Edited version of your written advice

Authorisation Number: 1013026001277

Date of advice: 30 May 2016

Ruling

Subject: 15 year exemption

Question

Is the disposal of the business considered to be in connection with the retirement of the significant individual of Company A for the purposes of the small business 15 year exemption from capital gains tax?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

Company A is selling its business which it has held for over 15 years.

The sole shareholder of Company A is Company B. Company B has had a significant individual for over 15 years.

The significant individual is over 55 years old.

The purchasers of the business can only afford to purchase 50% of the business at this time. They are not willing to purchase shares in the existing company and would prefer to trade through a new entity.

As a result, Company A will sell the business to a unit trust. The purchasers of the business will own 50% of the business through the unit trust and the significant individual will own 50% of the business.

The significant individual wishes to retire. However, the purchasers of the business would like the individual to retain some ownership and remain as a director to assist them in the management of the business and provide training and advice on a part time basis.

The significant individual currently works 5 days a week. Once the sale is processed their working days will be reduced to 1 or 2 days and occasionally 3 days a week. The hours worked per day will also be reduced.

The significant individual plans to sell their share of the business as soon as possible. They intend to sell it to the existing purchasers as soon as they are able to afford it. They plan to fully retire after that.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 152-110

Income Tax Assessment Act 1997 - Section 152-55

Reasons for decision

Subdivision 152-B of the Income Tax Assessment Act 1997 (ITAA 1997) provides a small business 15-year exemption as part of the CGT small business relief provisions. If you qualify for the small business 15-year exemption, the capital gain is entirely disregarded and it is unnecessary to apply any other concessions.

To qualify for the small business CGT concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. The 15-year exemption also has further requirements that you must satisfy for the concessions to apply

15 year exemption

Section 152-110 of the ITAA 1997 provides a small business 15-year exemption for companies and trusts. Under this section, the company can disregard the capital gain from the disposal of its business, being CGT event A1 happening to the asset, if the company:

(a) satisfies the basic conditions in subdivision 152-A of the ITAA 1997 for the small business CGT concessions

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

(c) had a significant individual for a total of at least 15 years during which the entity owned the CGT asset and the individual was:

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

(ii) permanently incapacitated at the time.

In your application, you have asked us to rule on whether the sale of the business is considered to be in connection with the retirement of the company's significant individual. Therefore, this ruling will consider only those conditions that are specific to the 15 year exemption and not the basic conditions for small business CGT concessions.

Accordingly, condition (a) will not be considered. In your case, condition (b) is met because you advise that the company has continuously owned the business for over 15 years. Condition (c) will be satisfied if the sale is considered to be in connection with the retirement of a significant individual of the company.

Significant individual

Under section 152-55 of the ITAA 1997, an individual is a significant individual in a company if the individual has a small business participation percentage in the company of at least 20%. This 20% can be made up of either direct or indirect percentages.

In this case, Company A is solely owned by Company B. This company has had a significant individual for over 15 years. Accordingly, this individual can also be considered to be a significant individual of Company A over the same period.

Condition (c)

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. There would need to be at least a significant reduction in the number of hours that the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce.

A CGT event may also 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.

Application to your circumstances

In this case, the significant individual is over 55 years old. The amount of hours they will work each week will drop significantly after the company sells the business. Moreover, it is the intention of the significant individual to fully retire as soon as the existing purchasers are able to purchase the remaining share of the business. As a result, the sale can also be seen as part of a move towards a planned full retirement.

Therefore, the sale can be considered to be in connection with the significant individual's retirement and the company will satisfy this condition for the 15 year exemption to disregard any capital gain it makes on the sale of the business.