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Ruling

Subject: Capital gains tax - 15 year small business retirement exemption

Question 1

Are you eligible to apply the small business 15 yr exemption under section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to the capital gain you will make on the sale of your products?

Answers

Yes

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The company is 50% owned by the two directors who have held their shares continuously since 19XX and have been the sole directors of the company since that date. There have been no other shareholders of the Company over that time.

The two directors are currently aged above 60 years old.

The total net value of CGT assets of the company, and its affiliates and entities connected with it, (or those of the two directors) do not exceed $6 million.

Since its incorporation the company has developed, manufactured and marketed two ranges of products to relevant industries.

The company is currently in negotiations with a third party for the sale of the products and related technology associated with the industries.

At the present time your client is unsure whether the two product ranges will sell within the same financial year or whether it will take a number of years to sell both products.

The patent for the company's products was taken out X years ago and expired after X years. At the time of expiry the company did not renew the patent and allowed it to expire.

The company has been using the technology and selling products associated with it for X years.

The company will be selling everything associated with the product range (i.e. the technology, the process, equipment and the rights to manufacture).

Given the above if a successful sale of the products range is achieved, then the two directors intend to resign as full time employees and retire from the company as employees. They currently work approximately X hours per week each.

In order to protect their investment in the company until the product range is sold the two directors intend to remain as directors. In this instance it is anticipated that they would be required to attend monthly board meetings of the company whilst the company is continuing to negotiate the sale of the product range.

The basic conditions for the CGT small business concessions contained in Subdivision 152-A of the Income Tax Assessment Act 1997 are satisfied. The company will have no association with the products range once it is sold. There is no sub-license associated with the company's products and once they are sold there will be no further income generated.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-A

Income Tax Assessment Act 1997 section 152-B

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

Small business 15-year exemption

As the conditions in Subdivision 152-A of the Income Tax Assessment Act 1997 (ITAA 1997) have been satisfied, the CGT asset has been owned for at least 15 years and you had a significant individual for at least 15 years, who was 55 years or over at the time of the sale of the asset, the 15 year exemption is available to disregard any capital gain made.

Detailed reasoning

Section 152-105 of the ITAA 1997 provides a small business 15-year exemption for individuals, companies and trusts. Under this section, you can disregard the capital gain from the disposal of your product range, if you:

(a) satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 for the small business CGT concessions

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

(c) if you are a company and you had a significant individual for at least 15 years and the significant individual is either 55 years or over and the sale of the asset happened in connection with the significant individual's retirement.

A significant individual is an individual in a Company or trust that has a small business participation percentage of at least 20% (section 152-55 of the ITAA 1997).

Basically in accordance with section 152-65, 152-70 and 152-75 of the ITAA 1997, a small business participation percentage is the sum of direct and indirect interest in the shares of a company.

As you each own 50% of the shares in you, you have a significant individual with a participation percentage of at least 20%.

You have advised in your application that your clients satisfy the basic conditions in Subdivision 152-A of the ITAA 1997 and that you have continuously owned the assets of the business for at least 15 years. The first two of the above conditions are therefore satisfied.

Condition (c)

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 retirement. Whether particular cases satisfy the conditions depends very much on the facts 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:

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 15-year exemption do not define what is meant by 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 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 Advanced guide to capital gains tax concessions for small business 2010-11also supports this view. It states that if it can be shown that the reason for disposing of the assets is connected to retirement and the sale is integral to your retirement plan, the sale may be accepted as happening in connection with your retirement.

Application to your circumstances

Your Clients are over 55 years old and have stated that they are disposing of the products as a part of their retirement plans.

Given the above, if a successful sale of the products range is achieved, then your clients intend to resign as full time employees and retire from the company as employees. They currently work approximately X hours per week each.

In order to protect their investment in the company until the product range is sold they intend to remain as directors. In this instance it is anticipated that they would be required to attend monthly board meetings of the company whilst the company is continuing to negotiate the sale of the product range.

The sale of the assets are a part of their retirement plans, hence the sale is in connection with their retirement. As the company will have no association with the products range once it is sold. There is no sub-license associated with the company's flow meter products and once they are sold there will be no further income generated.

These factors indicate that your clients satisfy this condition.

Conclusion

As all the conditions in Subdivision 152-B of the ITAA 1997 will be satisfied you are eligible to apply the 15 year exemption to the capital gain they make on the disposal of their product range.

The company is 50% owned by your clients who have held their shares continuously since 19XX and have been the sole directors of the company since that date. There have been no other shareholders of the Company over that time.

The directors are currently aged above 60 years old.

The total net value of CGT assets of the company, and its affiliates and entities connected with it, (or those of the two directors) do not exceed $6 million.

Since its incorporation the company has developed this product range and the business now principally manufactures ad markets two ranges of the products specific industries.

The company is currently in negotiations with a third party for the sale of the product technology associated with the relevant industry and intends to list for sale the technology associated with the two products.

At the present time your client is unsure whether the two product ranges will sell within the same financial year or whether it will take a number of years to sell both products.

The patent for the company's products was taken out X years ago and expired after X years. At the time of expiry the company did not renew the patent and allowed it to expire.

The company has been using the technology and selling products associated with it for X years.

The company will be selling everything associated with the product range (i.e. the technology, the process, equipment and the rights to manufacture).

Given the above if a successful sale of the products range is achieved, then two directors intend to resign as full time employees and retire from the company as employees. They currently work approximately X hours per week each.

In order to protect their investment in the company until the product range is sold they intend to remain as directors. In this instance it is anticipated that they would be required to attend monthly board meetings of the company whilst the company is continuing to negotiate the sale of the product range.

The basic conditions for the CGT small business concessions contained in Subdivision 152-A of the Income Tax Assessment Act 1997 are satisfied. The company will have no association with the products range once it is sold. There is no sub-license associated with the company's products and once they are sold there will be no further income generated.