ATO Interpretative Decision
ATO ID 2003/743 (Withdrawn)
Income Tax
CGT small business retirement exemption: whether amount paid is 'unreasonable'FOI status: may be released
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This ATO ID is withdrawn as it contains a view in respect of a provision of the ITAA 1997 that does not apply after 23 June 2009.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
Status of this decision: Decision Withdrawn 19 March 2010
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Will any part of a payment of $500 000 made by the taxpayer, a private company, under section 152-325 of the Income Tax Assessment Act 1997 (ITAA 1997) be considered by the Commissioner to be unreasonable under subsection 109(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. The payment of $500 000 made by the taxpayer, a private company, under section 152-325 of the ITAA 1997 will not be considered by the Commissioner to be unreasonable, in any part, under subsection 109(1) of the ITAA 1936.
Facts
The taxpayer is a private company with only a single shareholder who was employed in the business operated by the company as the business manager.
After five years of working in and managing the business the shareholder/employee decided to retire, having reached retirement age.
The company then disposed of the business assets in order to provide a retirement benefit to the retiring shareholder/employee. The company made a capital gain on the disposal and chose to disregard $500 000 of the capital gain in accordance with section 152-315 of the ITAA 1997. The capital gains tax exempt amount for the assets under consideration is therefore $500 000.
The company immediately made a payment of $500 000 under section 152-325 of the ITAA 1997 to the shareholder/employee who retired.
The company chose the small business retirement exemption and satisfied the requirements of Subdivisions 152-A and 152-D of the ITAA 1997.
Reasons for Decision
For a company to choose the small business retirement exemption in Subdivision 152-D of the ITAA 1997 it must, among other things, make an eligible termination payment (ETP) in accordance with section 152-325 of the ITAA 1997. This ETP must satisfy the definition of 'eligible termination payment' in subsection 27A(1) of the ITAA 1936. Under subparagraph (a)(v) of that definition an amount that is deemed to be a dividend is excluded from being an ETP. Thus any payment or part thereof considered to be unreasonable and deemed to be a dividend will not satisfy section 152-325 of the ITAA 1997 and the retirement exemption will not be available.
Taxation Ruling IT 2621 outlines the factors and circumstances the Commissioner will take into consideration when determining whether a payment is unreasonable under section 109 of the ITAA 1936. Paragraph 13 of IT 2621 states that when forming an opinion under section 109 of the ITAA 1936 the Commissioner must take all the circumstances of the case into account.
In Ferris v. Federal Commissioner of Taxation (1988) 20 FCR 202; (1988) 19 ATR 1705; 88 ATC 4755, it was held that the Commissioner had used the discretion under section 109 of the ITAA 1936 incorrectly because the decision as to what was reasonable was based solely on what was reasonable for superannuation purposes. It was emphasised that what is and what is not reasonable depends on the circumstances of the case and upon commercial practice.
On this basis it would be incorrect for the Commissioner to base his decision as to what is reasonable solely with reference to the CGT retirement exemption limit of $500 000.
In determining whether an amount paid under section 152-325 of the ITAA 1997, in order to comply with the requirements of the small business retirement exemption, is unreasonable under section 109 of the ITAA 1936 the Commissioner will take all the circumstances of the case into account.
When all the circumstances of the current case are considered, a payment of $500 000 would not be unreasonable for the purposes of section 109 of the ITAA 1936. In forming this opinion under section 109 of the ITAA 1936, in this case, the Commissioner has had particular regard to:
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- the purpose behind the payment
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- the length of service with and level of contribution to the business by the shareholder/employee
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- the election by the taxpayer to use the small business retirement exemption
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- the policy intention behind the exemption; and
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- the level of the CGT retirement exemption limit ($500 000).
As the taxpayer has worked in the business for several years and is intending to use the small business retirement exemption, the Commissioner does not consider the payment of $500 000 to be unreasonable.
Date of decision: 4 April 2003Year of income: Year ending 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
section 152-325
section 152-315
Subdivision 152-A
Subdivision 152-D
section 109
subsection 27A(1)
Case References:
Ferris v. Federal Commissioner of Taxation
(1988) 20 FCR 202
88 ATC 4755
19 ATR 1705
Related Public Rulings (including Determinations)
Taxation Ruling IT 2621
Keywords
Deemed dividends
Small business retirement exemption
ISSN: 1445-2782
| Date: | Version: | |
| 4 April 2003 | Original statement | |
| You are here → | 19 March 2010 | Archived |