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Ruling

Subject: CGT small business 15 year exemption

Question 1

Do you satisfy the requirement contained in subparagraph 152-105(d)(i) of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Are you eligible for the small business 15 year exemption in relation to the disposal of the property?

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 acquired the property for the purpose of conducting your business more than 15 years ago.

You conducted a business as a sole trader from the property, working full time.

During the relevant income year you signed a contract for the disposal of the property. You continued to operate your business for a period of time.

During the relevant income year you took up a part-time contracted engagement with a larger corporate group, which enabled you to continue to derive an income and helped you transition your clients.

You hold no proprietary interest in the company you took up a part-time contracted engagement with.

Your former staff remained at the property for a period of time for the purpose of transferring records and other general tasks associated with moving.

Settlement for the contract for the disposal of the property occurred during the subsequent income year with the payment of final proceeds.

After your return from leave you resumed your part-time work and subsequently further reduced your hours.

You presently continue to work part-time, but intend to fully retire once you are comfortable that all of your clients have had sufficient opportunity to make other arrangements. You anticipate that this will be within the next X months.

Immediately prior to the sale of the property, you were a small business entity.

You also satisfied the maximum net asset value test immediately prior to the sale of the property

You were over 55 years of age at the time of the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Section 152-105

Income Tax Assessment Act 1997 Subparagraph 152-105(d)(i)

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:

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

(b) continuously owned the CGT asset for the 15-year period ending just before the CGT event happened and

(c) 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 your case, it is accepted that you meet the basic conditions contained in section 152-10 of the ITAA 1997 due to the following:

· a CGT occurred when you disposed of the property

· the event resulted in a gain

· you were a small business entity at the time of the CGT event, and

· the asset meets the active asset test as it was used in a business carried on by you for the entire period of ownership.

Additionally, you owned the property for a period of more than 15 years.

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:

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 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 subparagraph 152-105(d)(i) of the ITAA 1997.

In your case, there is a significant reduction in the number of hours worked. Additionally you transitioned from operating as a sole trader to working part-time in a contracted position with a company that you hold no proprietary interest in. Once you have ensured all of your clients have made other arrangements you intent to retire completely. This will be within a reasonable amount of time following the CGT event. As a consequence, it is reasonable to conclude that the event happened 'in connection with' your retirement.

Accordingly, you meet all of the conditions under section 152-105 of the ITAA 1997 and the small business 15 year exemption will apply to disregard the capital gain made on the disposal of the property.

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