Edited version of private advice

Authorisation Number: 1052246884980

Date of advice: 6 May 2024

Ruling

Subject: CGT - small business concessions

Question 1

Does A and B meet the conditions in subparagraph 152-105(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997) with respect to the disposal of the CGT asset of the property A on the XX of XXXX 2023?

Answer

Yes.

Question 2

Does A and B meet the conditions in subparagraph 152-105(d)(i) of the ITAA 1997 with respect to the proposed disposal of the CGT assets of the Property B and Property C which are to be transferred to their child and spouse before 30 June 2024?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 2023

Income year ending 30 June 2024

Relevant facts and circumstances

A and B are partners in a partnership with a Trust (the Partnership). The Trust is a discretionary trust, and A and B are the directors and shareholders of the Trustee of the Trust.

The Partnership commenced on XX month 20XX. Prior to this date A and B traded as a partnership. A and B commenced their XXX business in month 19XX. A and B are over 55 years old.

A and B owned, and continued to own, the multiple rural properties in XXXXX and XXXXX,

•         Property A located at XXXXXXXXXX (purchased XXXXXX 19XX). This was the A and B home property where they lived until it was sold on the XX XXXX 20XX.

•         Property Blocated at XXXXXX (purchased XXXX 20XX).

•         Property D located at XXXXXXX (purchased XXXX 20XX).

•         Property Clocated at XXXXXXX (purchased XXXX 20XX).

•         Property E located at XXXXXX (purchased XXXX 20XX).

•         Property F located at XXXXXX (purchased XXXX 20XX).

The Partnership uses the above properties to carry on its business. The Partnership employs arms-length employees in the business. A and B's children also help in the business.

Property A is a property of XX hectares (XXXX acres) and was used in the business. A and B mainly managed this property and did all the work; entailing 15 days (or approximately XXX hours) per month.

Property B and Property C are neighbouring properties. A and B's child (Child 1), and Child 1's Spouse, live on Property B. They help with work on the property and also have their own business. They have had their own stock since before Property B was purchased, and then relocated their business to Property B in 20XX.

Both the Partnership and Child 1 keep their stock on the properties Property B and Property C, and each business has their own brand. The Partnership runs one set of books for all the businesses across the properties.

A and B's child (Child 2), lives on Property E. Child 2 helps on the property and has their own business.

A and B also manage and work on the other properties:

•         They would visit Property F approximately four to six days per month to check stock and conditions.

•         They manage and oversee their stock at the properties Property B and Property C, spending two days a month checking in on the properties, while Child 1 and Spouse, and other employees do most of the day to day work on the properties.

•         They also manage and oversee the Property E and Property D, spending two days a month checking in on the properties, while Child 2, and other employees do most of the day to day work on the properties.

In total A and B would work on the properties for approximately 25 days per month. A and B communicate daily with their Child 1, Child 2, and employees regarding the business operations. They manage the overall Partnership business and are responsible for all decision making, and all the financial record keeping and management for the Partnership.

On XX XXXX 20XX A and B sold Property A as part of their retirement plan. Property A was approximately an hour drive from the nearest town. A and B purchased a house in town as their principle place of residence. After the sale of Property A there was a significant reduction in hours (approximately XX days per month) and a significant change in A and B's present activities in connection with the retirement plan.

A and B are planning to do the following transfers as part of the retirement plans:

•         Transfer the ownership of Property B and Property C (and associated stock) to Child 1 and spouse before 30 June 20XX.

•         Transfer the ownership of Property E and associated stock to Child 2.

•         Transfer the remaining properties and associated livestock to Child 2 and Child 1 (and Spouse).

Once the transfers are complete A and B plan to retire permanently. The expected time frame is 4 to 7 years.

Assumption

The Partnership's aggregated turnover, as defined in section 328-115 of the ITAA 1997, is under $X million as at 30 June 2023.

Relevant legislative provision

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 subparagraph 152-105(d)(i)

Does Part IVA apply to this private ruling?

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

Reasons for decisions

All subsequent legislative references are to the ITAA 1997.

Summary

The CGT event relating to the disposal of Property A, and the Properties B and C, was and will be in connection with the retirement of A and B for the purposes of subparagraph 152-105(d)(i).

Detailed reasoning

Subdivision 152-B 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.

Section 152-105 relevantly states:

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;

Note: Section 152-115 allows for continuation of the period if there is an involuntary disposal of the asset.

(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 connection with your retirement

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

The Macquarie Dictionary (Macmillan Publishers Australia, The Macquarie Dictionary online) defines 'retirement' to mean 'removal or retiring from service, office, or business, especially in reaching the end of one's working life'. Paragraph 1.68 of the Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999 outlines the following about the requirement to be permanently incapacitated or retiring:

One of the requirements of this concession for an individual small business taxpayer is that they must be either permanent incapacitated at the time of the CGT event, or at least 55 years old and using the capital proceeds for their retirement.

The legislation also does 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.

The ATO provides further guidance (QC27963) stating that a CGT event is in connection with an individual's retirement will depend on the "particular circumstances of each case. There would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities to be regarded as a retirement. However, it is not necessary for there to be a permanent and everlasting retirement from the workforce." The guide also provides that "a CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement."

Example 36 in the guide contrasts two scenarios to illustrate what is meant by 'retirement':

A small business operator and spouse are both pharmacists, are both over 55 years old and carry on business through two pharmacies. They sell one (and make a capital gain) and, accordingly reduce their working hours from 60 hours a week each to 45 and 35 hours a week respectively. There has been some change to their present activities in terms of hours worked and location - but there has not been a significant reduction in the number of hours worked or a significant change in the nature of their activities; therefore, there has been no 'retirement'.

If, on the other hand, one spouse reduced their hours to nil (stopped working), there would be a significant reduction in the number of hours that spouse was engaged in the business activities. Therefore the sale would be in connection with the retirement of that spouse.

The above guidance indicates that whether the proposed sale and transfer of your ownership interest in the relevant properties is 'in connection with your retirement' will depend at least in part on whether there will be a significant reduction in the number of hours worked by you or a significant change in the nature of your present business activities.

Application to your circumstances

A and B are over 55 years old, satisfying the first element of subparagraph 152-105(d)(i).

A and B sold Property A as part of their retirement plans. The sale of Property A resulted in a significant reduction of in the number of hours A and B worked in the current business. Once Property B and Property C and the stock is transferred to Child 1 and Spouse before 30 June 2024 this too will be seen as a step in the plan leading to their retirement.

As such, the Commissioner is satisfied that in these circumstances the sale of Property A and the transfer of Property B and Property C to Child 1 and Spouse by A and B would be in connection with their retirement for the purpose of subparagraph 152-105(d)(i).