Edited version of private advice

Authorisation Number: 1051564236976

Date of advice: 15 August 2019

Ruling

Subject: Small business 15-year CGT exemption

Question

Was the sale of the business (ie the relevant CGT event) in connection with the retirement of A (being a significant individual of the Company at that time) 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:

Income year ending 30 June 20XX

The scheme commences on:

15 November 20XX

Relevant facts and circumstances

Company X conducted a business since 1977.

Related company Y conducted a business and leased assets to Company X for use in its business.

A is the largest shareholder in Company X, owning around XX% of the issued shares. A also holds YY% of the issued shares in Company Y. The remainder of the shares in Company X and Company Y are held by non-active investors.

On 15 November 20XX, Company X and Company Y sold their businesses to an unrelated third party (the new owner).

Prior to the business sale, A was the Managing Director and controlling mind of both businesses. He had ultimate management and decision making authority for the business, making all strategic and executive decisions in respect of staffing, financial management, stocktake and purchasing, sourcing and negotiating with suppliers, and client site meetings and measures.

A was 61 years of age at the time of the sale, and had been contemplating retiring for some time leading up to the sale.

The sale agreement was subject to the following conditions:

·         The business achieving minimum EBITDA for the financial years ending 30 June 2019 and 30 June 2020, and

·         A remaining as an employee of the new owner as at 30 June 2019 and 30 June 2020.

From 1 December 2018, A entered into an employment agreement with the new owner.

At the time of the sale, A signed an undertaking to the shareholders of Company X and Company Y to accept employment by, and continue employment with, the new owner up to and including 30 June 2020.

A letter from the new owner confirmed the following:

·         A's employment with the new owner will end on 30 June 2020.

·         A's contractual commitments to the new owner under the sale agreement and the employment agreement will conclude at that time.

·         As agreed during the sale negotiations, the employment period is a time for A to gradually extract himself from the business.

As an Executive Manager of the business for the new owner, A's activities in the business have changed as he is employed to facilitate his gradual extraction from the business.

Since the sale of the business, A's working hours to date have reduced, and the new owner has confirmed that the 2020 financial year will be a period for him to further reduce his hours, prior to his ultimate exit on 30 June 2020.

A will use his share of the proceeds from the sale of the business to fund his retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997

paragraph 152-110(1)(d)

subparagraph 152-110(1)(d)(i)

Reasons for decision

Paragraph 152-110(1)(d) of the ITAA 1997 requires that an individual who was a significant individual of the company just before the CGT event was either:

(i)      55 or over at that time and the event happened in connection with the individual's retirement; or

(ii)     permanently incapacitated at that time.

The courts consider that the words 'in connection with' have a wide meaning but are to be interpreted in the context of the statute in which they are contained (Burswood Management Ltd & Ors v Attorney-General (Cth) & Anor (1990) 20 ALD 357, Hatfield v. Health Insurance Commission (1987) 15 FCR 487; 77 ALR 103).

The legislation does not provide a specific definition of the word 'retirement' for the purpose of the ITAA 1997, therefore, it takes its ordinary meaning. The Macquarie Dictionary (online version, downloaded 7 August 2019) defines 'retirement' to mean 'removal or retiring from service, office, or business, especially in reaching the end of one's working life'.

The Small business 15-year exemption guidance from the Australian Taxation Office (ATO) website (ato.gov.au, quick search code QC 52288 downloaded 9/8/2019) advises that whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it isn't necessary for there to be a permanent and everlasting retirement from the workforce.

A CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement. If it can be shown that the earlier CGT event was integral to the individual's plan to cease activities and retire, the CGT event may be accepted as happening in connection with retirement.

In your circumstances, A had been considering retiring prior to the sale of the business. A's continued employment was required as a condition of the contract, which increased the purchase price. A has reduced his weekly working hours from 50-40 hours per week, with further reduction expected over the next 10 months, and full retirement from 30 June 2020.

Prior to the sale, he was the controlling mind of the business, held ultimate decision-making authority, and administered the strategic, financial and operational management of the business. From the commencement of his employment up to the 30 June 2020, A will no longer carry out executive, strategic or financial decision making activities - his activities will primarily involve transitioning his role and responsibilities to his replacements, and to minimise any impacts relating to his withdrawal from the business.

As such, the Commissioner is satisfied that the sale of the business was in connection with A's retirement for the purpose of subparagraph 152-110(1)(d)(i) of the ITAA 1997.

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