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Ruling

Subject: Small business concessions

Question and answer:

If you accept the full time position, will the small business 15-year exemption under section 152-110 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to disregard any capital gain from your portion from the sale of the business?

No.

This ruling applies for the following periods:

Year ending 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You sold your business which was operated as a partnership by you and your spouse.

Your ultimate intention of disposing of your business was to retire using the proceeds from the sale.

Upon the sale of the business your spouse immediately retired. However the sale contract stipulated that both you and your spouse would be required to be available to work on a consultancy basis if required, to assist with the smooth transition of the business to the new owners.

The contract of sale also required you to be employed on a full time basis for the transition year.

When operating the business yourself, you regularly worked long hours on a weekly basis.

After the initial transition year it was your intension to retire, however you have been offered a full time position beyond this initial transition year.

You are over 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-05

Reasons for decision

Small business 15-year exemption

Section 152-105 of the ITAA 1997 provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain from the disposal of your body corporate management business, being CGT event A1 happening to the asset, 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) 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.

You have advised in your previous application that you 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 Advanced guide to capital gains tax concessions for small business 2008-09 (the guide) 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.

The guide also gives a number of examples to help identify the likely scope of the term. These examples appear to suggest the following:

§ that any reduction in working hours must be significant - in the first example the retiree reduces his working works to a few hours per week.

§ the examples suggest that there needs to be some temporal connection between a person's retirement and the CGT event. A six month time limit is used in a number of the examples.

Application to your circumstances

You are over 55 years old and have stated that you have disposed of your business as a part of your retirement plans. Although you have disposed of your business you have continued to work for a transitional period as a condition of the sale of the business. In this instance it was determined that the reason for disposing of the asset was connected to your retirement and the sale was integral to your retirement plan.

However, after the transition period you have been offered a full time employment position where you will continue to work indefinitely. Consistent with the guide that suggests that any reduction in hours must be significant and which provides the example where a significant reduction in hours was considered where a retiree reduced his hours to a few hours a week, in comparison accepting a fulltime position is not considered a significant reduction in working hours.

In addition, as you will also be working in the business well beyond a six month period from the disposal of the business, there appears to be a diminishing temporal connection between your eventual retirement and the CGT event that resulted from the disposal of the business.

Therefore should you accept a fulltime position, the sale of your property is no longer considered to be in connection with your retirement and therefore you do not satisfy this condition.

Conclusion

You are not eligible to apply the 15 year exemption to the capital gain you made on the disposal of your business.