Edited version of private advice

Authorisation Number: 1052353681404

Date of advice: 19 February 2025

Ruling

Subject: CGT - small business concessions

Question 1

Is the sale of your Business and its Assets, a CGT event that happened in connection with the significant individual's retirement under subparagraph 152-110(1)(d)(i) for the purposes of the 15-year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a private company registered in 20XX.

You commenced a business in the property industry (Business) shortly after your registration.

You issued ordinary shares upon registration, which were initially equally owned by two shareholders, being a related Trust and another unrelated party.

The Trust acquired the shares from the other shareholder and became the sole shareholder in mid 20XX. There has been no change in your ownership since.

You have a sole director and secretary (Director).

Your Director is also the sole director and secretary of the Corporate Trustee for the Trust, the first appointor for the Trust and the first principal beneficiary of the Trust.

You purchased some business assets between specified years. These assets were merged with your existing assets which was developed since your inception.

You had an annual turnover of less than $XX for each of the income years ended 30 June 20xx and 30 June 20xx.

The Trust (which is a discretionary trust) made the following income distributions during the 20XX to 20XX income years (except for the loss years) to the beneficiaries. The Trust did not make distributions of income in those loss years because the Trust made a tax loss and did not have net income in those years. The Trust did not make capital distributions during this period.

You entered into an Asset Sale Agreement (ASA) on a specified date to sell your Business to the Purchaser. Settlement occurred on another specified date.

The Purchase Price comprised the Completion Payment, the Retention Payment and the Sales Target Amount as follows:

•                     The Completion Payment was $XX, reduced by certain employee entitlements.

•                     The Retention Payment was calculated under a formula by reference to specified income derived over the X-month period after Completion.

•                     The Sales Target Amount will be $XX if the gross sale commission in the Sales Retention Period (X months after Completion) is greater than $XX.

You received an amount consisting of the Completion Payment and Retention Payment. There will be no Sales Target Amount received.

Your Business assets sold, included various assets such as goodwill, plant and equipment, various intellectual property (IP) rights and business contracts (Assets).

The lease for your Business premises was assigned to the Purchaser.

As a condition of the ASA by the Purchaser, your Director entered into a new employment contract with the Purchaser on a specified date to work for the Purchaser on completion of the sale contract (Employment Contract).

Although the Employment Contract states that it was a full-time permanent role, the agreement with the Purchaser was that your Director would only work for X months after completion of the sale. Your Director did not negotiate terms beyond X months as they had no intention to work after a specified date. Your Director's remuneration was negotiated on the basis that it was for a retainer of $XX per annum for the first X months.

Your Director's employment with the Purchaser ceased on a specified date.

Your Director was required to hold their licence as principal licensee on premises under X law for the Purchaser to continue operating the Business at the current Business premises. On ceasing employment with the Purchaser in late November 20XX, the Purchaser will be required to have a new principal licensee on premises for the Business.

Prior to the sale of your Business, your Director was employed by you. Your Director was fully responsible for setting your strategic directions and policies, carrying out management duties and overseeing operational functions of all aspects of your Business. Their duties included the following:

•                     Managing cash flow

•                     Setting budgets including marketing expenditure

•                     Approving payments of both capital and non-capital expenditure

•                     Responsible for managing a specified number of accounts

•                     Managing workforce including hiring new staff members and reviewing staff performance and dealing with HR issues

•                     Reviewing and dealing with legal compliance matters

•                     Workplace health and safety review

•                     Negotiating leasing of business premises

•                     Reviewing and signing lodgments of documents as public officer, including business activity statements and company tax returns

•                     Dealing with customer complaints

•                     Reviewing and renewing office insurance policies

Before the sale of your Business, your Director held two licences - a personal licence and a company licence for the purpose of conducting your Business.

There have been significant changes in the nature of the work performed by your Director while working for the Purchaser during the X-month transitional period, including:

•                     They are not a director of the Purchaser and does not hold any management position in the Purchaser's business.

•                     They have no management and administration responsibilities for the Purchaser.

•                     They report to the Branch Manager.

•                     They only provide specified services to the Purchaser.

•                     They only hold a personal licence as principal licensee on premises under X law. The overall licensee is the Purchaser and the business operates under their licence.

•                     They are no longer responsible for any specified accounts of the Purchaser.

•                     Their ordinary hours of work per week are X hours under their Employment Contract.

Your Director operated your Business for over X years and had worked X days per week over the past X years and an average of X hours per week. They had very limited time for themselves and family.

Your Director had to be available all day with regards to the Business. They also had to deal with specified business issues X days per week.

Your Director was over X years of age at the time you entered into an ASA on a specified date to sell your Business to the Purchaser.

Your Director has ongoing health issues, which was the main reason for selling the Business.

Your Director wishes to spend more time with their elderly parent and family. Their plan for retirement includes:

•                     Selling main residence and moving into an apartment.

•                     Spending more time with their parent.

•                     Visiting children and grandchildren in other states of Australia.

•                     Overseas travel.

Your Director's main residence was listed for sale on a specified date, however, has not yet sold.

Your Director signed a contract to purchase a new residence to retire to. Settlement of the contract occurred on a specified date and they reside in the new property as their main residence.

Before the sale of your Business and its Assets, the net value of your capital gains tax (CGT) assets for the purpose of the maximum net asset value test did not exceed $XX.

Other than disclosed above, you have no other connected entities.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Subdivision 152-A

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 section 152-15

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 152-75

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 subsection 152-105(d)

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 section 152-125

Reasons for decision

Question

Is the sale of your Business and its Assets, a CGT event that happened in connection with the significant individual's retirement under subparagraph 152-110(1)(d)(i) for the purposes of the 15-year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes. The sale of your Business and its Assets is a CGT event that happened in connection with the significant individual's retirement under subparagraph 152-110(1)(d)(i) for the purposes of the 15-year exemption in Subdivision 152-B of the ITAA 1997.

Detailed reasoning

The 15-year exemption in Subdivision 152-B of the ITAA 1997 can be used by a CGT small business entity to disregard a capital gain arising from a CGT asset that it has owned for at least X years if certain conditions are met. Capital losses are not affected.

Section 152-110 of the ITAA 1997 provides a small business X-year exemption for companies and trusts. Under this section, a company or trust can disregard any capital gain arising from a CGT event if all the following conditions are satisfied:

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

(b)          the entity continuously owned the CGT asset for the X-year period ending just before the CGT event,

(c)           the entity had a significant individual for a total of at least X years (even if the X years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset, and

(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

(ii)           was permanently incapacitated at that time.

Significant Individual

An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least X% (section 152-55 of the ITAA 1997). The small business participation percentage is the sum of the entity's direct and indirect percentage (section 152-65 of the ITAA 1997).

The direct small business participation percentage is provided by section 152-70 of the ITAA 1997. As you are a company, item 1 of the table in section 152-70 of the ITAA 1997 is relevant. It provides that an entity has, because of holding the legal and equitable interests in shares in the company:

(a)          the percentage of 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.

An entity's direct percentage in a trust depends first on the type of trust (broadly, whether the trust is a fixed trust or not).

Non-fixed trust (where entities do not have entitlements to all the income and capital of the trust)

Trust makes income and/or capital distributions

If the trustee makes either an income or capital distribution during the relevant year, an entity's direct percentage will be the percentage of that distribution to which it is beneficially entitled.

The 'relevant year' is the year in which the relevant time (for which the direct percentage is being determined) falls in.

Trust does not make income or capital distribution

If the trustee has made neither an income nor capital distribution in the relevant year, the direct percentage an entity has in connection with a CGT event can still be determined as follows:

(1) using the percentages of beneficial entitlement to distributions made in the year of the CGT event (the reference in item 3 of the table in subsection 152-70(1) of the ITAA 1997 to 'relevant year' is treated as a reference to the CGT event year)

(2) if no distributions were made in the CGT event year because the trust had no net income and had a tax loss, using the percentages of beneficial entitlement to distributions made in any year before the CGT year (the most recent year must be used).

This enables an entity to work out their direct percentage for purposes of the small business X-year exemption where an individual must be a significant individual of the company or trust just before the CGT event (paragraph 152-110(1)(d)) of the ITAA 1997. It also enables the percentage to be calculated for purposes of section 152-125 of the ITAA 1997 where an individual must be a CGT concession stakeholder just before the CGT event.

The rules therefore allow an entity to calculate its direct percentage in a trust in a relevant year where the trust makes no distribution because it has a tax loss by considering a previous income year when a distribution was made. However, an entity's direct percentage can only be greater than zero if the trust did not have net income or had a tax loss for the relevant year.

An entity that holds an indirect interest in a trust can calculate its indirect small business participation percentage in that trust (under section 152-75 of the ITAA 1997) for a relevant year even if the intermediate trust had a tax loss and did not make an income or capital distribution that year. The distributions made by the intermediate trust to the entity in a previous income year can be used to calculate the entity's direct percentage and consequently its indirect small business participation percentage in the trust in the relevant year.

In connection with retirement

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 or after 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 concessions:

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 X-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 words used in the EM support this interpretation.

The ATO's Advanced guide to capital gains tax concessions for small business 2013 -14 (NAT 3359) 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 purpose of subsection 152-105(d) of the ITAA 1997.

The EM and the guide provide that the retirement does not need to occur immediately following the event, however whether a particular case satisfies the conditions depends very much on the facts of the case.

Application to your circumstances

In your case, the disposal of your Business and its Assets will result in a CGT event A1 happening in the income year of disposal (i.e. the income year ended 30 June 20XX), and the disposal will result in a capital gain (section 104-10 of the ITAA 1997), therefore satisfying paragraphs 152-10(1)(a) and (b) of the ITAA 1997.

Additionally, before the disposal of your Business and its Assets, the net value of your CGT assets did not exceed $XX, therefore satisfying the maximum net asset value test under section 152-15 of the ITAA 1997, in the income year your Business and its Assets were disposed of. As a result, paragraph 152-10(1)(c) of the ITAA 1997 is also satisfied.

The active asset test under section 152-35 of the ITAA 1997 is also satisfied as you owned the Business and its Assets for more than X years and they were active assets for more than X years during the ownership period, therefore satisfying paragraph 152-10(1)(d) of the ITAA 1997.

All the requirements are therefore satisfied for the basic conditions for relief in Subdivision 152-A regarding the disposal of your Business and its Assets. Consequently, the first requirement for the X-year exemption in paragraph 152-110(1)(a) will be satisfied.

You have been operating the Business and continuously owned its Assets since 20XX, which is longer than the prescribed X-year period ending just before the disposal, therefore also satisfying the requirements in paragraph 152-110(1)(b) of the ITAA 1997.

The Trust has been your sole shareholder since mid-June 20XX. Your Director is the sole director and secretary of the Corporate Trustee for the Trust, the first appointor for the Trust and the first principal beneficiary of the Trust.

The Trust made the following income distributions during the 20XX to 20XX income years (except for the loss years) to the beneficiaries. The Trust did not make distributions of income in those loss years because the Trust made a tax loss and did not have net income in those years. The Trust did not make capital distributions during this period.

In your case, as evidenced by the above trust distribution percentages, Your Director is a significant individual in you and the Trust, as they have a small business participation percentage in you and the Trust of at least XX% (section 152-55 of the ITAA 1997). Your Director holds an indirect interest in the Trust and can therefore calculate their indirect small business participation percentage in that Trust (under section 152-75 of the ITAA 1997) for a relevant year even if that intermediate Trust had a tax loss and did not make an income or capital distribution that year. The distributions made by the Trust to your Director in a previous income year can be used to calculate their direct percentage in the Trust and consequently their indirect small business participation percentage in the Company in the relevant year. Your Director has therefore been a significant individual in you for a total of at least XX years during the ownership period of your Business and its Assets, subsequently satisfying paragraph 152-110(1)(c) of the ITAA 1997.

Additionally, your Director (being a 'significant individual' of yours) was over 55 years of age just before the disposal and their duties and responsibilities (under their Employment Contract with the Purchaser) have significantly changed and reduced, with their employment with the Purchaser ceasing on a specified date. Your Director's continued XX-month employment was a requirement of the sale that was stipulated by the Purchaser to ensure that the goodwill of the Business was protected. Your Director's working hours reduced from XX to XX hours per week in the X-month transitional period following the sale of the Business and its Assets and they had no management and administration responsibilities for the Purchaser. Your Director then retired completely effective on a specified date, satisfying paragraph 152-110(1)(d) of the ITAA 1997.

It is considered therefore, that there is a clear link between the sale of your Business and its Assets and the retirement of your Director, your 'significant individual', and that the sale of the Business and its Assets was integral to their retirement plans.

As such, the Commissioner is satisfied that in these circumstances, the sale of your Business and its Assets is a CGT event that happened in connection with the significant individual's retirement under subparagraph

152-110(1)(d)(i) for the purposes of the XX-year exemption in Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997).

Consequently, as you satisfy all the relevant requirements of section 152-110 of the ITAA 1997, you are entitled to apply the small business XX-year exemption to disregard any capital gain made upon the disposal of your Business and its Assets in the relevant income year.

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