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Edited version of private advice
Authorisation Number: 1051808587414
Date of advice: 1 March 2021
Ruling
Subject: CGT - small business concessions
Question
If Company B enters into a contract to sell business properties to a third party purchaser will a CGT Event happen in connection with the retirement of the Significant Individual (Person A) for the purpose of subparagraph 152-110(1)(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes. The disposal of the business/properties is integral to the retirement plans of your sole director/shareholder Person A. While there may be a delay of a few years between the sale of the properties and Person A ceasing all work activities there will be a significant reduction in the number of hours worked following the disposals. In addition Person A has taken steps to retire from his employment. It is accepted that the CGT events arising from the disposal of the farming properties happen in connection with retirement.
Further information about whether a CGT event happens in connection with an individual's retirement can be found by searching for 'QC 52288' on ato.gov.au
This ruling applies for the following period:
Income year ended 30 June 20XX
The scheme commences on:
XX YY 19ZZ
Relevant facts and circumstances
You are a private company.
You have a sole director and shareholder (Person A) who is at least 55 years old.
You own farming land on which you conducted a farming business.
Person A spent considerable time running your farming business over the years.
Person A is also employed.
Since being established Person A has supported your business operations by subscribing for additional share capital when you required long term working capital.
Person A has funded a significant part of your working capital requirements by borrowing from financial institutions.
Due to the costs of improvements and seasonal farming conditions you have not been able to recoup your operating losses.
Person A received an unsolicited approach from a third party to purchase the property and a contract has been entered into.
While you have been producing gross profits for at least the past six years there has been a mix of net profit and losses resulting.
Due to your inability to recoup your operating losses you have been unable to distribute funds to Person A.
It has not therefore been possible for Person A to repay the loans obtained to acquire his shares in you.
Due to his personal debt level, Person A does not believe he can achieve the lifestyle he seeks in retirement if he retains you. Accordingly, it is necessary for him to continue to work in his professional occupation to fund his financial commitments.
The third-party approach to purchase the properties and farming business has enabled Person A to plan for retirement with the sale proceeds enabling the borrowings undertaken by him to contribute working capital support to you to be cleared.
Person A has notified his employer of his intention to retire within a few years and has suggested a process to his employer to gradually transition his work to another employee. Person A is a significant employee and the transitioning of his clients to another employee will take time. Person A will reduce their work hours over time.
You were a Small Business Entity for the income year ended 30 June 20XX with an aggregated turnover of less than $2,000,000.
Upon settlement of the properties you will be wound up, officially ending Person A's involvements in all farming businesses.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 subdivision 152-A
Income Tax Assessment Act 1997 subdivision 152-B
Income Tax Assessment Act 1997 section 152-10
Income Tax Assessment Act 1997 section 152-110
Income Tax Assessment Act 1997 paragraph 152-110(1)(d)(i)
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