection with their retirement or ● permanently incapacitated at that time. In connection with retirement Whether a CGT event happens in connection with an individual’s retirement depends on the particular circumstances of each case. A CGT event may be in connection with your retirement even if it occurs at some time before retirement. The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be permanently incapacitated or retiring as one of the conditions for the concession: 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 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. It could be argued that the phrase ‘in connection with retirement’ means that the capital gain arising from the disposal of active assets is to be used to provide funds for a person’s retirement rather than to precipitate retirement at the time of the CGT event. The words used in the EM support this interpretation. The Advanced guide to capital gains tax concessions for small business 2013-14 (NAT 3359) also supports this view. It makes it clear that it is not necessary for there to be a permanent and everlasting retirement from the workforce. However, there would need to be at least a significant reduction in the number of hours worked or a significant change in the nature of the activities to be regarded as a retirement for the purposes of paragraph 152-110(1)(d)(i) of the ITAA 1997. In this case, X had commenced transitioning toward retirement prior to the sale of the assets by reducing the duties undertaken within the business. After the sale of the assets, X ceased involvement in the business entirely. Accordingly, it is reasonable to conclude that the event happened ‘in connection with’ X’s retirement.

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