Edited version of your written advice

Authorisation Number: 1012883806486

Date of advice: 24 September 2015

Ruling

Subject: 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 ended 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

You own land which was sold in the relevant financial year.

You intend to contribute an amount, up to the relevant cap, to your superannuation fund.

For a period of time you operated a business from the property via a related company.

You were a director of the company which was deregistered in 20XX.

The business ceased in 200X and you then became the landlord and held no ownership in the separate entity.

A lease agreement was drawn by your solicitors and lease payments were made.

The residential houses were leased to third parties and you maintained and received the rent for these properties.

All titles have been owned for more than 15 years.

You satisfy the maximum net asset test.

You will continue as the land lord up until settlement.

This activity will all cease on the settlement of the land sale.

You have maintained computerised records for accounting transactions and submitted a quarterly BAS.

You have undertaken employment activities over at least the past X years for family businesses. Your services were not remunerated.

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 a director and shareholder of the company that conducted a business on the land for a period of time. The company ceased operations in 200X and was deregistered in 20XX, some four to five years prior to your disposal of the property. Even though you continued to lease the properties and completed some unpaid work for family businesses, 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. 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.