Edited version of private advice

Authorisation Number: 1052111074107

Date of advice: 8 May 2023

Ruling

Subject: CGT - small business concession

Question

Does the sale of your interest in the Property happens in connection with your retirement for the purpose of subparagraph 152-105(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse jointly own the following two parcels of farmland (Parcel 1 and Parcel 2).

As a partnership, you and your spouse used Parcel 1 and Parcel 2 in carrying on a business from their acquisition to 20XX.

Aside from your partnership with your spouse, you had a separate career, from which you retired in 20XX.

From 20XX to the present date, your spouse has carried on the business in relation to the land parcels in their own name as a sole trader.

Since 20XX you have assisted your spouse with the physical aspect of the business for on average 1 day per week.

You satisfy the basic conditions for the small business capital gain tax concessions under Subdivision 152-A of the ITAA 1997.

You intend to sell Parcel 1 and Parcel 2 and apply the small business 15-year exemption under section 152-105 of the ITAA 1997.

After selling Parcel 1 and Parcel 2, you intend to no longer be involved in the farming business.

You and your spouse are both over the age of 55.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 Subdivision 152-A

Reasons for decision

15-year exemption

Under section 152-105 of the ITAA 1997, an individual can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied:

(a)  the basic conditions in Subdivision 152-A are satisfied for the gain;

(b)  you continuously owned the CGT asset for the 15-year period ending just before the CGT event;

(c)   if the CGT asset is a share in a company or an interest in a trust - the company or trust 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 you owned the CGT asset;

(d)  either:

(i)    you are 55 or over at the time of the CGT event and the event happens in connection with your retirement; or

(ii)   you are permanently incapacitated at the time of the CGT event.

In this case, you have asked whether the sale of your interest in parcel 1 and parcel 2 is 'in connection with' their retirement, in accordance with the condition in paragraph 152-105(d)(i) of the ITAA 1997. Thus, the scope of this ruling will be limited to whether this condition will be satisfied.

In connection with retirement

The phrase in connection with your retirement is not defined in the legislation and, as such, it takes its ordinary meaning.

The Macquarie Dictionary defines retirement as 'removal or retiring from service, office or business'. The question then arises as to whether a mere withdrawal from a position or business with the ability to commence involvement in another position or business would be sufficient; otherwise, there may have to be a complete withdrawal from the workforce.

In the context of the purpose and effect of the provision, merely moving from one position or business to another would not be sufficient. However, there does not need to be a complete withdrawal from the workforce. For example, staying on for a limited period to assist a new owner during a transitional period should be acceptable. Also, working the equivalent of a couple of days per week in the former business or elsewhere should not jeopardise the exemption.

The phrase in connection with your retirement can be given a relatively wide interpretation to mean that the relevant CGT event would not necessarily have to occur contemporaneously with the retirement. Therefore, the CGT event could occur either in anticipation of, or after, the retirement.

While it may be a question of fact, the essential element will be to demonstrate that the CGT event happens as part of an actual retirement plan. Thus, if there is no relevant connection with the small business operator's retirement, the requirement would not be satisfied. However, if it can be shown that the reason for the disposal of the assets is connected to retirement and the later sale is integral to the small business operator's retirement plan, the sale may be accepted as happening in connection with retirement.

In this case, although you have continued to have a limited involvement assisting your spouse with the physical aspects of the farming business, you ceased carrying on the farming business in partnership in 20XX. On an objective assessment of events of 20XX, being the cessation of your farming business, the significant reduction in your work hours, and your retirement from your vocation leads readily to the conclusion that you retired at that time for the purpose of the 15-year exemption.

Given the length of time between the retirement in 20XX and the proposed farmland sale over X years later, our view is that your retirement was not made in anticipation of the sale of Parcel 1 and Parcel 2, nor was it part of an overarching plan. Therefore, the sale of your interest in Parcel 1 and Parcel 2 will not be in connection with your retirement, for the purpose of paragraph 152-105(d)(i) of the ITAA 1997.