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Ruling

Subject: Small business concessions - 15 year exemption

Question

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

Answer

No

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You acquired land.

The land was continuously used by your spouse in their business. Your spouse's business was a small business entity.

Your marriage with your spouse broke down. As a result the land was transferred to your spouse during the 2011-12 income year (the CGT event) and you made a capital gain. The transfer was not a result of a court order or made by consent under the Family Law Act.

You were over 55 years of age at the time of the CGT event.

You were employed by your spouse's business for a period of time; this employment ceased around the 2007-08 income year. You continued to complete the bookkeeping for the business but were not employed by the business or paid for this work after this time.

You were not employed by any other entity after ceasing employment with your spouse's business. You derive income from rent and other investments.

Relevant legislative provisions

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

Reasons for decision

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 words 'in connection with' can also apply where the CGT event occurs sometime after retirement. This type of case would depend on its own particular facts, and would need to be considered on a case-by-case basis. The Advanced guide to capital gains tax concessions for small business 2011-12 (NAT 3359) provides the following example:

A small business operator 'retires' and his children take over the running of the business. Within six months, they sell some business assets and make a capital gain. Several reasons may have prompted the sale of the assets. If there is no relevant connection with the small business operator's business, the requirement would not be satisfied. However, if it can be shown that the reason for the disposal of the assets is connected to retirement and the later sale is integral to the small business operator's retirement plan, the sale may be accepted as happening in connection with retirement.

In this case, you were employed by your spouse's business for a period of time. Your employment with the business ceased some four to five years prior to your disposal of the property. Even though you continued to complete the bookwork for the company on an unofficial basis, you had retired completely from the workforce and derived your income from rent and other investments.

Although the Advanced Guide provides that retirement can occur sometime before the CGT event, there would still need to be a connection between your retirement and the sale of the land. You ceased working a significant period of time before the disposal of the property. Additionally, the disposal of the property was as a result of your separation from your spouse, not as a result of your retirement. We do not consider that there is a connection with your retirement and the disposal of the property.

Accordingly, you do not satisfy the requirement in paragraph 152-105(d) of the ITAA 1997 and will not be eligible to apply the 15 year exemption to the capital gain.