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Edited version of your private ruling
Authorisation Number: 1012442525260
Ruling
Subject: Small business capital gains tax concessions
Question
Did the capital gains tax event happen in connection with the significant individual's 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
A company is the trustee for the trust.
An individual is the sole director and shareholder of the company and has 100% of the voting rights in the company.
The trust owned a business premises.
The premises are an active asset and have been held by the trust for more than 15 years.
The basic conditions for the small business capital gains tax (CGT) concession have been satisfied.
The trust distributions for the previous 15 years (where applicable) have been 100% to the individual.
The individual is over 60 years of age.
The business was sold in the relevant financial year.
The individual has not retired fully, but is on a transition to retirement income stream through their self managed super fund.
The individual has reduced his working hours per week and intends to retire completely within approximately X years of the sale.
The individual has some health problems which may lead to them retiring at an earlier date.
As the individual operates as a sole trader, there will not be a change in their responsibilities.
The individual is a significant individual of the trust.
The funds will be used for the individual's retirement plans.
Relevant legislative provisions
Income Tax Assessment Act 1997 Paragraph 152-110(1)(d)
Income Tax Assessment Act 1997 Section 152-125
Reasons for decision
Under section 152-125 of the ITAA 1997, payments to a company's capital gains tax (CGT) concession stakeholders are exempt if;
· a capital gain of the company is disregarded under section 152-110 of the ITAA 1997; 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:
(a) the company satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions
(b) the company continuously owned the CGT asset for the 15-year period ending just before the CGT event happened
(c) 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
(d) 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 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 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.
Application to your circumstances
In this case, the significant individual has reduced their working hours per week. The significant individual operates the business as a sole trader so their responsibilities will not change. The significant individual intends to retire within X years of the 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 the individual's retirement, when taking their age and future plans into account, it is considered that there is a clear link between the sale of the business and the individual's retirement. The significant individual is currently in receipt of a transition to retirement pension and will use the payment for their retirement plans. Accordingly, the CGT event is considered to have happened in connection with their retirement in accordance with paragraph 152-110(1)(d) of the ITAA 1997.
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