Edited version of your private ruling

Authorisation Number: 1012379061097

Ruling

Subject: CGT small business concessions

Question

Will the disposal of your shares in Company X occur in connection with your retirement for the purposes of paragraph 152-105(d) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You are the sole shareholder of Company X.

You have held these shares for more than 15 years.

Company X holds 50% of the shares in Company Y.

Company Y carried on a business. Company Y was a small business entity and all of the company's assets were active assets.

Company Y sold its business in the 2010-11 income year.

You were a managing director of the business. You, in conjunction with another director, actively managed the company's business with a fulltime role in all aspects of the business. Additionally, you had an invested stake in the financial viability of the business as an owner, through Company X.

As a part of the business sale agreement, you stepped down from your role as managing director. You were required as a part of the agreement to remain employed in the business in a senior role.

You now work in the business as an employee reporting to a superior. Your duties and responsibilities have changed and you are now no longer required to complete numerous duties you carried out as a managing director, such as those relating to business management, staffing and administration. Additionally your hours went from approximately 50 hours per week to 35 hours per week.

The sale agreement states that your role will be wound back over time to allow you to transition out of the business over a period of time that is acceptable to you and the purchaser.

You have indicated that you will only be working four days per week (instead of five), and your hours will reduce over each year, with you completely ceasing work at the end of a further four years.

Company Y has been placed into voluntary liquidation.

CGT event C2 will occur in relation to Company X's shares in Company Y. Company X will subsequently be placed into voluntary liquidation following the tax clearance of Company Y's liquidation.

Following this, CGT event C2 will occur in relation to your shares in Company X. You wish to utilise the 15 year exemption in relation to this event.

You are over 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 152-105(d)

Reasons for decision

Section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain from the disposal of a CGT asset if you:

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

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

· if the CGT asset is a share in a company or an interest in a trust - the company or trust 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 you owned the CGT asset; and

you are;

· at least 55 years old at that time and the event happened in connection with your 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 or after 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 paragraph 152-105(d) of the ITAA 1997.

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. In this case, your duties and responsibilities have significantly changed subsequent to the sale of the business. Although you have remained as a senior employee, you are no longer responsible for the financial and strategic management of the business. Your continued service was a requirement of the sale that was stipulated by the purchaser to ensure that the goodwill of the business was protected. Your working hours will be reduced over the five years following the sale of the business before you retire completely.

It is considered that there will be a clear link between the sale of the business, the subsequent liquidation of Company Y, the disposal of your shares in Company X following its liquidation and finally, your retirement. It is considered that the sale of the business was integral to your retirement plans. Accordingly, the subsequent CGT event when you dispose of your shares in Company X, will be considered to happen in connection with your retirement in accordance with paragraph 152-110(1)(d) of the ITAA 1997.

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