Edited version of private advice

Authorisation Number: 1052137481839

Date of advice: 7 July 2023

Ruling

Subject: 15-year retirement concession

Question 1

Does each Taxpayer satisfy the basic conditions set out in section 152-10 of the Income Tax Assessment Act 1997 (ITAA 1997) with respect to their 50% interest in the Property for the purposes of Subdivision 152-B of the ITAA 1997 in relation to the disposal of the Property?

Answer

Yes

Question 2

Does each Taxpayer satisfy the requirements in section 152-105 of the ITAA 1997 to apply the 15-year exemption with respect to their 50% interest in the Property in relation to the sale of the Property?

Answer

Yes.

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

Individual A and Individual B (collectively the Taxpayers) jointly acquired the Property after 20 September 1985.

The estimated cost base of the Property is $X.

The sale price of the Property is $X.

The contract exchange date for sale of the Property is XXXX.

The Taxpayers each have a 50% interest in the Partnership.

The Property has been used in the primary production business of the Partnership from the time of acquisition to the time of sale of the Property in a business operation. The Property has been disclosed as an asset of the Partnership in the financial statements.

The Taxpayers also hold Other Property.

The Taxpayers are not involved in any other businesses.

The Partnership's aggregated turnover for each of the income years ending 30 June XXXX and 30 June XXXX is less than $2 million.

The Taxpayers are both over 55 years of age.

The Taxpayers were previously both employed but have both ceased their respective employment activities at or around 30 June XXXX.

The Taxpayers have participated in the business of the Partnership both before and after their retirement from their employment activities but are seeking to reduce their involvement in the business of the partnership because of Individual B's health concerns.

The Taxpayers have reduced their activities through the sale of the Property.

Some of the sale proceeds will be used to engage someone to assist in the running of the other Property.

The Taxpayers also intend to use the proceeds from the sale to purchase a property for lifestyle purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-105

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

Reasons for decision

Questions 1 and 2

Summary

The sale of the Property is in connection with Individual A and Individual B's retirement.

Individual A and Individual B are both at least 55 years old and will be using the capital proceeds for their retirement.

Detailed reasoning

Subdivision 152-B of the ITAA 1997 allows a CGT small business entity to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met.

Relevantly, for an individual, section 152-105 of the ITAA 1997 provides:

152-105 15-year exemption for individuals

If you are an individual, you can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a) the basic conditions in Subdivision 152-A are satisfied for the gain;

(b) you continuously owned the CGT asset for the 15-year period ending just before the CGT event;

...

(d) either:

(i) you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

(ii) you are permanently incapacitated at the time of the CGT event.

Basic conditions in Subdivision 152-A of the ITAA 1997

Subsection 152-10(1) of the ITAA 1997 sets out the basic conditions.

Relevantly, the requirements include the following:

a)    A CGT event happens in relation to a CGT asset in an income year.

b)    The event would (apart from Division 152 of the ITAA 1997) have resulted in a gain.

c)    you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership

d)    The CGT asset satisfies the active asset test in section 152-35 of the ITA 1997.

CGT event giving rise to a capital gain

Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss is made if a CGT event happens to a CGT asset.

The Property is a CGT asset (section 108-5 of the ITAA 1997).

Relevantly, under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset.

Under subsection 104-10(2) of the ITAA 1997, you dispose of a CGT asset when a change of ownership occurs from you to another entity.

The effect of CGT Event A1 happening is that you make a capital gain if the capital proceeds from the disposal are more than the asset's costs base or a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(5) of the ITAA 1997).

The time of the event is when you enter into the contract for the disposal, or, if there is no contract, when the change occurs (subsection 104-10(3) of the ITAA 1997).

Small business entity

Pursuant to subsection 152-10(1AA) of the ITAA 1997:

You are a CGT small business entity for an income year if:

a)    you are a small business entity for the income year; and

b)    you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

As defined in section 995-1 of the of the, a small business entity has the meaning given by subsection 328-110(1) of the ITAA 1997, as follows:

You are a small business entity for an income year (the current year) if:

a)    you carry on a business in the current year; and

b)    one or both of the following applies:

i)      you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

ii)     your aggregated turnover for the current year is likely to be less than $10 million.

Active asset test

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

a)    you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period, or

b)    you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the test period.

Under subsection 152-35(2) of the of the ITAA 1997 the period:

a)    begins when you acquired the asset; and

b)    ends at the earlier of:

i)      the CGT event; and

ii)     if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if:

(a) either entity controls the other entity; or

(b) both entities are controlled by the same third entity.

Relevantly, Taxation Determination TD 2022/7 Income tax: aggregated turnover - application of the 'connected with' concept to partnerships, foreign hybrids and non-entity joint ventures, explains that Subdivision 328-C of the ITAA 1997 applies to a 'partnership' as though it were an entity separate to its partners in the following manner:

a)    A partner is capable of directly controlling a partnership based on the tests in subparagraphs 328-125(2)(a)(i) or (iii) (the 'general control tests') or the specific test for determining whether an entity directly controls a partnership under subparagraph 328-125(2)(a)(ii) (the 'partnership control test').

b)    When determining whether a partnership directly controls another entity under section 328-125, the partnership is the relevant entity, rather than the individual partners in their capacity as partners.

c)    Where an entity is directly controlled by a partnership within the meaning of section 328-125, that entity will also need to consider whether it is indirectly controlled by any other entities that control the partnership, including the individual partners in their capacity as partners of the partnership.

d)    Likewise, where a partner directly controls a partnership, that partner will also need to consider whether they indirectly control any other entities that are controlled by the partnership.

e)    Further, as only an individual or a company can be an affiliate within the meaning of section 328-130, a partnership is not capable of being an affiliate of another entity.

Continuously owned

The Commissioner explains in Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? that, generally for CGT purposes, ownership in relation to the disposal of property is determined with reference to settlement:

3. However, a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs. Settlement effects a change of ownership and a disposal (subsection 160M(1)) which then triggers the operation of subsection 160U(3). When settlement occurs, the taxpayer is then required to include any capital gain or loss in the year of income in which the contract was made (subsection 160U(3)). If an assessment has already been made for that year of income, the taxpayer may need to have that assessment amended.

However, whether an entity has continuously owned the CGT asset for the 15-year period set out in paragraph 152-110(1)(b) of the ITAA 1997 is determined with reference to when the CGT asset commences to be owned by the entity to just before the CGT event (in the case of CGT event A1, the date of the contract for the sale of the CGT asset).

In connection with retirement

This phrase 'in connection with their retirement' has no statutory definition.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with their retirement', nor does it give any indication of the degree of retirement for the purposes of this concession.

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case.

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:

Requirement to be permanently incapacitated or retiring

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 legislation does not provide a specific definition of the word 'retirement' for the purpose of subparagraph 152-110(1)(d)(i) of the ITAA 1997. Consequently, 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 phrase 'in connection with' has been judicially considered in numerous cases.

In Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 (Pozzolanic), it was stated by the Full Court of the Federal Court that:

The words 'connected with' are capable of describing a spectrum of relationships ranging from the direct and immediate to the tenuous and remote. As Sheppard and Burchett JJ observed in Australian National Railways Commission v Collector of Customs (SA) [(1985) 69 ALR 367 at 377-378; 8 FCR 264, at 265] the meaning of the word 'connection' is wide and imprecise, one of its common meanings being 'relation between things one of which is bound up with, or involved in, another': Shorter Oxford English Dictionary. (at 288)

Given the potential width of the words 'in connection with', the question remains in a particular case what kind of relationship will suffice to establish the connection contemplated by the statute. This in turn will require a value judgment about the range of the statute: see e.g. Pozzolanic at 289 and Taciak v Commissioner of Australian Federal Police (1995) 59 FCR 285 at 295.

Wilcox J of the Federal Court considered the meaning of the phrase 'in connection with the retirement' in Claremont Petroleum NL v Cummings (1992) 110 ALR 239 (Claremont). The case concerned the application of provisions within the Queensland Companies Code and in particular, whether payments made were in connection with the retirement of certain individuals. Wilcox J made the following observations on the phrase 'in connection with:

The phrase "in connection with" is one of wide import, as I had occasion to observe in a different context in Our Town FM Pty Ltd v Australian Broadcasting Tribunal (1987) 16 FCR 465 at p479-80; 77 ALR 577 at pages 591-2:

The words 'in connexion with'...do not necessarily require a causal relationship between the two things: see Commissioner for Superannuation v Miller (1985)8 FCR 153 at 154, 160, 163; 63 ALR 237at 238, 244, 247. They may be used to describe a relationship with a contemplated future event: see Koppen v Commissioner for Community Relations (1986) 11 FCR 360 at 364, Johnson v Johnson [1952] P 47 at 50-1. In the latter case the United Kingdom Court of Appeal applied a decision of the British Columbia Court of Appeal, Re Nanaimo Community Hotel Ltd [1945] 3 DLR 225, in which the question was whether a particular court, which was given 'jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act', had jurisdiction to deal with a matter which preceded the issue of an assessment. The trial judge held that it did, that the phrase 'in connection with' covered matters leading up to, or which might lead up to an assessment. He said...: 'One of the very generally accepted meanings of "connection" is "relation between things one of which is bound up with or involved in another"; or, again "having to do with". The words include matters occurring prior to as well as subsequent to or consequent upon so long as they are related to the principal thing. The phrase "having to do with" perhaps gives as good a suggestion of the meaning as could be had.'

Having regard to the context of subparagraph 152-110(1)(d)(i) of the ITAA 1997, the Commissioner considers that it would be reasonable to adopt the meaning given to the phrase 'in connection with' in Claremont such 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)(i) of the ITAA 1997.

Similarly, the words 'in connection with' can apply where the CGT event occurs sometime after retirement. Again, this would depend on the particular facts, and would need to be considered on a case-by-case basis.

Application in these circumstances

Relevantly, in this case:

• The basic conditions for relief in Subdivision 152-A of the ITAA 1997 are satisfied:

-       the sale of the Property will result in a capital gain for the purpose of CGT event A1

-       the Partnership is carrying on a business and its aggregated turnover is less than $2 million for the purposes of section 328-110 of the ITAA 1997; and

-       the Property is an active asset as was owned by the Taxpayers for more than 15 years and it was used by the Partnership for a total of at least 7½ for the period it was owned in carrying on the Partnership's business activities.

• The Taxpayers have continuously owned the CGT asset (i.e. the Property) for the 15-year period ending just before the CGT event - i.e. for, the acquisition of the Property in May XXXX to the contract for the sale of Property in September XXXX.
• Individual A and Individual B have reduced their activities/involvement in the Partnership due to the sale of the Property.

As such, the Commissioner is satisfied that in these circumstances the sale of the Property is in connection with Individual A and Individual B's retirement for the purpose of subparagraph 152-110(1)(d)(i) of the ITAA 1997.

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