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Edited version of your written advice
Authorisation Number: 1051241165732
Date of advice: 23 June 2017
Ruling
Subject: Sale of CGT assets 'in connection' with retirement for the purposes of the 15 year exemption
Question
Is the sale of your X commercial properties considered to be 'in connection with your retirement’ for the purposes of the small business 15 year concession under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 2017
Year ending 30 June 2018
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You are over 55 years old.
You acquired commercial office properties after 20 September 1985.
You paid approximately $XXX in total for these properties.
You and your spouse own and control various companies and trusts which run businesses (your business interests).
Your business interests began renting the commercial office properties from you at the time the properties were acquired.
In 20XX your business interests vacated the offices and moved to another location.
The commercial office properties were then rented to unrelated third parties.
You have been planning for your retirement for the several years.
You will be selling the commercial properties to your Self-Managed Superannuation Fund (SMSF) for approximately $XXX in the 2016/17 or 2017/18 financial years.
The rent gained from the properties sold to your SMSF is intended to fund your retirement.
You will be placing the proceeds from the sale of the commercial properties into your SMSF.
You currently manage the properties yourself, with some input from real estate agents, and will continue to manage them when the properties are purchased by your SMSF.
As part of your retirement plan you have reduced the size of your business from XX employees down to X employees.
Over the next several months you will be moving to a part-time consultative position.
During the last several months you have replaced several positions within the company with more qualified managerial staff.
With limited staff and several experienced managers you will be able to reduce your commitment to your business to two to three days per week as of the beginning of the 2017/18 financial year.
You also plan to start seeking a partner or to sell your business interests by the during the 2017/18 financial year.
You expect this process to take up to XX months.
On completion of either the sale or finding a partner you will go into full retirement.
As the new management team gains experience you will reduce your input will be reduced to monthly meetings and financial overview.
Over the next several months you will be promoting one of the four new managers which will release you from any day to day involvement in the business though you do expect that over that period you will be present on a part-time basis.
Relevant legislative provisions
Income Tax Assessment Act 1997 (ITAA 1997) section 152-105
Income Tax Assessment Act 1997 (ITAA 1997) paragraph 152-105(d)
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, an individual can disregard the capital gain from the disposal of a CGT asset if:
(a) the individual satisfies the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions
(b) the individual continuously owned the CGT asset for the 15-year period ending just before the CGT event happened
(c) an individual, 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 152-105(d) of the ITAA 1997.
In your case, you are over 55 years old. You have already started making plans for your retirement and plan to continue to implement these plans over the next several months. Moreover, the sale of the commercial properties is to fund your retirement. Your work load will continue to lessen and your duties are currently being taken over by management staff hired specifically to assist your retirement. This will culminate in your full retirement.
Therefore, the sale of the X commercial properties by you can be considered to be in connection with your retirement and you will satisfy this condition for the 15 year exemption to disregard any capital gain it made on the sale of the X commercial properties.
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