Edited version of your written advice

Authorisation Number: 1013092840271

Date of advice: 16 September 2016

Ruling

Subject: Capital gains tax (CGT): Small Business CGT Concessions - 15 year exemption

Question 1

Does the capital gains tax (CGT) event which happens as a result of the disposal the Property) meet the requirements of subsection 152-110(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period(s)

Year ended 30 June 20ZZ

The scheme commences on

1 July 19WW

Relevant facts and circumstances

Person A is over 55 years of age.

Person B is over 55 years of age.

Company A (the Trustee) is the trustee for the X Trust. For the purposes of this ruling any actions undertaken by the Trustee will be referred to as action undertaken by the X Trust. The X Trust is a discretionary trust operated by Person A and Person B for the benefit of them and their family.

A number of years ago the X Trust acquired premises (the Property).

From the time of acquisition until 20XX, the Property was rented to a related entity (the Entity) for use in its business.

In 20XX, and in accordance with their retirement plans, Person A and Person B sold all their shares (the share sale) in the Entity to a third party (the Share Purchaser).

On the sale of their shares in the Entity, Person A and Person B retired.

At the time of the share sale, it was intended that the Property would be sold to the Share Purchaser. The sale of the Property in conjunction with the sale of the business was part of Person A and Person B's retirement plans, as the proceeds from the sales were to be contributed to their superannuation fund to provide for their retirement.

At the time of the share sale, the Share Purchaser was unable to fund the acquisition of the Property. As there were no other reasonable offers for the property at that time, the X Trust retained the Property and leased it to the Share Purchaser.

It was intended that the Property would be sold to the Share Purchaser at a later date once the Share Purchaser's financial circumstances allowed.

The Share Purchaser's ability to finance the potential acquisition of the Property had not improved by 20YY.

The X Trust received and accepted an offer from another unrelated party to acquire the property. A contract of sale was entered into, with settlement due to occur in the 20YY-ZZ income year.

The sale of the Property will result in the X Trust making a capital gain.

The X Trust has continuously owned the Property for greater than 15 years until the time of the CGT event.

Assumption(s)

In making this ruling you have requested that the Commissioner make the following assumptions in accordance with section 357-110 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953):

• The CGT event which occurred as a result of Person A and Person B selling their shares in the Entity was in connection with their retirement;

• The basic conditions in section 152-10 of the ITAA 1997 have been met in relation to the disposal of the Property;

• Both Person A and Person B are each a "significant individual" of the X Trust pursuant to the definition in section 152-55 of the ITAA 1997; and

• The X Trust satisfies the other conditions in subsection 152-110(1) of the ITAA 1997 in relation to the disposal of the property.

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Division 152 of the Income Tax Assessment Act 1997

Reasons for decision

Summary

It is accepted the sale of the Property was 'in connection with' Person A and Person B's retirement.

Detailed reasoning

Small business 15-year exemption

Subsection 152-105 of the ITAA 1997 provides that an individual can entirely disregard any capital gain if all of the following conditions are satisfied:

(a) you satisfy the basic conditions

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

(c) you are either:

i. 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

ii. permanently incapacitated at the time of the CGT event.

In your case:

• you satisfy the basic conditions;

• you have owned the asset for over 15 years;

• Person A and Person B are aged over 55, and

• Person A and Person B were both significant individuals of the X Trust.

Therefore, it only needs to be established whether the disposal of the property, a couple of years after the sale of the business, could be considered to be 'in connection with' your 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 Capital gains tax concessions for small business 2016 (QC 48078) 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.

Application to your circumstances

In your case, you have stated that the Person A and Person B retired in 20XX when the Share Sale occurred.

You have stated that it was the intention that the Share Purchaser of the business purchase the property. However, this did not eventuate due to the Share Purchaser not being able to raise sufficient funds for the acquisition of both the business and the property at that time. When it became clear that it was unlikely that the Share Purchaser would be able to raise the funds to purchase the property, you acted to sell the property to an unrelated third party. In addition, since the Share Sale, the property has always been leased to the Share Purchaser for use in its business (the business that you sold) until it could raise the required funds to acquire it.

Based on the information provided, your situation has similarities to the example in the guide (apart from the period of time mentioned). Therefore, while there has been a significant amount of time between when the business was sold to when the property was sold, it appears that later disposal of the property was part of your retirement plan from the time the business was sold.

As such, we accept that the disposal of the property is 'in connection with' your retirement and accordingly, you satisfy the required conditions to be eligible for the 15-year exemption concession.

Other references (non ATO view)

The Explanatory Memorandum (EM) to the New Business Tax System (Capital Gains Tax) Bill 1999

Capital gains tax concessions for small business 2016 (QC 48078)