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Ruling

Subject: CGT small business concessions

Question 1:

Did the CGT event happen in connection with X's retirement?

Answer:

Yes.

Question 2:

Did the CGT event happen in connection with Y's retirement?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

The company entered into a contract to sell its business during the 2011-12 income year.

The CGT assets sold under the contract were acquired prior to 20 September 1985.

X and Y each own 50% of the shares in the company. X and Y both acquired their shares prior to 20 September 1985.

Division 149 of the Income Tax Assessment Act 1997 has not been triggered to deem to CGT assets to be acquired after 20 September 1985.

X is over 55 years of age. Y is over 55 years of age.

X and Y decided to sell the business as a part of their retirement plans.

Under the terms of the contract, X and Y (as practitioners) and their respective family trusts were required to enter into agreements to provide services to the purchaser of the business for a period of time after settlement. This was to ensure the protection of the goodwill of the practice for the purchaser.

Additionally, X and Y are responsible for ensuring the practice continues to meet certain income targets to ensure the company receives the final payment for the business.

Prior to the sale, X and Y were responsible for all management activities, including day to day management, financial and strategic operations. Following the sale, they will still be involved in the day to day management of the practice as senior staff, however, they will no longer be responsible for business management issues (financial and strategic).

X will continue to work normal hours for a number of months following the sale. They will then gradually cut back those hours over the contractual period. Their intention is to then retire.

X will contribute some or all of their share of the capital proceeds to their superannuation subject to advice from their financial advisor.

Y intends to work normal hours for a number of months following the sale and then commence a reduction of their hours.

Y will use some of their share of the capital proceeds to reduce debt and the remainder will be used to fund their retirement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Paragraph 152-110(1)(d)

Income Tax Assessment Act 1997 Section 152-125

Reasons for decision

Under section 152-125 of the Income Tax Assessment Act 1997 (ITAA 1997), payments to a company's capital gains tax (CGT) concession stakeholders are exempt if;

· a capital gain of the company would have been disregarded under section 152-110 of the ITAA 1997 except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985; and

· the company makes one or more payments (whether directly or indirectly through one or more interposed entities) in relation to the exempt amount within 2 years after the relevant CGT event to an individual who was a CGT concession stakeholder of the company or trust just before the event.

Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for companies and trusts. Under this section, a company can disregard the capital gain from the disposal of a CGT asset if: 

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

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

· the company 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 time the company owned the CGT asset; and

· an individual who was a significant individual of the company just before the CGT event was either:

· 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

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 paragraphs 152-105(d) or 152-110(1)(d) of the ITAA 1997. The guide also provides that a CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement.

In this case, both X and Y will significantly change their duties and responsibilities subsequent to the sale. Although they will remain as senior employees, X and Y will no longer be responsible for the financial and strategic management of the practice. Their continued service was a requirement of the sale that was stipulated by the purchaser to ensure that the goodwill of the business was protected. X and Y will both reduce their working hours over the period they are required to provide their services to the new owner. The EM and the guide provide that the retirement does not need to occur immediately following the event, however whether a particular case satisfies the conditions depends very much on the facts of the case.

Although there is a delay between the CGT event and Y and X's retirement, when taking their age and future plans into account, it is considered that there is a clear link between the sale of the business and their retirement. Both Y and X will use the proceeds to fund their retirement. It is considered that the sale of the business was integral to the retirement plans of Y and X. Accordingly, the CGT event is considered to have happened in connection with Y and X's retirement in accordance with paragraph 152-110(1)(d) of the ITAA 1997.