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Edited version of your written advice
Authorisation Number: 1012757286301
Ruling
Subject: Capital gains tax
Question
Will the transaction entered into by the company satisfy the requirements of subparagraph 152-110(1)(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2013
The scheme commences on
1 July 2012
Relevant facts and circumstances
The company was formed more than 15 years ago.
Since incorporation until disposal of its assets, the company was carrying on a business.
Currently, the ownership structure is as follows:
• X% is held by individual A
• X% is held by individual B and
• X% is jointly held by individual A and B
Individual A is the sole director and secretary of the company
Individual A is more than 55 years of age.
A Business Purchase Agreement (the BPA) was settled upon by the company and purchaser.
The agreement outlined the purchaser would purchase all of the business assets of the company.
As a condition of sale, as stated by the BPA, individual A was required to enter into a full time employment contract with the purchaser.
After the several months of employment, employment would cease.
Upon completion of the employment contract, individual A retired from all employment and has no intention of returning to employment in the future.
Relevant legislative provisions
Income Tax Assessment Act 1997 subparagraph 152-110(1)(d)(i)
Income Tax Assessment Act 1997 section 152-110
Income Tax Assessment Act 1997 section 152-125
Reasons for decision
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:
i. at least 55 years old at that time and the event happened in connection with their retirement or
ii. 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.
Application to your circumstances
In this case, individual A's continued service on a full-time basis for X months 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 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 their retirement. Accordingly, the CGT event is considered to have happened in connection with individual A's retirement in accordance with subparagraph 152-110(1)(d)(i) of the ITAA 1997.
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