Edited version of private advice

Authorisation Number: 1051980787245

Date of advice: 10 May 2022

Ruling

Subject: CGT - small business relief

Question

Is the proposed CGT event arising from the disposal of the Subject Land to the Purchaser happening in connection with Mr A's retirement for the purposes of subparagraph 152-110(1)(d)(i) of the Income Tax Assessment Act (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

Mr A is a former director of the trustee company, XYZ Pty Ltd.

The XYZ Property Trust owns primary production land ("Subject Land") that was acquired by the XYZ Property Trust after 19 September 1985.

For at least XX years, the XYZ Property Trust has been conducting a horticultural business and a separate farming business on the Subject Land.

From 19XX (possibly earlier) until December 20YY, Mr A resided in a dwelling situated on the Subject Land which allowed Mr A to manage and oversee the businesses conducted by the XYZ Property Trust until his retirement in 20XX.

On 1 January 20XX, the XYZ Property Trust entered into a conditional and deferred settlement contract ("Contract 1") for the sale of the entirety of Subject Land to Property Developer 1.

In the course of entering into Contract 1, Mr A gradually reduced his work hours associated with the horticultural business and farming business.

A trustee resolution was executed by XYZ Pty Ltd as trustee of the XYZ Property Trust on 31 January 20XX set out the circumstances of Mr A's retirement, notably:

• Mr A's work activities included managing the farming and horticultural operations on the Subject Land and some physical work in the horticultural operations;
• on or about December 20YY, Mr A moved from his residence on the Subject Land to Residential Property
• prior to moving to the Residential Property, Mr A's work hours traditionally involved approximately 20 to 30 hours per week, but Mr A substantially reduced his working hours to as little as 5 to 10 hours per week as the Subject Land moved closer to being sold to Property Developer 1; and
• at the time, Mr A intended on using some of the proceeds of sale to fund his retirement (i.e. repaying the whole of the loan on the Residential Property so its mortgage could be discharged and investing in listed shares and other passive investments for income in retirement).

Following Mr A's retirement in 20YY, Mr A's son, Mr B has had responsibility for the management and oversight of the XYZ Property Trust's primary production businesses which continue to be conducted by the XYZ Property Trust as at the date of this ruling application.

Unfortunately, due to various circumstances, the development and land sale to Property Developer 1 did not proceed.

In mid 20MM, the XYZ Property Trust entered negotiations with Property Developer 2, for the purchase of the Subject Land for the purposes of commercial development.

On 30 June 20MM:

• the XYZ Property Trust terminated Contract 1; and
• the XYZ Property Trust progressed negotiations with Property Developer 2 for the sale of the Subject Land.

Following negotiations and the due diligence process, Property Developer 2 decided that it only wanted to purchase a portion of the Subject Land (as opposed to all of the Subject Land), which was unacceptable to the directors of XYZ Pty Ltd.

Accordingly, XYZ Pty Ltd, as trustee of the XYZ Property Trust, terminated its negotiations with Property Developer in early 20JJ.

XYZ Holdings Pty Ltd has since early 20JJ progressed negotiations with another potential purchaser for the purchase of the Subject Land. This purchaser is known as the Purchaser.

It is now proposed that the XYZ Property Trust will enter into a contract for disposal of the Subject Land to the Purchaser.

It is proposed that part of the XYZ Property Trust's proceeds from the sale to the Purchaser will be applied to fund Mr A's ongoing healthcare, retirement and living costs.

The XYZ Property Trust will make a capital gain upon the disposal of the Subject Land to the Purchaser.

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 subsection 152-110(1)

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

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise specified.

Subdivision 152-B of the ITAA 1997 allows a CGT small business entity to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years if certain conditions are met.

For a company or trust, subsection 152-110(1) provides that the capital gain arising from a CGT event can be disregarded if all of the following conditions are satisfied:

(a)  the basic conditions in Subdivision 152-A of the ITAA 1997 are satisfied,

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

(c)   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 always the same significant individual) during which the entity owned the CGT asset,

(d)  an individual who was a significant individual of 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 their retirement or

(ii)   was permanently incapacitated at that time.

This ruling focuses on subparagraph 152-110(1)(d)(i) of the ITAA 1997 only, specifically whether the CGT event happened 'in connection with retirement'. The taxpayer will self-assess all other conditions of subsection 152-110(1) of the ITAA 1997, including whether Mr A was a significant individual.

In connection with retirement

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

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.

Guidance on the ATO website at QC 52288 indicates that it is not necessary for there to be a permanent and everlasting retirement from the workforce. However, there would need 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 a retirement for the purposes of paragraph 152-110(1)(d)(i) of the ITAA 1997.

Similarly, the words 'in connection with' can apply where the CGT event occurs sometime after retirement. Again, this would depend on the particular facts, and would need to be considered on a case-by-case basis.

In this case:

•         Mr A had commenced transitioning toward retirement around the time the XYZ Property Trust entered into Contract 1 for the sale of the Subject land, by reducing the duties undertaken within the farming and horticultural businesses;

•         At the time of entering into Contract 1 on 1 January 20YY, Mr A intended for the capital proceeds from the sale of the Subject Land to discharge the mortgage on the Residential Property and to invest the remainder to derive passive income for retirement;

•         Although Contract 1 was terminated on 30 June 20MM, the XYZ Property Trust progressed negotiations with Property Developer 2 for the sale of the Subject Land.

•         The negotiations with Property Developer 2 were terminated on 1 February 20JJ, however since that date, XYZ Property Trust progressed negotiations with the Purchaser for the sale of the Subject Land.

•         It is proposed that part of the XYZ Property Trust's proceeds from the sale to the Purchaser will be applied to fund Mr A's ongoing healthcare, retirement and living costs.

Based on the above facts and circumstances of the case, the Commissioner is satisfied that the proposed CGT event arising from the disposal of the Subject Land to the Purchaser would be 'in connection with retirement'.