Private ruling: Capital Gains Tax - Retirement Exemption
Published: August 2017
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Did the capital gains event arising from the disposal of the Trust's business assets happen 'in connection' with Individual A's retirement for the purposes of subparagraph 152-110(1)(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The Trust (the taxpayer) was established at a point in time. The Taxpayer operated a business for more than 15 years and is a small business entity as provided under section 328-110 of the ITAA 1997. The taxpayer sold the business to Company A. This disposal resulted in a capital gain. The CGT assets disposed of are active assets. Individual A is over 55 years of age and is a significant individual of the Taxpayer just before the time of the capital gains tax (CGT) event. Not a condition of the sale, Company A approached Individual A prior to the sale and offered the following; A term of casual employment to assist with the transition A share in Company A A directorship in Company A At a point in time Individual A accepted the offer to purchase shares in Company A and the directorship, since the duties required under the directorship were minimal. During the period of casual employment following the sale of the business, Individual A's duties were vastly different to those that were undertaken previously and the working hours reduced to half of what was undertaken previously. It was Individual A's intention at the time of the sale of the business that they would retire and that their services at Company A would no longer be required after the short term contract. Individual A proceeded to cease employment with Company A. At a later date, Company A offered Individual A, a further term of employment. After a period of retirement, Individual A decided that they were able to continue work for another short term and agreed to a period of casual employment that may be extended.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 152-110

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, 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 time the company owned the CGT asset; and (d) An individual who was a significant individual of the company just before the CGT event was either: (i) At least 55 years old at that time and the event happened in connection with their retirement or (ii) Permanently incapacitated at that time. 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. Our publication the Advanced guide to capital gains tax concessions for small business 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) of the ITAA 1997. In this case, Individual A is over 55 years old and has significantly reduced their working hours and there has also been a change in the nature of the activities conducted. Therefore, the sale of the business by the Taxpayer can be considered to be in connection with Individual A's retirement and the trust will satisfy this condition for the 15 year exemption to disregard any capital gain it made on the sale of the business.