Edited version of your private ruling

Authorisation Number: 1052120043149

Date of advice: 17 May 2023

Ruling

Subject: Business sale - aggregated turnover

Question 1

Does the taxpayer satisfy the requirement in subparagraph 152-110(1)(d)(i) of the Income Tax Assessment Act 1997 that the sale of the business was "in connection with" the significant individual's retirement?

Answer

Yes.

Question 2

Are the NSW JobSaver payments received by the taxpayer during the 20XX financial year excluded from the definition of "aggregated turnover" for the purposes of the CGT small business entity test in subsection 152-10(1AA) of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2022

Year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Business Sale

1.            ABC Holdings Pty Ltd (ABC) was incorporated on 17 September 19XX and has since carried on a pest control business (the business).

2.            ABC's share structure has been limited to 100 issued ordinary shares since incorporation. Initially, 50 shares were held by its founder and sole director (Director), and 50 shares were held by Director's partner (Partner).

3.            Employee A began working for ABC on 1 July 20XX. The functions that she was responsible for included:

Payroll

Workers' compensation

Vehicle insurance

Vehicle registrations

Occupational health and safety

Human resources

Paying accounts

Payments.

4.            On 19 September 20XX, Employee A bought 12 shares in ABC from Director and 13 shares from Partner.

5.            Employee A's 25% shareholding in ABC entitled her to 25%:

Voting power

Of dividends paid

Of capital distributions.

6.            In March 20XX, Employee A and Director attended a pest conference where they were approached by a business broker with an offer to acquire the business. In April 20XX, a representative from the Purchaser approached ABC with an interest in acquiring its business.

7.            In an end of year meeting in 20XX, Employee A's expressed an intention to retire at or around the age of 60.

8.            When Employee A commenced her plans to retire, Employee A and Director decided to explore the option of selling the business. In June 20XX they reached out to the business broker to explore the option of selling the business. As a result of this, Employee A, Director and Partner had a verbal discussion where it was agreed that the business would be sold.

9.            On 30 August 20XX, ABC entered into a contract to sell its business to the Purchaser. Completion of this contract occurred on 1 September 20XX.

10.          On 1 September 20XX, Employee A commenced employment for the Purchaser. Her employment is on a fixed term contract ending 31 August 20XX.

11.          Employee A is now responsible for assisting with transition requirements including:

iPhones and iPads

Computers

Software changes

Setting up new procedures.

12.          The functions Employee A was previously responsible for are now done by the head office of the Purchaser.

JobSaver Payments

13.          During the income year ending 30 June 20XX, ABC received amounts paid under the NSW JobSaver Program (JobSaver).

14.          JobSaver was a joint initiative between the Commonwealth government, NSW government and various state government agencies aiming to alleviate economic impacts to businesses as a result of the Public Health (COVID-19 Additional Restrictions for Delta Outbreak) Order 2021 (Public Health Order) from 26 June 2021 to 30 November 2021.

15.          Relevantly, JobSaver payments were made as 'act of grace' payments under section 5.7(1) of the Government Sector Finance Act 2018. This allows a Minister to authorise an amount to be paid to a person on behalf of the NSW government if they are satisfied there are special circumstances to warrant the payment.

16.          The program provided cash flow support to businesses impacted by the Public Health Order and the COVID-19 pandemic to help them maintain their NSW employee headcount from 13 July 2021 onwards. The program also extended to not-for-profit organisations.

17.          Eligible businesses and not-for-profit organisations received fortnightly payments. The minimum payment amount was $1,500 per week whilst the maximum was $100,000 per week. These payments were scaled back when NSW reached 70% and 80% double dose vaccination rates.

18.          Businesses and not-for-profit organisations impacted by the Public Health Order were eligible if:

•         they had an Australian Business Number (ABN) and were operating in NSW on 1 June 2021;

•         they had an aggregated annual turnover of between $75,000 and $250 million (inclusive) for the year ended 30 June 2020;

•         they experienced a decline in turnover of 30% or more due to the Public Health Order over a minimum 2-week period commencing 26 June 2021, compared to:

o   the same period in 2019, or

o   the same period in 2020, or

o   the 2 weeks immediately prior to any restrictions, 12-25 June 2021 (inclusive);

•         for employing businesses, they maintain their employee headcount from 13 July 2021 if they receive payments from the commencement of JobSaver, or otherwise from the day immediately prior to the fortnight they first experienced the required decline in turnover while they continue to receive JobSaver payments; businesses that do not maintain the declared headcount must notify Service NSW.

19.          Eligible entities were required to maintain their 'Employee Headcount' whilst receiving payments under the program. This refers to the total number of NSW full-time and part-time staff or casual staff who have been employed for more than 12 months by the entity.

20.          The JobSaver payment assisted eligible businesses to cover their business costs incurred due to the impacts of the Public Health Order in NSW. These costs may have included, but were not limited to, salary and wages, utilities and rent, financial, legal or other advice, marketing and communications, perishable goods, or other business costs. While JobSaver payments could be used to cover general business costs, the primary objective of the payment was to help businesses to 'survive, maintain relationships with their employees and be in a position to trade when restrictions are lifted.'

Assumption

Employee A will not extend their employment beyond 31 August 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Section 152-55

Income Tax Assessment Act 1997 Section 152-65

Income Tax Assessment Act 1997 Subsection 152-70(1)

Income Tax Assessment Act 1997 Section 152-110

Income Tax Assessment Act 1997 Paragraph 152-110(d)(i)

Income Tax Assessment Act 1997 Section 328-115

Income Tax Assessment Act 1997 Subsection 328-115(1)

Income Tax Assessment Act 1997 Subsection 328-115(2)

Income Tax Assessment Act 1997 Section 328-120

Income Tax Assessment Act 1997 Subsection 328-120(1)

Reasons for decision

Question 1

Does the taxpayer satisfy the requirement in subparagraph 152-110(1)(d)(i) of the Income Tax Assessment Act 1997 that the sale of the business was "in connection with" the significant individual's retirement?

Summary

The sale of the business was "in connection with" a significant individual's retirement for the purpose of subparagraph 152-110(1)(d)(i).

Detailed reasoning

21.          Section 152-110 of the Income Tax Assessment Act 1997 (ITAA 97) provides:

(1) An entity that is a company or trust can disregard any * capital gain arising from a * CGT event if all of the following conditions are satisfied:

...

(d) an individual who was a significant individual of the company or trust just before the CGT event either:

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

...

22.          Section 152-55 of the ITAA 97 provides:

An individual is a significant individual in a company or a trust at a time if, at that time, the individual has a * small business participation percentage in the company or trust of at least 20%.

23.          Section 152-65 of the ITAA 97 provides:

An entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

(a) the entity's * direct small business participation percentage in the other entity at that time; and

(b) the entity's * indirect small business participation percentage in the other entity at that time.

24.          Subsection 152-70(1) of the ITAA 97 provides:

An entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage worked out using this table:

25.          Table item 1 of subsection 152-70(1) of the ITAA 97 provides that an entity's direct small business participation percentage is:

This percentage that the entity has because of holding the legal and equitable interests in * shares in the company:

(a) the percentage of the voting power in the company; or

(b) the percentage of any * dividend that the company may pay; or

(c) the percentage of any distribution of capital that the company may make;

or, if they are different, the smaller or smallest.

26.          The sale of the business is a CGT event for the purpose of section 152-110 of the ITAA 97.

27.          Employee A's shareholding in ABC entitles her to 25% voting power, 25% of dividends, and 25% of capital distributions of ABC. Therefore, her direct small business participation percentage is 25%. She does not have an indirect small business participation percentage so her small business participation percentage will be 25%. Because this exceeds 20% she will be a significant individual at the time ABC's business was sold.

28.          The legislation does not define the word 'retirement' for the purpose of the ITAA 1997. It therefore takes its ordinary meaning. The Macquarie Dictionary (online version) defines 'retirement' to mean 'removal or retiring from service, office, or business, especially in reaching the end of one's working life'.

29.          Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There must 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 is not necessary for there to be a permanent and everlasting retirement from the workforce.

30.          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).

31.          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.

32.          The work functions that Employee A is completing after the sale of the business have significantly reduced in scope, and she has gone from working on a full-time basis to now working on a part-time basis of 19 hours a week. She will cease employment with the Purchaser on 31 August 2023.

33.          The sale of ABC's business has occurred in connection with Employee A's retirement. Therefore, the requirement in paragraph 152-110(d)(i) of the ITAA 97 that the CGT event happened in connection with the retirement of a significant individual has been met.

Question 2

Are the NSW JobSaver payments received by the taxpayer during the 2022 financial year excluded from the definition of "aggregated turnover" for the purposes of the CGT small business entity test in subsection 152-10(1AA) of the Income Tax Assessment Act 1997?

Summary

JobSaver payments will be excluded from the definition of aggregated turnover.

Detailed reasoning

34.          Subsection 328-115(1) of the ITAA 1997 provides:

Your aggregated turnover for an income year is the sum of the relevant annual turnovers (see subsection (2)) excluding any amounts covered by subsection (3).

35.          Subsection 328-115(2) of the ITAA 1997 provides:

The relevant annual turnovers are:

(a) your * annual turnover for the income year; and

(b) the annual turnover for the income year of any entity (a relevant entity) that is * connected with you at any time during the income year; and

(c) the annual turnover for the income year of any entity (a relevant entity) that is an * affiliate of yours at any time during the income year.

36.          Subsection 328-120(1) provides:

An entity's annual turnover for an income year is the total * ordinary income that the entity * derives in the income year in the ordinary course of carrying on a * business.

Ordinary Income

37.          Subsection 6-5(1) of the ITAA 1997 provides

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

38.          Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business provides at paragraph 11:

A GPI to provide income support because of an actual or expected reduction in business income is ordinary income in the hands of the recipient and assessable under section 6-5 in the income year in which it is derived.

39.          In Federal Commissioner of Taxation v Myer Emporium Ltd [1987] HCA 18, the court stated:

The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind.

40.          In Commissioner of Taxation (Cth) v Dixon [1952] HCA 65 (Dixon), the court held a payment to be income because the amount was an 'expected periodical payment' and '... formed part of the receipts upon which he depended for the regular expenditure upon himself and his dependents and was paid to him for that purpose...'. The court also held that where a payment '... is intended to be, and is in fact, a substitute for - the equivalent pro tanto of - the salary and wages which would have been earned and paid...', then the payment:

... must be income, even though it is paid voluntarily and there is not even a moral obligation to continue making the payments. It acquires the character of that for which it is substituted and that to which it is added.

41.          The decision in Dixon was followed in Keily v Federal Commissioner of Taxation 83 ATC 4248 where the aged person's pension was held to be income. The taxpayer had been receiving an aged person's pension under the Social Services Act 1947 since she reached 60 in 1978. The court held that the pension had all the accepted characteristics of income and formed part of the receipts upon which the pensioner depended for support. Further, she had a continuing expectation of receiving regular payments.

42.          In Reckitt & Colman Pty Ltd v FC of T (1974) 74 ATC 4185, Mahoney J noted that:

In determining whether government payments... are of the nature of income, the court must examine the nature of the payment itself and the relationship to the activities, actual or potential, of the recipient.

43.          In Scott v Federal Commissioner of Taxation [1966] HCA 48, Windeyer J noted that:

Whether or not a particular receipt is income depends upon its quality in the hands of the recipient. It does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make. The ordinary illustrations of this are gratuities regularly received as an incident of a particular employment. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income. Whether or not a gratuitous payment is income in the hands of the recipient is thus a question of mixed law and fact. The motives of the donor do not determine the answer. They are, however, a relevant circumstance.

44.          The JobSaver payments are periodical, regular or recurrent. Subject to meeting the eligibility criteria, the payments are received in circumstances where businesses have an expectation of receiving the payments, and businesses can rely on the payments for their regular expenditure.

45.          While not determinative, the motives of the payer are a relevant consideration. JobSaver was aimed at providing cash flow support to eligible entities to help them maintain their NSW employee headcount. The program objective was to help businesses save jobs to support the economy after restrictions are lifted. The JobSaver payment was intended to be utilised for 'Eligible Expenses' incurred due to the impacts of the Public Health Order which can be broadly described as any expenditure relating to the general operation of a business.

46.          Consequently, JobSaver payments are properly characterised as ordinary income.

In the ordinary course of carrying on a business

47.          The phrase 'in the ordinary course of carrying on a business' in section 328-120 of the ITAA 1997 is not defined in the taxation legislation. Therefore, it must be interpreted according to its ordinary meaning and legislative context. The correct starting point is the text of the legislation, evaluated by reference not only to its literal meaning, but to the purpose and context of the provision.

48.          The Macquarie Dictionary defines 'ordinary' to mean:

•         'such as is commonly met with';

•         'of the usual kind'

•         'customary; normal'

•         'something regular, customary or usual...'.

49.          The Macquarie Dictionary defines 'course' to mean:

•         'customary manner of procedure'

•         'regular or natural order of events'

•         'a mode of conduct; behaviour'

•         'a particular manner of proceeding...'

50.          Section 328-120 of the ITAA 1997 was introduced by Tax Laws Amendment (Small Business) Act 2007. The Explanatory Memorandum to Tax Laws Amendment (Small Business) Bill 2007 (the EM) states that the phrase 'in the ordinary course of carrying on a business' must be interpreted according to its ordinary meaning. Paragraphs 2.15 to 2.16 of the EM provide:

2.15 In general, income is derived in the ordinary course of carrying on a business if the income is of a kind that is regularly or customarily derived by the entity in the course of carrying on its business, arising out of no special circumstance or unusual event. Similarly, the income is derived in the ordinary course of carrying on a business if the income, although not regularly derived, is a direct result of the normal activities of the business.

2.16 Ordinary income may be derived in the ordinary course of carrying on a business even if it is not the main type of ordinary income derived by the entity. Similarly, the income does not need to account for a significant part of the entity's overall receipts. It is sufficient that the ordinary income is of a kind derived regularly or customarily in the carrying on of a business.

51.          In Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liq) [1948] HCA 14, Rich J noted that:

It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary business as carried on, calling for no remark and arising out of no special or particular situation (emphasis added).

52.          In Re EJ Taylor & Son Pty Ltd [1964] HCA 11, Dixon CJ noted that:

The time-honoured phrase "in the ordinary course of business" is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination.

53.          The Commissioner provided guidance on the interpretation of the phrase 'in the ordinary course of business' in the context of former subsection 328-370(1) (part of the precursor to the small business entity regime) in Taxation Ruling TR 2002/11(W) Income tax: Simplified Tax System eligibility - STS average turnover (TR 2002/11(W)). While this ruling has been withdrawn, it is considered that it is of assistance here.

54.          TR 2002/11(W) discussed the meaning of 'in the ordinary course of carrying on a business' at paragraphs 20-23:

'in the ordinary course of carrying on a business'

20. The phrase 'in the ordinary course of carrying on a business' is not defined in the ITAA 1997 or the income tax law generally. It must therefore be interpreted according to its ordinary meaning and its legislative context.

21. For the purposes of the 'value of the business supplies' definition in subsection 995-1(1), a supply is made in the ordinary course of carrying on a business if it is a supply of the kind regularly or customarily made by the entity in the course of carrying on its business, arising out of no special circumstance or unusual event.

22. A supply can be made in the ordinary course of carrying on a business even though it is not the main type of supply made by the entity. Similarly, the supply does not need to account for a significant part of the entity's overall receipts. It is sufficient that the supply is of a kind made regularly or customarily in the carrying on of a business.

23. Determining whether a supply is of the kind regularly or customarily made by an entity in the course of its business will be a question of fact to be determined on the circumstances of the particular case. See Examples 1A to 2B in the Explanations and Examples section of this Ruling.

55.          TR 2002/11(W) specifically considered government grants at paragraphs 30-31 providing:

Government grants

30. An entity needs to include a government grant in its *STS group turnover for an income year if that grant:

(i) constitutes consideration for a supply made by the entity or one of its grouped entities in that year; and

(ii) that supply was made in the ordinary course of carrying on a business.

31. The test in paragraph 21 above should be used by the entity to determine if a supply, the consideration for which is a government grant, was made in the ordinary course of carrying on a business.

56.          The phrase 'in the ordinary course of business' was considered in the context of division 328 of the ITAA 1997 in Doutch v Commissioner of Taxation [2016] FCAFC 166 (Doutch). Greenwood, McKerracher and Moshinsky JJ held at paragraph [77].

But in the context of s 328-120(1), it seems likely that it is the ordinary course of the particular business that is relevant. The provision is concerned with the "annual turnover" of a particular entity, and the reference to "business" is to the business of that entity. Nevertheless, the passage is of assistance in indicating that the expression "ordinary course of business" refers to the ordinary and common flow of transactions of a business.

57.          The judgment in Doutch indicates the relevant question here then is whether the 'transaction' in question was part of the ordinary and common flow of transactions of the respective business.

58.          This notion is supported by paragraphs 21-23 and 30-31 of TR 2002/11(W) which suggests that in characterising whether income was derived in the ordinary course of carrying on a business, you must examine whether the 'supply' was made in the ordinary course of carrying on a business. That is, the thing which gives rise to the income (albeit in the context of 'value of the business supplies').

59.          In the context of the JobSaver payments, the thing or 'transaction' which gives rise to the income, being the amounts received under the JobSaver program, is the submission of the application for JobSaver to Service NSW.

60.          It cannot be said that the submission of the application by ABC for JobSaver to Service NSW was a part of the ordinary and common flow of its business and as such it cannot be said that JobSaver payments were derived by it in the ordinary course of carrying on a business.

61.          While not determinative, the motives of the payer are a relevant consideration. Though JobSaver payments could be used to cover general business costs, the primary objective of this payment was to help businesses to 'survive, maintain relationships with their employees and be in a position to trade when restrictions are lifted.' In the context of the COVID-19 pandemic, these grants were provided to businesses to help manage economic impacts as a result of the Public Health Order mandating lockdowns over geographic areas these entities operated in.

62.          The JobSaver payments do not provide enduring relief for businesses. They provided temporary assistance to help them navigate the pandemic.

Conclusion

63.          JobSaver payments will not be included in the calculation of aggregated turnover under section 328-115 of the ITAA 1997.

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