Edited version of private advice

Authorisation Number: 1052215945485

Date of advice: 22 March 2024

Ruling

Subject: 15-year retirement concession

Issues

Question

Will 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 interest in the premises used to carry on the business of the Partnership in relation to the transfer of the premises to the Trust?

Answer

Yes

This ruling applies for the following periods:

1 July XXXX to 30 June XXXX

Relevant facts and circumstances

Individual A and Individual B (collectively, the Taxpayers) acquired the Property in XXXX as joint tenants.

Individual A and Individual B do not carry on any businesses in their own names.

The Partnership was established in XXXX. Each has a 50% interest in the Partnership.

Individual A and Individual B provided the use of the Property to the Partnership for the Partnership to carry on its business on the premises (i.e. Individual A and Individual B continued to hold the Property as joint tenants). The Partnership commenced carrying on the business on the premises in XXXX.

The business attributes are:

•        X rooms available for occupants.

•        X rooms have ensuites X rooms have shared bathrooms.

•        All rooms have small kitchenettes.

•        Shared laundry facilities.

The fees charged are $X per week for the ensuite rooms and $X per week for the shared bathroom rooms.

The Partnership provides linen. A commercial cleaner is engaged to clean the bathrooms each week. A caretaker is engaged to perform general maintenance etc. The Partnership provides all furniture for the rooms.

The Taxpayer maintains control over the rooms and restricts the usage. The occupants agree to conditions including the following:

House rules

•        No pets are allowed.

•        Rooms must be kept in a clean and tidy manner at all times.

•        Radio and television must be at lowest possible volume at all times.

•        Visitors must leave by 10 pm.Visitors cannot stay overnight unless they have a written permission.

•        Visitors cannot use bathroom/laundry facilities.

•        Rooms Fire Equipment will be inspected the first week of every month.

•        It is not permitted to operate the washing machine from 10 pm to 7 am

•        No smoking in bedroom and kitchen.

The occupants are liable to reimburse the Partnership for their gas and electricity, but not water usage.

The minimum stay is 90 days.

Occupants are required to give 2 days' notice to vacate.

The turnover of the Partnership was less than $2 million for the income year ended 30 June XXXX and will be less than $2 million for the income year ending 30 June XXXX.

The Taxpayers are planning to transfer the Property to a related discretionary trust in the income year ending 30 June XXXX. The discretionary trust will carry on the business following the proposed transfer of the property to the trust.

Individual A and Individual B are engaged in the Partnership business and have each worked on average 35 hours per week. Individual A and Individual B will be reducing their hours worked after the transfer to the trust.

Individual A and Individual B will be over 55 years of age at the time of the CGT event.

The transfer of the Property will result in a capital gain for the purposes of Part 3-1 and Part 3-3 of the ITAA 1997.

The combined net asset values of Individual A and Individual B is more than $6 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 to the transfer of the Property to the Trust?

Summary

As the requirements in section 152-105 of the ITAA 1997 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.

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:

(i) you are a *CGT small business entity for the income year;

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

(iii) you are a partner in a partnership that is a CGT small business entity for the income year and the CGT asset is an interest in an asset of the partnership;

(iv) the conditions mentioned in subsection (1A) or (1B) are satisfied in relation to the CGT asset in the income year;

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

The following requirements are relevant in these circumstances.

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).

It is noted that CGT event E2 under section 104-60 of the ITAA 1997 happens if you transfer a CGT asset to an existing trust. In broad terms, the discretionary trust would be trust. The time of the event is when the asset is transferred (i.e. when ownership of the asset changes). You make a capital gain if the capital proceeds from the transfer are more than the assets costs base.

Subsection 104-60(5) of the ITAA 1997 provides that CGT event E2 does not happen if you are the sole beneficiary of the trust, and you are absolutely entitled to the asset as against the trustee and the trust is not a unit trust (see e.g. ATO Interpretative Decision ATO ID 2003/559: Income tax: Disposal of a CGT asset to a trust: application of CGT event A1 or CGT event E2). It is also noted that a trustee's power to sell trust property without beneficiary consent is inconsistent with a beneficiary being absolutely entitled to an asset of the trust as against the trustee (see e.g. Decision Impact Statement for Kafataris v Deputy Commissioner of Taxation (2008) 172 FCR 242).

Section 102-25 of the ITAA 1997 provides that where more than one event can happen, the one you use is the one that is most specific to your situation. CGT event E2 is the more specific event if an asset is transferred to a trust of which the transferor or an associate is a beneficiary or object.

Passively held assets - partnerships

Section 152-10(IB) of the ITAA 1997 sets out the rules to access the small business CGT concessions via the small business entity test for CGT assets owned by partners that are used in the business of the partnership but are not interests in assets of the partnership (ie, the partners do not own the CGT assets in accordance with their fractional interest in the partnership or in accordance with their respective interests as specified in the partnership agreement):

152-10(1B)

The conditions in this subsection are satisfied in relation to the *CGT asset in the income year if:

(a) you are a partner in a partnership in the income year; and

(b) the partnership is a *CGT small business entity for the income year; and

(c) you do not carry on a *business in the income year (other than in partnership); and

(d) the CGT asset is not an interest in an asset of the partnership; and

(e) the business you carry on as a partner in the partnership referred to in paragraph (a) is the business that you, at a time in the income year, carry on (as referred to in subparagraph 152-40(1)(a)(i) or paragraph 152-40(1)(b) ) in relation to the CGT assetNote:

For businesses that are winding up, see section 152-49 and subsection 328-110(5)

Small business entity

If you carry on a business (other than in partnership) you cannot rely on subsection 152-10(1A) to satisfy the requirements of Subdivision 152-10 of the ITAA 1997. In that case, the small business entity test under paragraph 152-10(1)(c)(i) would apply to determine to your eligibility to the small business CGT concessions in Division 152 of the ITAA 1997.

Pursuant to subsection 152-10(1AA) of the ITAA 1997, you are a CGT small business entity for an income year if:

a)    you are a small business entity for the income year; and

b)    you would be a small business entity for the income year if each reference in section 328-110 to $10 million were a reference to $2 million.

As defined in section 995-1 of the ITAA 1997, a small business entity has the meaning given by subsection 328-110(1) of the ITAA 1997, as follows:

You are a small business entity for an income year (the current year) if:

a)    you carry on a business in the current year; and

b)    one or both of the following applies:

i)              you carried on a business in the income year (the previous year) before the current year and your aggregated turnover for the previous year was less than $10 million;

ii)             your aggregated turnover for the current year is likely to be less than $10 million.

Relevantly, pursuant to subsection 328-110(5) of the ITAA 1997 an entity is a small business entity if:

a) the entity is winding up a business it formerly carried on; and b) it was a CGT small business entity in the income year that it stopped carrying on the business.

Carrying on a business in partnership

The partnership has to meet the small business entity requirement, which encompasses carrying on a business for the purposes of section 328-110 of the ITAA 1997.

'Partnership' is defined in section 995-1 of the ITAA 1997 to mean:

(a) an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b) a limited partnership.

Relevantly, the first limb of paragraph (a) of the definition refers to 'an association of persons (other than a company or a limited partnership) carrying on business as partners'. This reflects the general law definition of a partnership, set out in the Partnership Act of each State and Territory, which is 'the relation which subsists between persons carrying on a business in common with a view of profit'. This type of partnership is referred to as a general law partnership.

In Taxation Ruling TR 94/8 Income tax: whether business is carried on in partnership (including 'husband and wife' partnerships) the Commissioner confirms that there are no statutory rules in the income tax law for deciding whether persons are carrying on business as partners. The question of whether a partnership exists is one of fact, having regard to:

•         Intention - the mutual assent and intention of the parties; and

•         Conduct:

(a) joint ownership of business assets

(b) registration of business name

(c) joint business account and the power to operate it

(d) extent to which parties are involved in the conduct of the business

(e) extent of capital contributions

(f) entitlements to a share of net profits

(g) business records

(h) trading in joint names and public recognition of the partnership.

The weight to be given to these factors varies with the individual circumstances. These factors are not exhaustive. No single factor is decisive, although the entitlement to a share of net profits is essential.

An important element of the definition is 'carrying on a business'. Without this, there can be no partnership at general law (see Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners _ where the Commissioner explains that co-ownership of rental property is a partnership for income tax purposes; but is not a partnership at general law unless the ownership amounts to the carrying on of a business).

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

Taxation Ruling TR 97/11 Income Tax: am I carrying on a business of primary production? (TR 97/11) provides the Commissioners view of the factors used to determine if a taxpayer is in business for tax purposes. Its principles are not restricted to questions of whether a primary production business is being carried on.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

•        whether the activity has a significant commercial purpose or character

•        whether the taxpayer has more than just an intention to engage in business

•        whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•        whether there is regularity and repetition of the activity

•        whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

•        whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

•        the size, scale and permanency of the activity, and

•        whether the activity is better described as a hobby, a form of recreation or sporting activity.

These factors are framed in TR 97/11 to reflect that the alternate outcome is as described in the final dot point.

TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' ( Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? sets out the principles to determine whether a company is carrying on a business for the purposes of section 328-110 of the ITAA 1997. Relevantly, it explains that the case law highlights that the differences between companies, individuals (including individuals in a partnership) and trusts influence the characterisation of the activities they carry on. These differences mean that the same activities carried on by companies are more likely to have a commercial character and amount to the carrying on of a business than if they were carried out by either an individual or trust.

Relevantly, the mere derivation of rental income from property is unlikely to constitute carrying on a business for income tax purposes.

Paragraph 8 of Taxation Ruling TR 2003/4 Income tax: boat hire arrangements (which is about whether boat charter activities generate business or investment income) states:

The receipt of income from the lease of an asset does not of itself amount to the carrying on of a business (see FC of T v. McDonald 87 ATC 4541; (1987) 18 ATR 957), but instead would generally be the passive receipt of income from property.

Paragraph 51 of Taxation Ruling TR 2003/4 states:

... Beaumont J indicated (quoting Wertman v. Minister of National Revenue 64 DTC 5158) that for a business to be carried on by owners of property, one would expect that they would be involved in providing services in addition to the process of letting property (as with a boarding house), not merely receiving payments for the tenants' occupation of the property.

Active asset test

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

a)    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

b)    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:

a)    begins when you acquired the asset; and

b)    ends at the earlier of:

i)              the CGT event; and

ii)             if the relevant business ceased to be carried on in the 12 months before that time or any longer period that the Commissioner allows - 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.

Nature of asset

For a CGT asset of a business to be an active asset for the purposes of Division 152 of the ITAA 1997 it must firstly satisfy one of the 'positive tests' in subsection 152-40(1) of the ITAA 1997 and then also not be excluded by one of the exceptions in subsection 152-40(4) of the ITAA 1997.

Under paragraph 152-40(1)(a) of the ITAA 1997 a CGT asset is an active asset (subject to the exclusions) if it is owned and used, or held ready for use, in the course of carrying on a business.

However, paragraph 152-40(4)(e) of the ITAA 1997 provides that an asset whose main use in the course of carrying on the business is to derive rent cannot be an active asset (unless that main use was only temporary). That is, even if the asset is used in a business it will not be an active asset if its main use is to derive rent.

In TD 2006/78 (Income tax: capital gains: are there any circumstances in which the premises used in a business of providing accommodation for reward may satisfy the active asset test in section 152-35 of the Income Tax Assessment Act 1997 notwithstanding the exclusion in paragraph 152-40(4)(e) of the Income Tax Assessment Act 1997 for assets whose main use is to derive rent?) the Commissioner explains the circumstances in which it is considered that the asset's main use is to derive rent.

The term 'rent' has been described as follows:

•        the amount payable by a tenant to a landlord for the use of the leased premises (C.H. Bailey Ltd v. Memorial Enterprises Ltd [1974] 1 All ER 1003 at 1010, United Scientific Holdings Ltd v. Burnley Borough Council [1977] 2 All ER 62 at 76, 86, 93, 99);

•        a tenant's periodical payment to an owner or landlord for the use of land or premises (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne); and

•        recompense paid by the tenant to the landlord for the exclusive possession of corporeal hereditaments. ....... The modern conception of rent is a payment which a tenant is bound by contract to make to his landlord for the use of the property let (Halsbury's Laws of England 4th Edition Reissue, Butterworths, London 1994, Vol 27(1) 'Landlord and Tenant', paragraph 212).

Whether an asset's main use is to derive rent will depend on the particular circumstances of each case.

A key factor therefore in determining whether an occupant of premises is a lessee is whether the occupier has a right to exclusive possession (Radaich v. Smith (1959) 101 CLR 209; Tingari Village North Pty Ltd v. Commissioner of Taxation [2010] AATA 233 at paragraphs 44-46, 2010 ATC 10-131, 78 ATR 693). Where premises are leased to a tenant under a lease agreement granting exclusive possession, the payments involved are likely to be rent and the premises not an active asset. On the other hand, if the arrangement allows the person only to enter and use the premises for certain purposes and does not amount to a lease granting exclusive possession, the payments involved are unlikely to be rent.

Relevant factors to consider (in addition to whether the occupier has a right to exclusive possession) include the degree of control retained by the owner and the extent of any services provided by the owner (Allen v. Aller (1966) 1 NSWR 572), Appah v. Parncliffe Investments Ltd [1964] 1 All ER 838 and Marchant v. Charters [1977] 3 All ER 918).

Relevantly, the Commissioner explains that a boarding house and holiday apartments are not excluded by paragraph 152-40(4)(e) of the ITAA 1997 and is therefore an active asset in the following circumstances

Example 3: boarding house

8. David owns an 8 bedroom property which he operates as a boarding house. He resides on the premises. Boarders enter into arrangements to occupy single rooms with the average length of stay being 4-6 weeks. No notice is required to quit the rooms. There are rules requiring visitors to leave the premises by a certain time and David retains the right to enter the rooms. David pays for all utilities (gas, electricity, water) and provides the following services and facilities to boarders:

•                     room cleaning and general maintenance;

•                     linen and towels; and

•                     common areas such as a TV/lounge room, kitchen, bathrooms, laundry and a recreation area.

9. In this example, the services and facilities provided to boarders are relatively significant and the average length of stay is relatively short. David retains a significant degree of control over the premises through being on the premises most of the time. The arrangements entered into indicate that those staying in the boarding house do not have the right to exclusive possession of a room but rather only a right to occupy the room.

10. These circumstances indicate that the relationship between David and those staying at the boarding house is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent' and therefore the paragraph 152-40(4)(e) exclusion does not apply. If David's activities amount to the carrying on of a business, the boarding house will be an active asset under section 152-40 of the ITAA 1997.

Example 4: holiday apartments

11. Linda owns a complex of 6 holiday apartments. The apartments are advertised collectively as a motel and are booked for periods ranging from 1 night to 1 month. The majority of bookings are from 1 to 7 nights.

12. Linda is responsible for bookings, checking guests in and out and cleaning the apartments. She also provides clean linen and meal facilities to guests. Linda does not enter into any lease agreements with guests staying at the apartments.

13. In this example, the apartments are operated similar to a motel. The guests do not have exclusive possession of the apartment they are staying in but rather only a right to occupy the apartment on certain conditions. The usual length of stay by guests is very short term and room cleaning, linen and meals are also provided to guests.

14. These facts indicate that the relationship between Linda and the guests is not that of landlord/tenant under a lease agreement. Accordingly, the income derived is not 'rent'. If Linda's activities amount to the carrying on of a business, the paragraph 152-40(4)(e) of the ITAA 1997 exclusion would not apply and the apartments would be active assets under section 152-40 of the ITAA 1997.

Connected with

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

a)    either entity controls the other entity, or

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

Control may be direct or indirect.

Relevantly, an entity will control another entity where the first entity or its affiliates, or the first entity and its affiliates between them, beneficially own, or have the right to acquire the beneficial ownership of, interests in the other entity that between them give the right to receive at least 40% of any distribution of either, paragraph 328-125(2)(a) of the ITAA 1997:

(a) income;

(b) the net income of the partnership (if the other entity is a partnership); or

(c) capital.

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(1)(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 define '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 March 2024) defines 'retirement' to mean 'removal or retiring from service, office, or business, especially in reaching the end of one's working life'.

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 be a question of fact and degree.

In Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 (Pozzolanic), the court observed 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.

In Claremont Petroleum NL v Cummings (1992) 110 ALR 239 (Claremont), the court, in considering whether payments made were in connection with the retirement of certain individuals, made the following observations regarding 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 was 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 involved 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.

o        The sale of the Property will result in a capital gain for the purpose of CGT event E2. The conditions in paragraphs 152-10(1)(a) and 152-10(1)(b) of the ITAA 1997 are satisfied.

It is noted that in this case, that CGT event E2 would happen to the transfer of the Property - it is unlikely that the beneficiaries of the discretionary trust would be absolutely entitled to the Property as against the trustee. CGT event E2 is the more specific event if an asset is transferred to a trust of which the transferor or an associate is a beneficiary or object

o        The Property is a passively held asset used in a business you carry on as a partner for the purposes of section 152-10(1B) of the ITAA 1997. The condition in subparagraph 152-10(1)(c)(iv) of the ITAA 1997 is satisfied.

Individual A and Individual B are partners in the Partnership in the income year in which the CGT event happens, and they do not carry on any other business during the relevant income year.

The Partnership is a small business entity for the purposes of section 152-10(1AA) of the ITAA 1997 for the relevant income years. The Partnership will be carrying on a business for the purposes of section 328-110 of the ITAA 1997 for the income year in which the CGT event happens.

The arrangements entered into with the occupants of the Property indicate that the occupants do not have the right to exclusive possession of the rooms, but rather only the right to enter and use the rooms for certain purposes for a relatively short period. This right is unassignable. There is also no indication of any intention to grant a lease. Other services are provided to the occupants of the boarding house. In the circumstances it is considered that a tenant/landlord relationship does not exist between the parties and therefore the amounts received are not rent. Accordingly, the Partners are considered to be carrying on a business in partnership. The Property is used in the course of the Partnership's business of providing boarding for purposes of subsection 152-40(1) of the ITAA 1997.

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

The Partnership is connected with both Individual A and Individual B. Relevantly, they both control the Partnership as each holds an interest in the Partnership that gives each the right to receive 50% of any distribution of the net income of the Partnership for the purposes of paragraph 328-125(2)(a) of the ITAA 1997.

Having regard to the activities and the purpose of profit, the Partnership is considered to be carrying on a business for the purposes of section 328-110 of the ITAA 1997 (refer to the discussion above).

•        Individual A and Individual B have continuously owned the CGT asset (i.e. the Property) for the 15-year period ending just before the CGT event - i.e. from the acquisition of the Property in XXXX to the proposed transfer of the Property to a discretionary trust during the XXXX income year.

•        Individual A and Individual B will be both over 55 years of age at the time of the CGT event and will work reduced hours following the transfer of the Property to the discretionary trust.

As such, the Commissioner is satisfied that in these circumstances the transfer 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 section 152-105 of the ITAA 1997 will be satisfied, the capital gain from the transfer of the Property to the discretionary trust can be disregarded under Subdivision 152-B with respect to Individual A and Individual B's interests in the Property.