Edited version of your written advice

Authorisation Number: 1051349050827

Date of advice: 15 March 2018

Ruling

Subject: 15-year exemption

Question

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

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

You are the trustee of a trust.

The trust provided services to an individual.

The trust owned a property from which the individual undertook their business.

The trust acquired the property over 15 years ago and had rented the property to the individual from this date.

The individual paid you rent at an arm’s length rate for the use of the property.

The individual is over 55 years of age and was looking to significantly reduce their working hours and retire.

In connection with their retirement, you would no longer need the property and you have consequently sold the property.

The individual has also ceased practicing their profession.

The trust had a significant individual for 15 years during the period the trust owned the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-55

Income Tax Assessment Act 1997 Section 152-110

Income Tax Assessment Act 1997 Section 152-105

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, you can disregard the capital gain from the disposal of the business, being CGT event A1 happening to the asset, if the trust:

(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 (even if the 15 years was not continuous and it was not always the same significant individual) during which the trust owned the CGT asset; and

(d) an individual who was a significant individual of the trust just before the CGT event was:

(i) 55 or over at that time and the event happened in connection with their retirement; or

(ii) permanently incapacitated at the time.

In connection with retirement of significant individual

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 or after 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 your 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 your 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 guide to the Capital gains tax concessions for small business also supports this view. It makes it clear that it is not necessary for there to be a permanent and everlasting retirement from the workforce. However, there needs to be at least a significant reduction in the number of hours worked, or a significant change in the nature of the activities, to be regarded as ‘in connection with your retirement’ for the purposes of paragraph 152-105(d) of the ITAA 1997.

The EM and the guide provide that the retirement does not need to occur immediately following the event, however whether a particular case satisfies the conditions depends very much on the facts of the case.

Application to your circumstances

In this case, the significant individual who was over 55 years of age retired from the profession, and as a result, the trust no longer needed the property and consequently sold the property.

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