Edited version of private ruling

Authorisation Number: 1011495274035

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Ruling

Subject: 15 Year Exemption

Was the capital gains tax (CGT) event involving the sale of shares in the company connected with your retirement in accordance with subparagraph 152-105(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You and your spouse each purchased shares in a private company more than 15 years ago.

Both of you were directors of the company, whilst you performed the managing director role, which involved managing all aspects of the business.

All of the shares in the company were sold to an unrelated party who continued the business.

You and your spouse both retired as directors of the company at the time of sale and you were over 55 years of age at the time.

Under the sale agreement, your spouse retired from the business immediately. You were required to stay on in the business for a defined period in a business development role before retiring from the workforce.

A new managing director was appointed upon the sale of the company.

Your role in the business changed upon the sale of the company, you no longer had any responsibility for the financial, human resource or general operations of the business. These functions had been taken over by the new managing director.

Your working hours also decreased, from 80 to 38 hours per week in accordance with the employment agreement. You also no longer work weekends or nights.

Your role within the business is to liaise with industry contacts, to co-ordinate the sales team and to assist in the transition to the new owners.

You intend to completely retire from the workforce at the end of the defined period under the sale terms of the company.

You have provided a copy of the employment agreement which also forms part of these facts.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 152-10

Income Tax Assessment Act 1997 - Subparagraph 152-105(d)(i)

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise specified.

In order to apply the 15 year exemption under Subdivision 152-B, amongst other requirements, subparagraph 152-105(d)(i) requires that the CGT event that gave rise to the capital gain is in connection with your retirement.

The scope of this ruling will be limited to this aspect.

In connection with your retirement

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at the very least a significant reduction in the number of hours worked, or a significant change in the nature of their present activities to be regarded as retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

In your case, it was necessary to effect the sale that you agreed to be employed by the company for a defined period following the sale. Immediately after the sale, your hours more than halved and your duties and responsibilities were greatly diminished. You intend to retire at the end of the defined transition period.

As such, we consider that the CGT event that gave rise to the capital gain, that is, the sale of the shares in the company, was connected with your retirement for the purposes of subparagraph 152-105(d)(i). Accordingly, you will be able to apply the 15 year exemption if all other conditions are met, such as those contained within section 152-10.