Edited version of private advice

Authorisation Number: 1052142045636

Date of advice: 21 November 2023

Subject: 15-year retirement concession

Ruling

Question

Did each Taxpayer satisfy the requirements in section 152-105 of the ITAA 1997 to apply the 15-year exemption with respect to their 50% interest in the Property in relation to the sale of the Property?

Answer

No.

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

Individual A

Individual A is a director of and holds a 50% share in the corporate trustee of the Trust.

Individual A was Managing Director of the Company from XXXX to XXXX. Individual A was over 55 years of age at the time of the CGT event and has retired.

Individual A does not carry on any businesses in their own name.

Individual B

Individual B is a director of and holds a 50% share in corporate trustee company of the Trust.

Individual B was employed by The Company Pty Ltd from XXXXXX to XXXXXX.

Individual B was over 55 years of age at the time of the CGT event and has retired.

Individual B does not carry on any businesses in their own name.

(Individual A and Individual B are also referred to collectively as the Taxpayers).

Partnership

There is no documented partnership agreement. The Partnership only exists for GST registration purposes.

The Partnership was formed in XXXX.

The Partnership does not carry on any businesses in its own name.

The turnover of the Partnership (excluding the sale of the Property) from leasing the property was less than $2 million for the income year ended XXXX.

The Property

The directors and shareholders of the Company all acknowledged that, as the business grew, it would need to move to larger premises. The Head Company did not wish to purchase new premises in the name of the Company.

Individual A and Individual B purchased vacant land as joint owners in XXXX (i.e. Individual A and Individual B each have a 50% interest in the Property).

Individual A and Individual B constructed facilities of a type and in a timeframe in accordance with the requirements of the Company.

The Company leased the Property from XXXX.

The Company has been the sole tenant and continues to occupy the premises.

The terms of the lease of the property to the Company were generally far more favourable than would be the case to an arms' length lessee. (The Property was not leased at commercial rates to the Company).

The Property is being sold to a third party. The contract for the sale of the property was signed on XXXX. Settlement took place on XXXX.

The Company

The Company was established on XXXX under an agreement between Individual A, Individual B and the Head Company to provide a permanent presence in Australia. Individual A and Individual B were acquainted with the directors of the Head Company through previous business dealings

Individual A was Managing Director of the Company from XXXX to XXXX.

The shareholders of the Company are the trustee of the Trust (until XXXX) and the Head Company (a company incorporated in Country A). The Head Company's directors and shareholders are not related to Individual A and Individual B.

The initial relationship with Company A was via that entity's relationship with a business owned and run by Individual B's parents. Individual B was always involved in the relationship with Company A. The Taxpayers were involved in establishing their business relationship with Company A, and they worked together to shape the direction of the Company (notwithstanding their status as an employee, Individual B was actively involved in shaping the direction of the Company) as reflected in the decisions Individual A implemented as a director (to reflect their joint vision of the Company). The Taxpayers consulted with each other on all critical business matters.

Individual A was the only Australian‐based director of the Company from XXXX to XXXX. They were entrusted by the Head Company with the strategic direction of the Company and its day‐to‐day operations. The other directors of The Company were Country A residents who were essentially absentee directors.

Individual A's role and influence:

•         The other directors from Country A have never visited Australia for business purposes or taken an active role in the running the Company.

•         The directors at the time consented to The Company leasing the factory site from the 'partnership' (i.e. Individuals A and B) soon after purchase and well before construction of the factory was completed.

•         Individual A was responsible for the preparation and implementation of annual and five-year business plans. These were adopted by the Board with minimal alteration.

•         The Company sold products through a network of agents. This mode of sales was unique amongst the Head Company's subsidiaries and was proposed and implemented by Individual A.

•         The Company imported components and assembled them in Australia. The majority of subsidiaries manufactured their own equipment, and this was the preferred model. The directors of The Company representing the Head Company were keen to manufacture in Australia but acceded to Individual A's preferred model of importing and assembling. The Company only acquired a manufacturing subsidiary, after both Individual A and Individual B had resigned as employees of The Company.

•         Appointment of employees and suppliers was solely the responsibility of Individual A.

•         For the majority of Individual A's employment with The Company they were the sole cheque signatory on the company's bank account.

•         At Individual A's instigation, the Company established a subsidiary company to sell equipment manufactured by the subsidiaries.

•         At Individual A's instigation, the Company established a Country B subsidiary company to sell equipment manufactured by the subsidiaries in Country B.

•         At Individual A's instigation, the Company established a service department, employing service technicians to support local customers. This was not normal practice for the subsidiaries.

The issued capital of the Company consists of X ordinary shares and X redeemable preference shares. The number ordinary shares issued was increased from X to X on XXXX and from X to X on XXXX.

The Company's aggregated turnover for the income years ended 30 June XXXX exceeded $M million.

The Trust

Individual A and Individual B are beneficiaries of the Trust.

The Corporate Trustee.

The Trustee was incorporated on XXXX.

The Trustee is also the trustee of the Self‐managed Superannuation Fund.

Individual A, Individual B along with their children are directors of the Trustee. The children are directors solely due to their membership of the self‐managed superannuation fund.

The issued capital of the Trustee consists of X ordinary shares which are held on behalf of Individual A and Individual B.

The Trustee had held more than 40% of the shares in the Company, but held less than 40% of shares at the time the Property was being sold.

The combined net asset values of Individual A, Individual B and the Family trust, but excluding any assets of the Super fund, is less than $M million.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 152-10

Income Tax Assessment Act 1997 subsection 152-105

Income Tax Assessment Act 1997 section 328-110

Income Tax Assessment Act 1997 section 328-125

Reasons for decision

Question

Did each Taxpayer satisfy the requirements in section 152-105 of the Income Tax Assessment Act 1997 (ITAA 1997) to apply the 15-year exemption with respect to their 50% interest in the Property in relation to the sale of the Property?

Summary

As the requirements in 152-105 of the ITAA 1997 would have been satisfied, the capital gain from the sale of the Property can be disregarded for the purposes of Subdivision 152-B of the ITAA 1997.

Detailed reasoning

Small business 15-year exemption for individuals

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.

Relevantly, for an individual, section 152-105 of the ITAA 1997 provides:

152-105 15-year exemption for individuals

If you are an individual, you 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;

...

(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.

Basic conditions in Subdivision 152-A of the ITAA 1997

Subsection 152-10(1) of the ITAA 1997 sets out the basic conditions. Relevantly:

A capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under this Division if the following basic conditions are satisfied for the gain:

(a) a CGT event happens in relation to a CGT asset of yours in an income year;

Note: This condition does not apply in the case of CGT event D1: see section 152-12.

(b) the event would (apart from this Division) have resulted in the gain;

(c) at least one of the following applies:

....

(ii) you satisfy the maximum net asset value test (see section 152-15);

...

...

(d) the CGT asset satisfies the active asset test (see section 152-35).

CGT event giving rise to a capital gain

Section 102-20 of the ITAA 1997 provides that a capital gain or capital loss is made if a CGT event happens to a CGT asset.

The Property is a CGT asset (section 108-5 of the ITAA 1997).

Relevantly, under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset.

Under subsection 104-10(2) of the ITAA 1997, you dispose of a CGT asset when a change of ownership occurs from you to another entity.

The effect of CGT event A1 happening is that you make a capital gain if the capital proceeds from the disposal are more than the asset's costs base or a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-10(5) of the ITAA 1997).

The time of the event is when you enter into the contract for the disposal, or, if there is no contract, when the change occurs (subsection 104-10(3) of the ITAA 1997).

The maximum net asset value test

In broad terms, section 152-15 of the ITAA 1997 provides that maximum net asset value test is satisfied if the sum of the net value of the CGT assets of yours, any entities connected with you, and any of your affiliates or entities connected with your affiliates just before the relevant CGT event does not exceed $6,000,000:

You satisfy the maximum net asset value test if, just before the *CGT event, the sum of the following amounts does not exceed $6,000,000:

(a) the *net value of the CGT assets of yours;

(b) the net value of the CGT assets of any entities *connected with yoI(c) the net value of the CGT assets of any affiliates of yours or entities connected with your affiliates (not counting any assets already counted under paragraph (b)).

Note 1: Some assets are not included in the definition of Net value of the CGT assets: see subsection 152-20(2),(3) and (4).

Note 2 The meaning of connected with is affected by section 152-78.

Relevantly, the term 'entity' is defined in subsection 960-100(1) of the ITAA 1997 to include 'an individual'.

Subsection 152-20(1) of the ITAA 1997 sets out the meaning of net value of the CGT assets as:

The net value of the CGT assets of an entity is the amount (whether positive, negative or nil) obtained by subtracting from the sum of the market values of those assets the sum of:

(a) the liabilities of the entity that are related to the assets; and

(b) the following provisions made by the entity:

(i) provisions for annual leave;

(ii) provisions for long service leave;

(iii) provisions for unearned income;

(iv) provisions for tax liabilities.

Subsection 152-20(2) of the ITAA 1997 sets out the assets to be disregarded as:

In working out the net value of the CGT assets of an entity:

(a) disregard shares, units or other interests (except debt) in another entity that is connected with the first-mentioned entity or with an affiliate of the first-mentioned entity, but include any liabilities related to any such shares, units or interests; and

(b) if the entity is an individual, disregard:

(i) assets being used solely for the personal use and enjoyment of the individual, or the individual's affiliate (except a dwelling, or an ownership interest in a dwelling, that is the individual's main residence, including any adjacent land to which the main residence exemption can extend because of section 118-120); and

(ii) except for an amount included under subsection (2A), the market value of a dwelling, or an ownership interest in a dwelling, that is the individual's main residence (including any relevant adjacent land); and

(iii) a right to, or to any part of, any allowance, annuity or capital amount payable out of a superannuation fund or an approved deposit fund; and

(iv) a right to, or to any part of, an asset of a superannuation fund or of an approved deposit fund; and

(v) a policy of insurance on the life of an individual.

Note:

The meaning of connected with is affected by section 152-78.

Connected with

Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if:

•         either entity controls the other entity, or

•         both entities are controlled by the same third entity in a manner described in the section.

Control may be direct or indirect.

Relevantly, subsection 328-125(7) of the ITAA 1997 sets of an indirect control test, which is designed to look through business structures that include interposed entities. This test applies to all entities, including discretionary trusts.

Broadly, an entity is taken to indirectly control a third entity where:

•         the entity directly controls a second entity (the interposed entity); and

•         the interposed entity controls (whether directly or indirectly) the third entity.

In other words, if Entity A controls Entity B and Entity B controls C, Entity A is also taken to control Entity C.

The tests to determine control are applied in respect of each entity. The direct control rules in subsections 328-125(2) to 328-125(6) of the ITAA 1997 apply to determine whether the first entity controls the interposed entity. Either the direct or indirect control rules can apply to determine whether the interposed entity controls the third entity.

Section 328-125 of the ITAA 1997 sets out the various ways an entity is taken to control another entity including the circumstances in which beneficiaries of a discretionary trust are taken to control the trust.

Broadly, an entity directly controls a discretionary trust if a trustee either:

•         acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity and/or its affiliates (subsection 328-125(3) of the ITAA 1997), or

•         in any of the last 4 income years, pays or applies at least 40% of any distributions of income or capital of the trust to the entity and/or its affiliates subsection 328-125(4) of the ITAA 1997).

Influence over trustee

Whether an entity acts in accordance with the directions or wishes of an entity and/or its affiliates depends on the particular facts and circumstances.

Re Gutteridge and Commissioner of Taxation 2013 ATC 10-347 sets out the principles that are relevant to determining whether a person or entity exercised effective control over the trustee of a discretionary trust for the purposes of subsection 328-125(3) of the ITAA 1997:

•         treating another person's instructions or wishes as a sufficient reason so to act, rather than making personal decisions where those wishes or instructions are merely a factor considered, meets the test of being accustomed so to act;

•         it is not necessary that the behaviour be universal, at least some decisions, one or more important decisions, would be enough, some or all decision making is the focus;

•         decisions made in pursuit of one's own business goals even, if consistent with the wishes of another party, do not necessarily render the decision maker accustomed to acting in accordance with the other party's wishes. The other party may have superior bargaining power;

•         while not significantly different, acting in accordance with a person's wishes covers a wider field than acting in accordance with a person's instructions, and

•         it is necessary to undertake a critical assessment of the way in which the trustee is managed.

Decision Impact Statement Gutteridge and Commissioner of Taxation explains that the Commissioner does not accept that the reasonable expectation test can be substituted with an accustomed to act test in all cases:

However, while the circumstances in this case allow for a finding that a person could reasonably be expected to act in a certain way because they were 'accustomed 'o act' in that way, the Commissioner does not accept that the 'reasonable expectation' test in subsection 328-125(3) of the ITAA 1997 can be substituted with an 'accustomed 'o act' test in all cases. It depends, as the AAT said at paragraph 21, on an examination of all the circumstances of a case. For example, if there is no history at all of a trustee having acted on the directions of another, there may nonetheless be an expectation (reasonably founded) that they would act on the directions of a particular person, were such directions to be given.

Relevantly, subsection 328-125(2) of the ITAA 1997 sets out the direct control of an entity other than a discretionary trust:

•         except if the other entity is a discretionary trust, Entity A controls Entity B if Entity A, its affiliates, or Entity A together with its affiliates own, or have the right to acquire the ownership of, interests in Entity B that carry between them the right to receive at least 40% (the control percentage) of any income or capital distribution by entity B (general control test) pursuant to paragraph 328-125(2)(a) of the ITAA 1997; or

•         Entity A also controls Entity B that is a company if Entity A, its affiliates, or Entity A together with its affiliates own, or have the right to acquire the ownership of, equity interests in the company that carry between them the right to exercise, or control the exercise of, at least 40% of the voting power in the company (voting control test) pursuant to paragraph 328-125(2)(b) of the ITAA 1997.

The control tests in this context focus on legal ownership, rather than beneficial ownership. The provisions apply to interests held by trusts, life insurance companies and superannuation funds in the same way as to other entities.

Affiliates

Affiliate is defined in subsection 328-130(1) of the ITAA 1997 as an individual or company that acts, or could reasonably be expected to act, in accordance with the entity's directions or wishes, or in concert with the taxpayer, in relation to the business affairs of that individual or company.

An individual or company is not automatically an affiliate merely because of the legal nature of a business relationship: subsection 328-130(2). For example, a company and its directors are not affiliates by reason only of the nature of the business relationship they share.

Relevantly, section 152-47 of the ITAA 1997 provides that spouses or children taken to be affiliates in certain circumstances.

The Explanatory Memorandum to the Tax Laws Amendment (2009 Measures No. 2) Bill 2009 explains the intended operation of section 152-47 of the ITAA 1997:

...

2.33 The amendments repeal subsection 152-40(1A) and insert a rule that treats an individual's spouse or child (under 18 years of age) as an affiliate of the individual for the purposes of determining whether the individual or an entity in which the individual has an interest, or is a beneficiary of, is eligible for the small business CGT concessions where one entity owns a CGT asset and:

•         that asset is used, or held ready for use, in the course of carrying on a business by another entity; or

•         is inherently connected with a business carried on by another entity.

[Schedule 2, items 11 and 14, subsections 152-47(1) and (2)]

2.34 The rule applies only in the business entity is not otherwise an affiliate of, or connected with, the asset-owning entity. This means that if the business entity is an affiliate of the asset-owning entity as a result of applying section 328-130 of the ITAA 1997, an individual's spouse or child (under 18 years of age) would not be treated as an affiliate of the individual. Similarly, if the business entity is already connected with the asset-owning entity via section 328-125 of the ITAA 1997, an individual's spouse or child (under 18 years of age) would not be treated as an affiliate of the individual. [Schedule 2, item 14, paragraph 152-47(1)(c),]

2.35 The rule is applied in two stages. The first stage treats an individual's spouse or child (under 18 years of age) as their affiliate, for the purposes of Subdivision 152-A of the ITAA 1997, when determining whether the entity that uses the CGT asset, or holds it ready for use, in its business is an affiliate of, or is connected with, the entity that owns the CGT asset. [Schedule 2, item 14, subsection 152-47(2)]

2.36 If the conditions of the first stage are met, the second stage will apply to treat the spouse or child (as the case may be) as an affiliate of the individual for the purposes of Subdivision 152-A of the ITAA 1997 and for the purposes of sections 328-110 to 328-125 of the ITAA 1997 to the extent that these sections relate to Subdivision 152-A. For example, if by the application of the first stage of the rule, the entity is taken to be an affiliate of, or an entity connected with, the entity that owns the asset, the asset is an active asset (subparagraph 152-40(1)(a)(ii) in its proposed new form, or new subparagraph 152-40(1)(a)(iii), or paragraph 152-40(1)(b) in its proposed new form). [Schedule 2, item 14, subsection 152-47(3)]

...

Active asset test

Under subsection 152-35(1) of the ITAA 1997, a CGT asset will satisfy the active asset test if:

•         you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period, or

•         you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of at least 7½ years during the test period.

Under subsection 152-35(2) of the of the ITAA 1997 the period:

•         begins when you acquired the asset; and

•         ends at the earlier of:

o   the CGT event; and

o   if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner a-lows - the cessation of the business.

Subsection 152-40(1) of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on by you, or your affiliate, or another entity that is connected with you.

Under subsection 328-125(1) of the ITAA 1997, an entity is connected with another entity if:

•         either entity controls the other entity; or

•         both entities are controlled by the same third entity.

Relevantly, Taxation Determination TD 2022/7 Income tax: aggregated turnover - application of the 'connected' with' concept to partnerships, foreign hybrids and non-entity joint ventures, explains that Subdivision 328-C of the ITAA 1997 applies to a partnership as though it were an entity separate to its partners in the following manner:

•         A partner is capable of directly controlling a partnership based on the tests in subparagraphs 328-125(2)(a)(i) or (iii)'(the general control tests) or the specific test for determining whether an entity directly controls a partnership under subparagraph 328-125(2)(a)(ii)'(the partnership control test).

•         When determining whether a partnership directly controls another entity under section 328-125, the partnership is the relevant entity, rather than the individual partners in their capacity as partners.

•         Where an entity is directly controlled by a partnership within the meaning of section 328-125, that entity will also need to consider whether it is indirectly controlled by any other entities that control the partnership, including the individual partners in their capacity as partners of the partnership.

•         Where a partner directly controls a partnership, that partner will also need to consider whether they indirectly control any other entities that are controlled by the partnership.

•         As only an individual or a company can be an affiliate within the meaning of section 328-130, a partnership is not capable of being an affiliate of another entity. It is noted that for the purposes of section 152-40 of the ITAA 1997 it is the use of the asset in the business, and not by the taxpayer who owns it, that is relevant. Where the taxpayer treats any use by their affiliate, or an entity that is connected with them, as their use, it is that entity's use of the property in their business that is relevant in this context. As such, the property would not be excluded on the basis that it is a rental property in the hands of the taxpayer.

Continuously owned

The Commissioner explains in Taxation Determination TD 94/89 Income tax: capital gains: in what year of income is a taxpayer required for tax purposes to include a capital gain or loss in relation to land disposed of under a contract which is made in one year of income, but which is settled in a later year of income? that, generally for CGT purposes, ownership in relation to the disposal of property is determined with reference to settlement:

3. However, a taxpayer is not required to include any capital gain or loss in the appropriate year until an actual change of ownership occurs. Settlement effects a change of ownership and a disposal (subsection 160M(1)) which then triggers the operation of subsection 160U(3). When settlement occurs, the taxpayer is then required to include any capital gain or loss in the year of income in which the contract was made (subsection 160U(3)). If an assessment has already been made for that year of income, the taxpayer may need to have that assessment amended.

However, whether an entity has continuously owned the CGT asset for the 15-year period set out in paragraph 152-105(b) of the ITAA 1997 is determined with reference to when the CGT asset commences to be owned by the entity to just before the CGT event (in the case of CGT event A1, the date of the contract for the sale of the CGT asset).

In connection with retirement

This phrase 'in connection with their retirement'has no statutory definition.

The provisions relating to the small business 15-year exemption do not define what is meant by the phrase 'in connection with their retirement', nor does it give any indication of the degree of retirement for the purposes of this concession.

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

The Explanatory Memorandum 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:

Requirement to be permanently incapacitated or retiring

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 legislation does not provide a specific definition of the word retirement for the purpose of subparagraph 152-105(d)(i) of the ITAA 1997. Consequently, it takes its ordinary meaning.

The Macquarie Dictionary (online version, downloaded 7 August 2019) defines retirement to mean 'removal or retiring from service, office, or business, especially in reaching the end of one's working life'.

The phrase 'in connection' with' has been judicially considered in numerous cases.

In Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 (Pozzolanic), it was stated by the Full Court of the Federal Court that:

The words 'connected' with' are capable of describing a spectrum of relationships ranging from the direct and immediate to the tenuous and remote. As Sheppard and Burchett JJ observed in Australian National Railways Commission v Collector of Customs (SA) [(1985) 69 ALR 367 at 377-378; 8 FCR 264, at 265] the meaning of the word 'connection' is wide and imprecise, one of its common meanings being 'relation between things one of which is bound up with, or involved in, another': Shorter Oxford English Dictionary. (at 288)

Given the potential width of the words in 'connection with', the question remains in a particular case what kind of relationship will suffice to establish the connection contemplated by the statute. This in turn will require a value judgment about the range of the statute: see e.g. Pozzolanic at 289 and Taciak v Commissioner of Australian Federal Police (1995) 59 FCR 285 at 295.

Wilcox J of the Federal Court considered the meaning of the phrase 'in connection with the retirement' in Claremont Petroleum NL v Cummings (1992) 110 ALR 239 (Claremont). The case concerned the application of provisions within the Queensland Companies Code and in particular, whether payments made were in connection with the retirement of certain individuals. Wilcox J made the following observations on the phrase 'in connection with:

The phrase "in connection with" is one of wide import, as I had occasion to observe in a different context in Our Town FM Pty Ltd v Australian Broadcasting Tribunal (1987) 16 FCR 465 at p479-80; 77 ALR 577 at pages 591-2:

The words 'in connexion with'...do not necessarily require a causal relationship between the two things: see Commissioner for Superannuation v Miller (1985)8 FCR 153 at 154, 160, 163; 63 ALR 237at 238, 244, 247. They may be used to describe a relationship with a contemplated future event: see Koppen v Commissioner for Community Relations (1986) 11 FCR 360 at 364, Johnson v Johnson [1952] P 47 at 50-1. In the latter case the United Kingdom Court of Appeal applied a decision of the British Columbia Court of Appeal, Re Nanaimo Community Hotel Ltd [1945] 3 DLR 225, in which the question was whether a particular court, which w's given 'jurisdiction to hear and determine all questions that may arise in connection with any assessment made under 'this Act', had jurisdiction to deal with a matter which preceded the issue of an assessment. The trial judge held that it did, that the phrase 'in connection with' covered matters leading up to, or which might lead up to an assessment he said...: 'One of the very generally accepted "meanings of "connection" is "relation between things one of which is bound up with or involve "in another" or, again "having" to do with". The words include matters occurring prior to as well as subsequent to or consequent upon so long as they are related to the principal thing. "The phrase "having" to do with" perhaps gives as good a suggestion of the meaning as could be had.'

Having regard to the context of subparagraph 152-105(d)(i) of the ITAA 1997, the Commissioner considers that it would be reasonable to adopt the meaning given to the phrase 'in connection with' in Claremont such 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 152-105(d)(i).

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.

Application in these circumstances

Relevantly in this case:

The basic conditions for relief in Subdivision 152-A of the ITAA 1997 are satisfied as follows.

•         The sale of the Property will result in a capital gain for the purpose of CGT event A1. The conditions in paragraphs 152-10(1)(a) and 152-10(1) (b) of the ITAA 1997 are satisfied.

•         The Taxpayers satisfy the maximum net asset value test in section 152-15 of the ITAA 1997. The combined net asset values of the Taxpayers, the Family trust but excluding any assets of the Self‐managed Superannuation Fund is less than $6 million at the time of the CGT event. Relevantly, the Company is not an affiliate for the purposes of test as the Taxpayers had resigned from the Company before the contract for the sale of the Property. It should be noted that the Company is not connected with the Taxpayers (as discussed below). The condition in subparagraph 152-10(1)(c)(ii) of the ITAA 1997 is satisfied

•         The Property is an active asset as it was owned by the Taxpayers for more than 15 years and it was used by an affiliate Company in carrying on the Company's business activities for a total of at least 7½ years for the period it was owned by the Taxpayers.

The connection and affiliation tests for the purposes of section 328-110 of the ITAA 1997 relate to partnerships that carry on a business. The tax law partnership with respect to the joint ownership of the Property, does not preclude the operation of the connection and affiliation tests with respect to the Taxpayers.

The Taxpayers have joint ownership of the property, and they are not carrying on a business (including in a partnership), and it is effectively the Taxpayers who are leasing the Property to the Company.

The key issue is whether the Company an affiliate of or connected with the Taxpayers.

In this case, the Taxpayers are not connected with the Company for all of the relevant period for the purposes of section152-40 of the ITAA 1997.

Relevantly, the Taxpayers would not satisfy the indirect control test (i.e. the Company is connected with the Taxpayers because they indirectly control the Company) as they each control the Trust and the Trust controls the Company. Whilst they may indirectly control the Trust as they each have influence over the Trustee (i.e the Trustee acts in accordance with their wishes), they have to establish that the Trustee controls the Company for the whole of the period the Property is an active asset. Whilst the Trustee held more than 40% of the ordinary shares from XXXX to XXXX, the Trustee held less than 40% of the shares in the Company for all of the relevant period.

However, the Commissioner accepts that the Company may be considered Individual A and Individual B's affiliate in these circumstances.

Individual B and Individual A were involved in establishing their business relationship with Company A, and that Individual B and Individual A worked together to shape the direction of the Company (notwithstanding her status as an employee, they were actively involved in shaping the direction of the Company) as reflected in the decisions Individual A implemented as a director (to reflect their joint vision of the Company). Individual B and Individual A consulted with each other on all critical business matters.

There are a number of factors which illustrate that Individual A, in their role as Managing Director, could be seen to have the Company acting in accordance with both Individual's wishes in relation to the business affairs of the Company. These include:

•         The other directors from Country A have never visited Australia for business purposes or taken an active role in the running the Company.

•         The directors at the time consented to the Company leasing the factory site from the 'partnership' (i.e. Individuals A and B) soon after purchase and well before construction of the factory was completed.

•         Individual A was responsible for the preparation and implementation of annual and five-year business plans. These were adopted by the Board with minimal alteration.

•         The Company sold products through a network of agents. This mode of sales was unique amongst the Head Company's subsidiaries and was proposed and implemented by Individual A.

•         The Company imported components and assembled them in Australia. The majority of subsidiaries manufactured their own equipment, and this was the preferred model. The directors of the Company representing the Head Company were keen to manufacture in Australia but acceded to Individual A's preferred model of importing and assembling. The Company only acquired a manufacturing subsidiary, after both Individual A and Individual B had resigned as employees of the Company.

•         Appointment of employees and suppliers was solely the responsibility of Individual A.

•         For the majority of Individual A's employment with the Company they were the sole cheque signatory on the company's bank account.

•         At Individual A's instigation, the Company established a subsidiary company to sell equipment manufactured by the subsidiaries.

•         At Individual A's instigation, the Company established a Country B subsidiary company to sell equipment manufactured by the subsidiaries in Country B.

•         At Individual A's instigation, the Company established a service department, employing service technicians to support local customers. This was not normal practice for the subsidiaries.

The Property satisfies the active asset test as it was used in a business by an entity that was connected with Individual A or was an affiliate of both taxpayers for the period specified in subsection 152-35(2) of the ITAA 1997. The condition in subparagraph 152-10(d) of the ITAA 1997 is satisfied.

•         The Taxpayers have continuously owned the CGT asset (i.e. the Property) for the 15-year period ending just before the CGT event - i.e. for, the acquisition of the Property in XXXX to the contract for the sale of Property in XXXX.

•         The Taxpayers are both over 55 years of age and have retired.

As such, the Commissioner is satisfied that in these circumstances the sale of the Property by the Taxpayers is in connection with their retirement for the purpose of subparagraph 152-105(d)(i) of the ITAA 1997. As all the conditions in 152-105 of the ITAA 1997 are satisfied, the capital gain from the sale of the Property can be disregarded under Subdivision 152-B with respect to the Taxpayers' interests in the Property.