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Ruling

Subject: small business capital gains tax concessions

Question

Did the Capital Gain Tax (CGT) event happen in connection with your retirement in accordance with paragraph 152-105(d) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You owned a farm (farm X).

You conducted a livestock business in partnership with your spouse and a crop production business in partnership with a family member on farm X.

You worked an average of 60 hours per week on farm X.

In the 2010-11 income year you exchanged contracts to sell farm X.

You were over 55 years of age at the time of the sale of farm X.

You had previously exchanged contracts earlier in the 2010-11 income year to purchase a small farm, (farm Y) in a different area to farm X.

You intended to move to farm Y to retire there once farm X was sold.

Since the sale of farm X, you work an average of seven hours per week at farm Y in a small livestock business in partnership with your spouse. You do not conduct any cropping operations on farm Y.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 152-105(d).

Reasons for decision

Section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain from the disposal of a CGT asset if you:

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

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

· you are;

· at least 55 years old at that time and the event happened in connection with their retirement or

· permanently incapacitated at that time.

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 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 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 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 Advanced guide to capital gains tax concessions for small business 2010-11 (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 purposes of paragraph 152-105(d) of the ITAA 1997.

In your case, there is a significant reduction in the number of hours worked. The reduction in hours from 60 hours per week prior to disposal, to seven hours per week on your new farm, indicates a desire to undertake a transition into retirement. You also no longer carry out any cropping operations. As a consequence, it is reasonable to conclude that the event happened 'in connection with' your retirement.