Edited version of private ruling

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Ruling

Subject: Small business concessions 15-year exemption

Question

Is the sale of farmland considered to be 'in connection with your retirement' for the purposes of the small business 15 year concession under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

No

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You are a married couple and have been in the business of farming since you purchased the land. Part of the land is pre-CGT, and part post CGT.

You have also been in separate employment not related to the farming business throughout this period.

You estimate that you were working between 70 and 85 hours a week on the combined farm and paid employment.

You are both over 55 years of age.

During the 2009-10 income year;

· you both commenced to receive a 'transition to retirement' pension

· you sold your farm

· this sale reduced your workload by approximately 50%.

You are still working in your paid employment.

Mrs XXX has reduced her employment hours following the sale of the farm.

Mr XXX employment hours have not changed following the sale of the farm.

You have purchased a property in town, which is undergoing renovations.

You are planning to retire more than two years after the CGT event.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997) section 152-105

Income Tax Assessment Act 1997 (ITAA 1997) paragraph 152-105(d)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise specified.

Summary

It is not considered that the disposal of the property was in connection with your retirement as per the requirements of subparagraph 152-105(d)(i).

Detailed reasoning

The rules covering the small business 15-year exemption are contained in Subdivision 152-B.

In order to apply the small business 15 year exemption, paragraph 152-105(d) requires that either you are permanently incapacitated at the time of the capital gains tax (CGT) event, or you are over the age of 55 and the CGT event happens in connection with your retirement.

The Advanced Guide to Capital Gains Tax Concessions for Small Business provides examples as to the Commissioners view on what is considered as 'in connection with an individual's retirement'.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number the individual works or a significant change in the nature of their 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.

A CGT event may be 'in connection with your retirement' even if it occurs at some time before or after retirement.

Mr XXX - In your case; you have been employed in YYY industry for a number of years. It is from this occupation that you derive the vast majority of your income. The farming venture provided you with minimal income. Although your hours of employment have reduced as a result of selling your interest in the farm, this has had minimal impact on your income earning activities.

Mrs XXX - In your case, you are in paid employment. Prior to the sale of the farm, you were engaged in this employment for X hours per week. On the sale of the farm, you reduced your hours to Y hours per week. You intend in the future to reduce your hours further, before retiring altogether.

You both continue to be engaged in your occupations. Whilst you may consider that there has been a significant reduction of your combined hours (both farm and employment) the fact remains that the majority of your income had previously come from employment sources. Your employment hours have reduced little. Additionally, your ultimate retirement date is more than 2 years after the CGT event. It is not considered that the sale has resulted in a significant change in the nature of your activities and is not regarded as a retirement.

It is considered that the CGT event (the sale of the farm) occurred at a point too soon to be considered as 'in connection with your retirement'.

In the circumstances, it is not considered that the disposal of the property was in connection with your retirement as per the requirements of subparagraph 152-105(d)(i).

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