Edited version of private advice

Authorisation Number: 1051527300988

Date of advice: 6 June 2019

Ruling

Subject: CGT - Small business concessions - 15 year exemption - retirement

Question 1

Will the small business 15-year exemption in section 152-110 of Subdivision 152 - B of the Income Tax Assessment Act 1997 (ITAA 1997) apply to allow Company X to disregard any capital gain from a CGT event that happened in connection with the retirement of a significant individual?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2019

The scheme commences on

01 July 2018

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company X was operating for more than 15 years. It appointed two directors on the date of its incorporation and had equal shareholding in the company.

The company had several employees prior to the CGT event.

Company X sold a CGT asset to Company Y and ceased its operation.

The directors along with other staff of the Company X commenced providing the same professional services to Company Y.

One of the directors of Company X was XY:

·        was over 55 years of age at the time of the CGT event;

·        held 50% shareholding in Company X since its incorporation;

XY was working in excess of 60 hours per week in Company X and in Company Y, they:

·        are an employed director;

·        have reduced their management responsibilities, working 40 hours per week and nine days per fortnight;

·        is required to support Company Y's growth over the next few years;

·        is likely to reduce to part time employed (or contracted) consultant during the course of the phase out period;

·        a phase out period (to be discussed annually between XY and the management team), not exceeding a specified number of years from the date of the restructure in place;

·        they will take longer holidays to use their accumulated leave entitlements;

XY's salary stayed the same in Company Y.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 paragraph 152-110(1)(d)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Company X Pty Ltd.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Summary

You do not satisfy the requirement in paragraph 152-110(1)(d) and will not be eligible to apply the 15 year exemption to the capital gain.

Detailed reasoning

Under subsection 152-110(1) of Subdivision 152-B, an entity that is a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

1. the basic conditions in Subdivision 152-A are satisfied for the gain;
2. the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event;
3. the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not the same significant individual) during which the entity owned the CGT asset; and
4. an individual who was a significant individual if the company or trust just before the CGT event either:

                           i.          was 55 or over at that time and the event happened in connection with the individual's retirement; or

                          ii.          was permanently incapacitated at that time.

In connection with your retirement

Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case.

The courts consider that the words 'in connection with' have a wide meaning but are to be interpreted in the context of the statute in which they are contained. Davies J stated in Hatfield v. Health Insurance Commission (1987) 15 FCR 487; 77 ALR 103:

Expressions such as 'relating to', 'in relation to', 'in connection with' and 'in respect of' are commonly found in legislation but invariably raise problems of statutory interpretation. They are terms which fluctuate in operation from statute to statute...

The terms may have a very wide operation but they do not usually carry the widest possible ambit for they are subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the statutory provision in which they appear.

The ITAA 1997 does not provide a definition of when a CGT event happens in connection with the retirement of an individual and as such the interpretation of that phrase takes on its ordinary meaning. The word 'retirement' is defined in the Macquarie Dictionary to mean:

noun

1.     the act of retiring.

2.     the state of being retired.

3.     removal or retiring from service, office or business. ...

The Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999 makes the following comments about the requirement to be retiring as one of the conditions for this concession:

1.5 ...the disposal is related to a person retiring...

and

1.68 ...an individual small business taxpayer...must be...at least 55 years old and using the capital proceeds for their retirement.

We consider that there would need to be at least a significant reduction in the number of hours 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.

In this case, XY was over 55 years of age at the time of the CGT event, working in excess of 60 hours per week. Following the sale of the CGT asset they are working at reduced hours per fortnight which will reduce further after taking regular annual leave. They will enter the phase out resulting in a significant reduction in hours or full retirement. Full retirement could occur over several years of the phase out period at their discretion. They are still sharing their previous duties in the Company Y with the other director and or with senior staff. Their remuneration has stayed the same in the Company Y.

We do not consider that the sale of the CGT asset was in connection with XY's retirement. Although a gradual reduction in their hours of work will occur incrementally over a period of up to agrees number of years, it is not considered that there will be a significant reduction in the number of hours they will work over the period. They remain a leader in Company Y and is central to the strategic decisions which Company Y makes. We do not consider that there will be a significant change in the nature of their present activities for some time. Therefore the sale of the CGT asset cannot be considered to be 'in connection with their retirement'. The condition under paragraph 152-110(1)(d) is not satisfied.

Therefore Company X cannot disregard any capital gain made from the sale of the CGT asset to Company Y, as it is considered not to be 'in connection with the retirement' of the significant individual.