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Subject: CGT concessions

Question:

Is the payment made to you by the company exempt under section 152-125 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The company commenced its business before 20 September 1985. It was a small business entity.

The company sold the business in 2010.

The business had been owned by the company for more than fifteen years.

You were the sole shareholder of the company.

You were over 55 years old when the business was sold.

You have been a significant individual of the company since its incorporation and a CGT concession stakeholder.

The company made a payment to you in 2010 in relation to the gain made on the sale of the business.

Prior to the sale, you worked full-time in the business.

Under the sale agreement, you were required to work for the new owner for two to three days a week, until 30 June 2012, to ensure a smooth transition.

You have the opportunity to continue working for the new owner after 30 June 2012 on a reduced basis of one to two days per week. The period for which that arrangement would continue is at present indeterminate but, subject to health, the agreement of his employer could conceivably be one to two years.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 - Subdivision 152-A

Income Tax Assessment Act 1997 - Subdivision 152-B

Income Tax Assessment Act 1997 - Section 152-35

Income Tax Assessment Act 1997 - Section 152-40

Income Tax Assessment Act 1997 - Section 152-60

Income Tax Assessment Act 1997 - Section 152-110

Income Tax Assessment Act 1997 - Section 152-125

Reasons for decision

The capital gains tax (CGT) small business relief provisions may reduce or eliminate liability to pay tax on capital gains associated with the disposal of CGT assets. Subdivision 152-B of the ITAA 1997 provides a fifteen year exemption as part of the small business concessions.

If a company or trust chooses the 15 year exemption and satisfies certain further conditions relating to the distribution of the exempt amount, the amount received by the shareholder or beneficiary is not included in their assessable income.

Section 152-110 of the ITAA 1997 addresses the 15 year exemption as it applies to companies and trusts. Under this section, a small business entity can disregard any capital gain arising from the disposal of an active CGT asset, where the event would have resulted in a gain, if the entity continuously owned the asset for the 15-year period, ending just before the CGT event, and the entity had a significant individual for at least 15 years and they were at least 55 years old when the event happened and it happened in connection with their retirement.

In your case, the company was a small business entity, had continuously owned the business asset for more than 15 years and the business was an active asset for the whole ownership period. The business was acquired before 20 September 1985 (a pre CGT asset) and any capital gain would have been CGT exempt, therefore, the event would not have resulted in a gain. You were a significant individual of the company, as the sole share holder, for the entire ownership period and were over 55 years old at the time of the event.

Whether the CGT event happened in connection with your retirement depends on the particular circumstances of the case. A CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement.

ATO publications, such as the Advanced Guide to Capital Gains Tax Concessions for Small Business, make 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 purposes of section 152-110 of the ITAA 1997.

In your case, there is a significant reduction in the number of hours worked. The reduction in hours from full-time, prior to disposal, to two to three days a week until 30 June 2012, then a further reduction to one to two days per week thereafter, indicates a desire to undertake a transition into retirement. Also, whilst there is no definite termination date set for the continuing employment, its duration is realistically limited by age. As a consequence, it is reasonable to conclude that the event happened 'in connection with' your retirement.

Subsection 152-125(1) of the ITAA 1997 states that any distributions made by the company or trust to a CGT concession stakeholder are exempt if the capital gain made by a company or trust was disregarded under the small business 15 year exemption, or would have been except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985, the payment was made within two years of the CGT event, and the distribution was made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event.

An individual is a CGT concession stakeholder of a company or trust if they are a significant individual.

In your case, the capital gain made by the company would have been disregarded under the small business 15 year exemption except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985. You were a CGT concession holder of the company just before the CGT event, for the purposes of subsection 152-125 of the ITAA 1997, and the company made the payment to you in the same month of the CGT event.

Therefore, the payment you received from the company in relation to the gain made on the sale of its business is exempt under section 152-125 of the ITAA 1997.