Edited version of private advice

Authorisation Number: 1051645194586

Date of advice: 17 March 2020

Ruling

Subject: Capital gains tax - 15 year exemption

Question

Did the sale of the property occur in connection with individual A's retirement in accordance with paragraph 152-110(1)(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Entity B satisfies the basic conditions for the small business CGT concessions under section 152-10 of Subdivision 152-A of the ITAA 1997 upon the sale of the property. Also, the company continuously owned the property for the 15-year period ending just before the CGT event; had a significant individual for at least 15 years; and the significant individual just before the sale (individual A) was over 55 years old. Having considered the specific circumstances of this case, the Commissioner considers that the sale of the asset was in connection with individual A's retirement. The Commissioner considers that the conditions under section 152-110 of Subdivision 152-B of the ITAA 1997 are satisfied.

This ruling applies for the following periods

Year ended 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commenced on

1 July 2018

Relevant facts

Entity B purchased the property more than 15 years ago.

Entity C conducted a business from the whole property for more than 15 years.

No other entity has used the property nor has any part of the property been rented out to another entity prior to entity B's sale of the property.

Entity C was a connected entity of entity B from xxxx until xxxx as individual D and/or individual A owned 100% of the shares in entity B and more than 50% of the shares in entity C during this time.

Individual D acquired a share on xxxx and an additional share on xxxx.

Individual A was allotted one share on xxxx.

Individual D was individual A's spouse who passed away unexpectedly on xxxx. At that time, the shares held by individual D in entity B passed to individual A.

Individual A currently owns all three shares in entity B (that is, is the sole shareholder) and is a significant individual of entity B.

Individual A was born on xxxx and is over 55.

Individual A was formally employed by entity C until xxxx. After this, individual A still helped entity C with invoicing on a day to day basis, paying creditors, following up outstanding debtors, handling correspondence and emails and discussing strategic and operational aspects of the business with her spouse.

Up until their death, individual D was a significant employee and sole director of entity C.

Following the death of individual D, individual A came out of retirement and resumed duties for entity C and took over the role of individual D. Individual D managed all components of the business on a full time basis including the strategic direction of the business, overseeing business operations including staff, managing trading stock levels and customer orders, annual leave requests, hiring of any new staff, payroll, debtors, creditors and cash flow. Individual A now did these duties. Individual A spent x days per week, approximately xx hours, on these activities which gradually reduced down to one day per week.

Following the death of individual D, individual A was appointed a director of entity C from xxxx until xxxx. The company could not continue without a director and the other major shareholder, was over 80 years old.

Individual A ceased to be a director for asset protection purposes. Individual A's relation was director after xxxx.

Individual A assumed a succession planning role for the business, as no formal plan had been developed by entity C. As part of the succession planning process, individual A agreed with key employees of entity C to transfer ownership in the business to them. The employees requested a 12 month lease of the property with entity B to xxxx with a further 12 month option. Given the request, individual A did not consider it feasible to sell the property until the lease expired.

As the lease was for only 12 months, individual A expected that entity C would leave at the end of the lease and the property would achieve a higher value with vacant possession.

Individual A disposed of the shares and xx% interest in entity C on xxxx. Individual A has not undertaken any paid employment from this time.

Up until that time, individual A undertook unpaid duties for entity C.

The lease between entity B and entity C ceased on xxxx. After individual A stepped down as director and shareholder in entity C, an external real estate agent managed the agreement between entity B and entity C. The lease was at market rate.

Entity B sold the property for $xxxx following the expiry of the lease. The contract was entered into on xxxx with settlement occurring on xxxx. The gross capital gain is calculated as $xxxx.

The exempt amount attributable to individual A from the sale of the property will provide funding for their retirement.

Entity B had a significant individual for more than 15 years.

Individual A has not utilised any capital gains tax (CGT) cap.

Payment of the exempt amount will be made by entity B within two years of the CGT event.

The exempt amount is proposed to be contributed to a complying superannuation fund. An election is proposed to be made in accordance with the requirements of section 292-100 of the ITAA 1997 such that the exempt amount is counted towards individual A's CGT cap.

There are no entities connected (as defined in section 328-125 of the ITAA 1997) with entity B during the income year of the CGT event.

Entity B satisfies the maximum net asset value test.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Division 152

Income Tax Assessment Act 1997 -Subdivision 152-A

Income Tax Assessment Act 1997 - Subdivision 152-B

Income Tax Assessment Act 1997 - Section 152-10

Income Tax Assessment Act 1997 - Section 152-110

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