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Edited version of your written advice
Authorisation Number: 1013074781304
Date of advice: 19 August 2016
Ruling
Subject: Was the CGT event in connection with your retirement
Question
Did the capital gains tax event arising from the sale of the property by the Trust happen 'in connection' with the retirement of Individual A, for the purposes of subparagraph 152-110(1)(d)(i) of the Income Tax Assessment Act 1997?
Answer
Yes.
This ruling applies for the following period:
Year ending 30 June 2016
The scheme commences on
1 July 2015
Relevant facts and circumstances
Individual A is over 55.
In 19XX the Company was incorporated.
The Company operated the Business.
The Company operated the Business from the Property, which was initially leased from a third party.
The Trust was established in 19YY and the trustee immediately purchased the Property.
The Trust continued to lease the property to the Company.
Individual A was an employee of the Company and was actively involved in the Business until it was sold.
The Business was sold in 20XX. The Property was still owned by the trust and leased to the new owner of the Business.
At the time the Business was sold the purchaser was given the first right of refusal over a future sale of the property, with a view to potentially purchasing the Property at a later time.
Since Individual A's employment ceased they have not been in any paid employment, but have continued to be involved in administering the affairs of the Company, the Trust and their spouse's deceased estate.
At the time of the sale of the Business Individual A and their spouse consulted with a financial planner.
Advice was provided in relation to planning for their retirement, including superannuation and income streams, rent from the property was included in these projections. The financial advice also included a recommendation that they maximise their non-concessional superannuation contributions in the years ahead by using the funds from savings and asset sales. This included the future sale of the Property. This advice became their retirement plan.
In 20YY Individual A's spouse passed away unexpectedly.
After the spouse's passing, discussions between the purchaser of the car dealership and Individual A in regards to the purchase of the Property ceased for a period of time.
The Trust sold the Property in 20AA.
Prior to the sale of the Property, Individual A and the business purchaser entered into negotiations for the sale of the Property. Ultimately the business purchaser chose not to exercise their right to purchase the Property and the Property was then sold to a third party in a private sale.
The right of refusal granted to the business purchaser endured until negotiations concluded with them deciding not to purchase the Property.
Relevant legislative provisions
Income Tax Assessment Tax 1997 section 152-110
Reasons for decision
Small business 15-year exemption
Section 152-110 of the Income Tax Assessment Act 1997 (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.
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 Advanced guide 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 152-110(1)(d) of the ITAA 1997.
In this case, Individual A is over 55 years old and no longer undertakes paid work and no longer works for the Company. Moreover, upon sale of the Business part of Individual A's retirement plan was the eventual sale of the Property by the trust. The delay in the sale of the Property was contributed to by the passing of Individual A's spouse and the eventual failed negotiations with the business purchaser.
Therefore, the sale of the Property by the Trust can be considered to be in connections with Individual A's retirement and the trust will satisfy this condition for the 15 year exemption to disregard any capital gain it made on the sale of the Property.
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