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Ruling

Subject: CGT small business concessions - in connection with retirement

Question

Did the capital gains tax (CGT) event happen in connection with your retirement in accordance with paragraph 152-105(d) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You owned a property (property A) jointly with your spouse which was purchased prior to 20 September 1985.

You conducted a business on property A and on a separate property owned by another entity (property B) in partnership with your spouse.

You hold a 50% interest in the partnership.

The partnership is a small business entity.

You have sold property A. Property B has been placed on the market.

Immediately following the sale of property A, you changed your business activities. This enabled you to reduce your working hours.

Following the sale of property B, you intend to retire from farming activities completely.

Relevant legislative provisions

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

Reasons for decision

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: 

 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 2011-12 (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.

In your case, there is a significant reduction in the number of hours worked. The reduction in hours indicates a desire to undertake a transition into retirement. You also intend to retire completely when Property B is sold. As a consequence, it is reasonable to conclude that the disposal of property A happened 'in connection with' your retirement.

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