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Edited version of your written advice
Authorisation Number: 1051326342231
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Date of advice: 12 January 2018
Ruling
Subject: Capital Gains Tax (CGT) 15 year exemption – permanently incapacitated
Question
Does the taxpayer satisfy the criteria under subparagraph 152-105 (d)(ii) of the Income Tax Assessment Act 1997, ITAA (1997) in regard to being permanently incapacitated at the time of the Capital Gains Tax (CGT) event?
Answer
Yes
This ruling applies for the following period:
1 July 20XX – 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The Taxpayer is a shareholder and holds XXX ordinary shares in the company.
The Taxpayer has held the shares since 20XX when the company was incorporated.
The Taxpayer is looking to sell the shares in the future.
The sale of the shares will be to a related party.
Sale of the shares will be sold at market value to the related party.
The business will continue on a smaller scale with employees.
The Taxpayer is qualified to do anything associated with the specific industry the company is involved in.
The Taxpayer is XX years of age.
The Taxpayer currently suffers from significant illnesses, making their employment position in the company difficult to maintain.
The Taxpayers medical practitioner has provided a certificate stating that it is unlikely that the Taxpayer will engage again in gainful employment for which the Taxpayer is reasonably qualified by education, training and or experience to partake in.
Relevant legislative provisions
Income Tax Assessment Act 1997, division 152 - B
Income Tax Assessment Act 1997, subparagraph 152-105(d)(ii)
Reasons for decision
A small business entity may access the small business concessions where the basic conditions for relief are met.
Those basic conditions are in Subdivision 152-A of the ITAA 1997. Some of the concessions have additional, specific conditions that must also be satisfied.
Under the small business 15-year exemption in section 152-105 of the ITAA 1997, an individual can disregard a capital gain arising from a CGT asset they have owned for at least 15 years if certain conditions are satisfied. One of those conditions is that the individual is either 55 or over at the time of the CGT event and the event happens in connection with their retirement; or the individual is permanently incapacitated at the time of the CGT event.
The term 'permanent incapacity' is used elsewhere within the retirement and superannuation provisions of the law and its meaning in those provisions may assist in providing some indication of its meaning for the purposes of the small business 15-year exemption. Having regard to the other provisions in which the term is used, a broadly indicative description of permanent incapacity is:
ill health (whether physical or mental), where it is reasonable to consider that the person is unlikely, because of the ill-health, to engage again in gainful employment for which the person is reasonably qualified by education, training or experience. The incapacity does not necessarily need to be permanent in the sense of everlasting.
Application to the Taxpayer’s circumstances
The Taxpayer is a shareholder in a company that works in a specific industry and this has been their job for over XX years. Prior to incorporating their own company the taxpayer worked in a related industry. We would agree that this is the industry to which you have a vast amount of experience in and to which you are most qualified to work. The Taxpayer is considering selling their shares in the company as the Taxpayer is permanently incapacitated after a series of illnesses.
The requirements of the 15-year exemption are such that the permanent incapacity needs to be experienced by the taxpayer who is under 55 years of age at the time the CGT event will take place.
The Taxpayer is under XX years of age and is requesting that the ATO confirm that for the provision of section 152-10 of the ITAA 1997 we would consider that the taxpayer is permanently incapacitated at the time the CGT event is to occur.
The CGT event will occur in 20XX. The Taxpayer has provided us with a medical certificate/letter stating that it is in their doctor’s opinion that the Taxpayer is unlikely to engage again in any gainful employment for which the Taxpayer is reasonably qualified by education, training and or experience to undertake. For this reason we agree that the Taxpayer meets the criteria under subparagraph section 152-105 (d) (ii) of the ITAA 1997 in regard to being permanently incapacitated at the time of the CGT event.
Therefore provided that the Taxpayer satisfies all the other requirements relating to the small business 15 year exemption under Subdivision 152-B, the Taxpayer will be entitled to disregard the capital gain on the sale of their shares in the company.
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