Edited version of private advice

Authorisation Number: 1052356307941

Date of advice: 31 January 2025

Ruling

Subject: 15-year retirement concession

Question 1

Will the Trustee for the Property Trust satisfy the requirements in section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the 15-year exemption with respect to a capital gain it makes on the disposal of the Property?

Answer 1

Yes

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

The Trustee for the Property Trust (Unit Trust) acquired the Property on XX Month 2003.

The Trustee of the Unit Trust is a corporate trustee (Trustee).

Individual 1 and Individual 2 are the joint directors and shareholders of the Trustee.

The unitholders of the Unit Trust are:

•                Individual 1 - X%

•                Individual 2 - X%

•                SMSF - X%

The terms of the trust deed for the Unit Trust, provide that all beneficiaries have an entitlement to all the income and capital of the trust, this includes any accumulated income or capital. This entitlement is in proportion to their unit holdings.

The Property owned by the Unit Trust was leased on commercial terms to the trustee for a Family Trust which used the Property to carry on its business from 2003 to 2014.

The Family Trust is a CGT small business entity for the purposes of subsection 152-10(1AA) of the ITAA 1997 at all times.

The corporate trustee of the Family Trust is also a corporate trustee (Trustee of the Family Trust).

Individual 1 and Individual 2 are the joint directors and shareholders of the Trustee of the Family Trust.

The Trustee of the Family Trust sold the business to a company that was jointly owned by Individual 2 and Individual 1's child and his spouse (Company).

The Property was leased by the Trustee on commercial terms to the Company for use in carrying in its business from 2014 to date.

The Company is a CGT small business entity for the purposes of subsection 152-10(1AA) of the ITAA 1997 at all times.

The Company has been struggling financially. The Trustee has supported the Company by providing financial assistance in the form of reduction (or waiver) of outstanding lease payments.

Individual 2 has substantial business expertise. Individual 2, in his role as a director of the Trustee (being one of two directors of the Trustee), influences the Company's business, its management and is involved in meetings. Individual 2 also negotiates contracts and authorises purchases on behalf of the Company. The Company follows Individual 2's business decisions and strategic direction.

The Property has been placed on the market for sale.

Individual 1 and Individual 2 will be over X years of age at the time of the CGT event and will have retired. The capital proceeds from the proposed disposal of the Property will be used to fund their retirement.

The Unit Trust is not carrying on a business and will not be carrying on a business in the income year the CGT event happens.

The combined net asset value of the Unit Trust (and any other relevant entity) is more than $X.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997, unless otherwise stated.

Question

Summary

As the requirements in section 152-110 will be satisfied, any capital gain from the sale of the Property can be disregarded by the Trustee for the purposes of Subdivision 152-B.

Detailed reasoning

Small business 15-year exemption for individuals

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

The Trustee will need to satisfy four primary requirements to be eligible for the 15-year exemption. Relevantly, section 152-110 provides:

15-year exemption for companies and trusts

(1) An entity that is a ... trust 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) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event;

Note: Section 152-115 allows for continuation of the period if there is an involuntary disposal of the asset.

(c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset;

(d) an individual who was a significant individual of the ... 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.

In other words, it will be necessary to show that the Trustee has:

1.              met the basic conditions in Subdivision 152-A

2.              continuously owned the CGT asset (i.e. the Property)

3.              has had a significant individual for a total of 15 years during the time the Trustee owned the Property, and

4.              just before the CGT event happens to the Property, the significant individual was over 55 and the CGT event happened in connection with their retirement.

Requirement 1

Basic conditions in Subdivision 152-A

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

(1) A capital gain ... you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(a) a CGT event happens in relation to a CGT asset of yours in an income year;

Note: This condition does not apply in the case of CGT event D1: see section 152-12.

(b) the event would (apart from this Division) have resulted in the gain;

(c) at least one of the following applies:

(i) ... ;

(ii) ... ;

(iii) ... ;

(iv) the conditions mentioned in subsection (1A) ... are satisfied in relation to the CGT asset in the income year;

(d) the CGT asset satisfies the active asset test (see section 152-35).

Note: This condition does not apply in the case of CGT event D1: see section 152-12.

The following requirements are relevant in these circumstances.

CGT event giving rise to a capital gain

Section 102-20 provides that a capital gain or capital loss is made if a CGT event happens to a CGT asset. The Property owned by the Unit Trust is a CGT asset (section 108-5).

Relevantly, under subsection 104-10(1), CGT event A1 will happen when the Trustee disposes of the Property.

Under subsection 104-10(2), 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)).

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

Passively held assets - affiliates and entities connected with you

The Trustee will need to demonstrate that it satisfies subsection 152-10(1A).

Subsection 152-10(1A) provides that:

(1A) The conditions in this subsection are satisfied in relation to the CGT asset in the income year if:

(a) your affiliate, or an entity that is connected with you, is a CGT small business entity for the income year; and

(b) you do not carry on a business in the income year (other than in partnership); and

(c) ... ; and

(d) in any case-the CGT small business entity referred to in paragraph (a) is the entity that, at a time in the income year, carries on the business (as referred to in subparagraph 152-40(1)(a)(ii) or (iii) or paragraph 152-40(1)(b)) in relation to the CGT asset.

Note 1: The meaning of connected with is affected by section 152-78.

Note 3: For businesses that are winding up, see section 152-49 and subsection 328-110(5).

In other words, the Trustee will need to demonstrate that at the time the CGT event happens to the Property, the Company is an affiliate of, or connected with the Trustee. Further, the Company will need to be a CGT small business entity when that CGT event happens (being the income year when the Trustee sells the Property).

Affiliates

Affiliate is defined in subsection 328-130(1) as an individual or company that acts, or could reasonably be expected to act, in accordance with the entity's directions or wishes, or in concert with the taxpayer, in relation to the business affairs of that individual or company.

An individual or company is not automatically an affiliate merely because of the legal nature of a business relationship: subsection 328-130(2). For example, a company and its directors are not affiliates by reason only of the nature of the business relationship they share.

Relevantly, section 152-47 provides that spouses or children are taken to be affiliates in certain circumstances.

The Explanatory Memorandum to the Tax Laws Amendment (2009 Measures No. 2) Bill 2009 explains the intended operation of section 152-47:

...

2.33 The amendments repeal subsection 152-40(1A) and insert a rule that treats an individual's spouse or child (under 18 years of age) as an affiliate of the individual for the purposes of determining whether the individual or an entity in which the individual has an interest, or is a beneficiary of, is eligible for the small business CGT concessions where one entity owns a CGT asset and:

•                that asset is used, or held ready for use, in the course of carrying on a business by another entity; or

•                is inherently connected with a business carried on by another entity.

[Schedule 2, items 11 and 14, subsections 152-47(1) and (2)]

2.34 The rule applies only if the 'business' entity is not otherwise an affiliate of, or connected with, the asset-owning entity. This means that if the business entity is an affiliate of the asset-owning entity as a result of applying section 328-130 of the ITAA 1997, an individual's spouse or child (under 18 years of age) would not be treated as an affiliate of the individual. Similarly, if the business entity is already connected with the asset-owning entity via section 328-125 of the ITAA 1997, an individual's spouse or child (under 18 years of age) would not be treated as an affiliate of the individual. [Schedule 2, item 14, paragraph 152-47(1)(c)]

2.35 The rule is applied in two stages. The first stage treats an individual's spouse or child (under 18 years of age) as their affiliate, for the purposes of Subdivision 152-A of the ITAA 1997, when determining whether the entity that uses the CGT asset, or holds it ready for use, in its business is an affiliate of, or is connected with, the entity that owns the CGT asset. [Schedule 2, item 14, subsection 152-47(2)]

2.36 If the conditions of the first stage are met, the second stage will apply to treat the spouse or child (as the case may be) as an affiliate of the individual for the purposes of Subdivision 152-A of the ITAA 1997 and for the purposes of sections 328-110 to 328-125 of the ITAA 1997 to the extent that these sections relate to Subdivision 152-A. For example, if by the application of the first stage of the rule, the entity is taken to be an affiliate of, or an entity connected with, the entity that owns the asset, the asset is an active asset (subparagraph 152-40(1)(a)(ii) in its proposed new form, or new subparagraph 152-40(1)(a)(iii), or paragraph 152-40(1)(b) in its proposed new form). [Schedule 2, item 14, subsection 152-47(3)]

...

It is noted that for the purposes of section 152-40 it is the use of the asset in the business, and not by the taxpayer who owns it, that is relevant.

Where the taxpayer treats any use by their affiliate, or an entity that is connected with them, as their use, it is that entity's use of the property in their business that is relevant in this context.

As such, the Property would not be excluded on the basis that it is a rental property in the hands of the Trustee. Rather, it is the Company's use of the Property in the Company's business that is relevant.

Connected with

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

•                either entity controls the other entity, or

•                both entities are controlled by the same third entity in a manner described in the section.

Broadly, an entity is taken to indirectly control a third entity where:

•                the entity directly controls a second entity (the interposed entity); and

•                the interposed entity controls (whether directly or indirectly) the third entity.

In other words, if Entity A controls Entity B and Entity B controls Entity C, then Entity A is also taken to control Entity C.

The tests to determine control are applied in respect of each entity. The direct control rules in subsections 328-125(2) to 328-125(6) apply to determine whether the first entity controls the interposed entity. Either the direct or indirect control rules can apply to determine whether the interposed entity controls the third entity.

Section 328-125 sets out the various ways an entity is taken to control another entity. Subsection 328-125(2) sets out the direct control of an entity other than a discretionary trust:

•                except if the other entity is a discretionary trust, Entity A controls Entity B if Entity A, its affiliates, or Entity A together with its affiliates own, or have the right to acquire the ownership of, interests in Entity B that carry between them the right to receive at least X% (the control percentage) of any income or capital distribution by Entity B (general control test) pursuant to paragraph 328-125(2)(a); or

•                Entity A also controls Entity B that is a company if Entity A, its affiliates, or Entity A together with its affiliates own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, at least X% of the voting power in the company (voting control test) pursuant to paragraph 328-125(2)(b).

The control tests in this context focus on legal ownership, rather than beneficial ownership. The provisions apply to interests held by trusts, life insurance companies and superannuation funds in the same way as to other entities.

Influence over trustee

Whether an entity acts in accordance with the directions or wishes of an entity and/or its affiliates depends on the particular facts and circumstances.

Re Gutteridge and Commissioner of Taxation 2013 ATC 10-347 sets out the principles that are relevant to determining whether a person or entity exercised effective control over the trustee of a discretionary trust for the purposes of subsection 328-125(3):

•                treating another person's instructions or wishes as a sufficient reason so to act, rather than making personal decisions where those wishes or instructions are merely a factor considered, meets the test of being accustomed so to act;

•                it is not necessary that the behaviour be universal, at least some decisions, one or more important decisions, would be enough, some or all decision making is the focus;

•                decisions made in pursuit of one's own business goals even, if consistent with the wishes of another party, do not necessarily render the decision maker accustomed to acting in accordance with the other party's wishes. The other party may have superior bargaining power;

•                while not significantly different, acting in accordance with a person's wishes covers a wider field than acting in accordance with a person's instructions, and

•                it is necessary to undertake a critical assessment of the way in which the trustee is managed.

Decision Impact Statement Gutteridge and Commissioner of Taxation explains that the Commissioner does not accept that the reasonable expectation test can be substituted with an accustomed to act test in all cases:

However, while the circumstances in this case allow for a finding that a person could reasonably be expected to act in a certain way because they were 'accustomed to act' in that way, the Commissioner does not accept that the 'reasonable expectation' test in subsection 328-125(3) of the ITAA 1997 can be substituted with an 'accustomed to act' test in all cases. It depends, as the AAT said at paragraph 21, on an examination of all the circumstances of a case. For example, if there is no history at all of a trustee having acted on the directions of another, there may nonetheless be an expectation (reasonably founded) that they would act on the directions of a particular person, were such directions to be given.

Small business entity

Pursuant to subsection 152-10(1AA):

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 $X were a reference to $X.

Note: For the purposes of subsection (1A) or (1B), in determining whether an entity would be a small business entity, see also sections 152-48 and 152-78.

As defined in section 995-1, a small business entity has the meaning given in Subdivision 328-C. Broadly, section 328-110 requires that to qualify as a small business entity, the entity must:

•                be carrying on a business; and

•                satisfy any 1 of 3 tests based on turnover:

o        the entity carried on a business in the income year (the previous year) before the current year and the entity's aggregated turnover for the previous year was less than $X (subparagraph 328-110(1)(b)(i) & paragraph 152-10(1AA));

o        the entity's aggregated turnover for the current year is likely to be less than $X provided the turnover when the business was carried on in both of the 2 previous years was not $X or more (subparagraph 328-110(1)(b)(ii); subsection 328-110(3) & paragraph 152-10(1AA)); or

o        the aggregated turnover of the entity for the current year (worked out as at the end of that year) is less than $X (subsection 328-110(4) & (paragraph 152-10(1AA)).

Pursuant to subsection 328-110(5) an entity is a small business entity if:

(5) ... you carried on a business in an income year if:

(a) in that year you were winding up a business you previously carried on; and

(b) you were a small business entity for the income year in which you stopped carrying on that business.

With respect to passively held assets, section 152-48 modifies the rules in section 328-115 for determining the aggregated turnover of the entity using the passively held asset.

Broadly, an entity (the Company) that is an affiliate of, or is connected with, the owner of a passively held CGT asset for the purposes of subsections 152-10(1A) (the Trustee) is treated as an affiliate of, or connected with, the entity that uses the asset in its business (the Company) if the Trustee is not already an affiliate of, or connected with, the Company.

Active asset test

Under subsection 152-35(1), 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 period specified in subsection (2); 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 71/2 years during the period specified in subsection (2).

Under subsection 152-35(2) 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.

The meaning of an active asset is provided in section 152-40, which for tangible assets is:

(1) A CGT asset is an active asset at a time if, at that time:

(a) you own the asset (whether the asset is tangible or intangible) and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by:

(i) you; or

(ii) your affiliate; or

(iii) another entity that is connected with you; ...

In these circumstances the test will be met if the Trustee of the Family Trust is connected with the Trustee. As discussed above, the Property would not be excluded on the basis that it is a rental property in the hands of the Trustee. Rather, it is the Trustee of the Family Trust's use of the Property in the Company's business that is relevant.

Requirement 2

Continuously owned the CGT asset

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? 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.

Whether the Trustee has continuously owned the CGT asset (the Property) for the 15-year period set out in paragraph 152-105(1)(b) is determined with reference to when the Trustee first owned the Property (6 March 2003) until just prior to when the Trustee disposes of it (at the future settlement date).

Requirement 3

Significant individual

For the purposes of the small business relief provision in Division 152, section 152-55 provides that:

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%.

Section 152-65 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.

Section 152-70 provides that 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:

Table 1: small business participation percentage

Relevantly, for the purposes of section 152-70, for a trust, where entities have entitlements to all the income and capital of the trust (fixed trust), an entity's direct small business participation percentage is the percentage of the income and capital of the trust that the entity is beneficially entitled to receive.

ATO Interpretative Decision ATO ID 2015/8 Income tax: CGT small business concessions: small business participation percentage - trust where entities have entitlement to all income and capital of the trust explains the Commissioner's approach to determining entitlement to trust income and capital for the purposes of determining an individual's small business participation percentage (as set out below).

Although 'income' is not relevantly defined, in context, it has the meaning which it has for the purposes of the general law of trusts (see e.g. ATO Interpretative Decision ATO ID 2012/99 Income Tax Capital gains tax - direct small business participation percentage in a trust - meaning of 'distributions of income' and capital). Similarly, it is considered that 'capital' has the meaning which it has for the purposes of the general law of trusts.

Accordingly, a determination of whether a trust is an entity to which item 2 of the table in subsection 152-70(1) applies, depends on whether or not, on a proper construction of the trust instrument, there is any amount of income or capital of the trust to which no beneficiary is entitled at the relevant time.

The 'relevant time' (as that phrase is used in subsection 152-70(1)) for making the determination is, with respect to the additional basic conditions, 'just before the CGT event' (subsection 152-10(2)).

Whilst every case will turn on a proper construction of the trust instrument, the power in the trustee to accumulate income of the trust may not of itself cause the trust to be one in which beneficiaries do not have entitlements to all the income and capital of the trust. Generally, an accumulation clause gives the trustee a power to effectively cause part of the income of the trust estate to be capitalised to the trust estate.

Provided that, under the trust instrument, one or more beneficiaries has, at the relevant time, an entitlement to all of the income and capital of the trust, including any accumulated income or capital, the trust will be a trust to which item 2 of the table in subsection 152-70(1) applies.

A significant individual is a CGT concession stakeholder of the company or trust for the purposes of section 152-60.

This test will be met if either Individual 1 or Individual 2 meet the requirements of a 'significant individual' for the purposes of section 152-70.

Requirement 4

In connection with retirement

Paragraph 152-110(1)(d) requires that just before the CGT event the Unit Trust has at least one significant individual that was 55 years of age or over.

The legislation does not define what is meant by the phrase 'in connection with' an individual's retirement for the purposes of the provision - it does not give any indication of what constitutes retirement, or whether partial retirement is contemplated, or whether there is any implied temporal relationship between the event in question and the individual's retirement such that retirement must occur contemporaneously with the disposal of the asset(s).

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:

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.

This wording would suggest that the funds arising from the disposal of the asset must predominantly be intended to fund the retirement of the individual (whether or not supplemented by other monies).

In the absence of a statutory definition of 'retirement' the term takes its ordinary meaning. The Macquarie Dictionary (online version, downloaded April 2024) defines 'retirement' to mean 'removal or retiring from service, office, or business, especially in reaching the end of one's working life'.

The tests in section 152-110 merely specify that there must be a significant individual 55 years or over, immediately prior to the event. There is no express or implied requirement that the significant individual must derive a salary from the company or trust prior to disposal of the asset - and nor is there any requirement that they must have drawn any other form of income from the company or trust other than to the extent necessary to satisfy the significant individual requirements.

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 237 at 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), 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 subparagraph 152-110(1)(d)(i). Whether a CGT event, happens in connection with an individual's retirement depends on the particular circumstances of each case.

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.

In these circumstances the test will be met if a significant individual (either Individual 1 or Individual 2) is over 55 years of age and will have retired at the time of the CGT event and the resulting funds from the sale of the Property will be used to fund their retirement.

Application in these circumstances

Relevantly in this case:

•                The basic conditions for relief in Subdivision 152-A are satisfied as follows.

o        The Property owned by the Trustee is a CGT asset, and the assumption is that the sale of the Property will result in a capital gain for the purpose of CGT event A1. The conditions in paragraphs 152-10(1)(a) and 152-10(1)(b) will be satisfied.

o        The Property will be used by the Company in the income year the CGT event happens (i.e. the disposal of the Property). The condition in subparagraph 152-10(1)(c)(iv) is satisfied.

o        The Company is a CGT small business entity for the purposes of subsection 152-10(1AA) at the relevant time.

o        The Company is an affiliate of the Trustee. In these circumstances, it is considered that the Company acts in accordance with the directions or wishes of the Trustee in relation to the business affairs of the Company.

o        The Company has outstanding financial obligations to the Trustee. The Company relies on the financial assistance provided by the Trustee, by way of rent waiver or reduction, to remain solvent.

o        Individual 2, in his role as a controlling entity of the Trustee, influences the Company's business, management and meetings (including negotiating contracts and purchasing). The Company follows Individual 2's business decisions and strategic direction.

o        The Property will satisfy the active asset test as it was used in a business by an entity that was connected with the Trustee (i.e. the Trustee of the Family Trust) for the period specified in subsection 152-35(2).

o        For the purposes of section 152-40 it is the use of the asset by the Trustee of the Family Trust in its business and not by the Trustee, that is relevant (i.e. the Property would not be excluded on the basis that it is a rental property in the hands of the Trustee). The condition in paragraph 152-10(d) will be satisfied.

o        Relevantly, the test in paragraph 152-35(1)(b) relates to an asset that has been owned for more than X years. In this case, it is necessary to establish whether the Property was active for a total of at least X years covering the period when the Property was acquired to when the property is actually disposed of. and whether the Trustee of the Family Trust (being the entity using the Property in carrying on its business) is connected with the Trustee.

o        The Property was leased to the Trustee of the Family Trust and used by the Trustee of the Family Trust in carrying on its business for X years.

o        Individual 1 and Individual 2 control the Unit Trust. Individual 1 and Individual 2 are affiliates for the purposes of section 152-47. Consequently, each will satisfy the control test in section 328-125 - their combined interests of X% (each has a X% interest) means that each and their affiliate will have the right to receive at least X% of any income or capital distribution by the Unit Trust.

o        Individual 1 and Individual 2 control the Family Trust. Individual 1 and Individual 2 are the joint directors of the corporate trustee of the Family Trust - the Trustee of the Family Trust acts in accordance with their directions.

o        Therefore, the Trustee of the Family Trust is connected with the Trustee for the purposes of section 152-40 for the relevant income years.

o        The Property will satisfy the active asset test as it was used in a business by an entity that was connected with the Trustee (i.e. the Trustee of the Family Trust) for the period specified in subsection 152-35(2).

o        It is noted that if it were necessary, the Company's use of the Property can be taken into account for the purposes of satisfying the test period set out in paragraph 152-35(1)(b.

•                The Trustee will have continuously owned the CGT asset (i.e. the Property) for the 15-year period ending just before the CGT event - i.e. from the acquisition of the Property on 6 March 2003 to when the contract for the sale of Property will be entered into (being a date after 6 March 2018). The condition in paragraph 152-110(1)(b) will be satisfied.

•                Individual 1 and Individual 2 are both significant individuals for the purposes of section 152-50. The condition in paragraph 152-110(1)(c) is satisfied.

Individual 1 and Individual 2 each have an entitlement to X% of the income and capital of the Unit Trust (and will do so just before the CGT event).

Therefore, Individual 1 and Individual 2 each have a X% small business participation percentage in Unit Trust and each will be a significant individual of it for the purposes of Subdivision 152-B.

•                Individual 1 and Individual 2 will both be over X years of age and will have retired at the time of the CGT event. The resulting funds from the sale of the Property will be used to fund their retirement.

As such, the Commissioner is satisfied that in these circumstances the sale of the Property by the Unit Trust is in connection with their retirement for the purpose of subparagraph 152-110(d)(i).

As all the conditions in section 152-110 will be satisfied, the capital gain from the sale of the Property can be disregarded under Subdivision 152-B.

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