Edited version of your private ruling

Authorisation Number: 1012308686479

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Retirement exemption

Question:

Did the capital gains tax (CGT) event happen in connection with your retirement?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You sold your business.

The sale of contract requires you to be employed on a full time basis for the transition year.

This full time basis is less hours then when you were operating the business.

After the initial transition year you intend to retire, however you want the option of working a little during your retirement to stay active.

Your ultimate intention of disposing of your business is to retire using the proceeds from the sale.

You are over 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 152-110(1)(d), and

Income Tax Assessment Act 1997 Section 152-125.

Reasons for decision

Under section 152-125 of the Income Tax Assessment Act 1997 (ITAA 1997), payments to a company's capital gains tax (CGT) concession stakeholders are exempt if;

· a capital gain of the company would have been disregarded under section 152-110 of the ITAA 1997 except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985; and

· the company makes one or more payments (whether directly or indirectly through one or more interposed entities) in relation to the exempt amount within 2 years after the relevant CGT event to an individual who was a CGT concession stakeholder of the company or trust just before the event.

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: 

· the company satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions

· the company continuously owned the CGT asset for the 15-year period ending just before the CGT event happened

· 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

· an individual who was a significant individual of the company 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

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 2010-11 (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 paragraphs 152-105(d) or 152-110(1)(d) of the ITAA 1997. The guide also provides that a CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement.

In this case, you will significantly change your duties and responsibilities subsequent to the sale. Although you will remain an employee, you will no longer be responsible for the operation of the business. Your continued service on a full-time basis for the transition year was a condition in the contract of sale. The EM and the guide provide that the retirement does not need to occur immediately following the event, however whether a particular case satisfies the conditions depends very much on the facts of the case.

Although there is a delay between the CGT event and your retirement, when taking your age and future plans into account, it is considered that there is a clear link between the sale of the business and your retirement. You will use the proceeds to fund their retirement. It is considered that the sale of the business was integral to your retirement plans. Accordingly, the CGT event is considered to have happened in connection with your retirement in accordance with paragraph 152-110(1)(d) of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).