Edited version of private advice

Authorisation Number: 5010100337440

Date of advice: 7 May 2024

Ruling

Subject: CGT - small business 15 year exemption

Question 1

Is the CGT event that will happen for the A Unit Trust be deemed to be in connection with the retirement of B and C thereby satisfying the requirements in subparagraph 152-110(1)(d)(i) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the CGT event that will happen for B be deemed to be in connection with their retirement thereby satisfying the requirements in subparagraph 152-105(d)(i) of the ITAA 1997?

Answer

Yes.

Question 3

Is the CGT event for that will happen for C be deemed to be in connection with their retirement thereby satisfying the requirements in subparagraph 152-105(d)(i) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following period:

1 July XXXX to 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

B and their spouse C are partners operating a business (the Partnership).

B and C are both over the age of 55 years.

B and C currently own X hectares of land in their individual joint names which was acquired on X/XX/XXXX. This land is currently used in the Partnership business carried on by them.

B and C also own 50% each of the units in the A Unit Trust (Unit Trust). The Unit Trust currently owns X hectares of land which was acquired on XX/XX/XXXX. This land is currently used in the Partnership business carried on by B and C.

The main business of the Partnership is X.

The Partnership has an aggregated annual turnover under $2 million.

The Unit Trust, the Partnership, B and C each affirm that they do not have any connected entities under sections 328-125 and 328-130 of the ITAA 1997.

As part of B and C's retirement, it is planned for the Unit Trust to dispose of the X hectares it owns to B and C as part of the vesting of the trust. B and C will own this property in their own names and use W hectares of this property. The remaining D hectares will be leased to Y's business operated by their trust.

The Partnership will sell the P hectares it owns for $X to a trust owned and controlled by Y and Z. The sale price is not at market value of the property, i.e., the parties will not be dealing with each other at arm's length and represents the amount payable by Y and Z.

B and C wish to contribute the $X land sale proceeds into their superannuation fund (using the 15-year exemption under Subdivision 152-B of the ITAA 1997) to provide for their retirement.

As part of their retirement after the proposed land sale and transfer, B and C work hours will reduce substantially from M to N hours per week. The J enterprise of the Partnership business will cease and the number of stock the Partnership will own/operate will reduce from K to approximately N. The land on which the Partnership's business will operate will also reduce from X hectares to D.

Currently the Partnership has X employees and no contractors in the running of its business. After the proposed sale/transfer, the Partnership will employ no employees due to the significant reduction in workload and labour requirements. Contractors will be hired as required in relation to the Partnership business.

After the proposed sale/transfer, the estimated turnover of the Partnership business will reduce to approximately $X to $P per year.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 152-10(1)(a)

Income Tax Assessment Act 1997 subsection 152-10(1B)

Income Tax Assessment Act 1997 section 152-35

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 Subdivision 152-B

Income Tax Assessment Act 1997 section 152-105

Income Tax Assessment Act 1997 paragraph 152-105(a)

Income Tax Assessment Act 1997 paragraph 152-105(b)

Income Tax Assessment Act 1997 paragraph 152-105(c)

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

Income Tax Assessment Act 1997 section 152-110

Income Tax Assessment Act 1997 subsection 152-110(1)

Income Tax Assessment Act 1997 paragraph 152-110(1)(a)

Income Tax Assessment Act 1997 paragraph 152-110(1)(b)

Income Tax Assessment Act 1997 paragraph 152-110(1)(c)

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

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

Income Tax Assessment Act 1997 section 328-125

Income Tax Assessment Act 1997 section 352-130

Reasons for decision

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

Question 1

Is the CGT event that will happen for the A Unit Trust be deemed to be in connection with the retirement of B and C thereby satisfying the requirements in subparagraph 152-110(1)(d)(i)?

Summary

The CGT event that will happen for the A Unit Trust is considered to be in connection with the retirement of B and C, thereby satisfying the requirements in subparagraph 152-110(1)(d)(i).

Detailed reasoning

Subsection 152-110(1) states:

An entity that is a company or trust 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) the entity 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 asse

(c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual) during which the entity owned the CGT asset;

(d) an individual who was a significant individual of the company or trust just before the CGT event either:

(i) was 55 or over at that time and the event happened in connection with the individuals retirement; or

(ii) was permanently incapacitated at that time

The A Unit Trust will satisfy the basic conditions in paragraph 152-10(1)(a) as:

(a)          CGT event A1 will happen when the A Unit Trust transfers its land to B and C

(b)          the event will result in a capital gain being made

(c)           a connected entity (i.e., the Partnership) is a small business entity

(d)          the relevant CGT asset being the land the A Unit Trust owns, is inherently used by its connected entity (the Partnership) in the course of carrying on its business. As the A Unit Trust has owned the land for more than 20 years, the land will satisfy the active asset test in section 152-35.

With the A Unit Trust owning the land for more than 15 years, it will satisfy the second condition in paragraph 152-110(1)(b).

To satisfy the third condition in paragraph 152-110(1)(c) requires the X Unit Trust to have a significant individual for a total of at least 15 years.

Section 152-55 states:

An individual is a significant individual in a company or trust at a time if, at that time, the individual has a small business participation percentage in the company or trust of at least 20%.

Both B and C will qualify as significant individuals of the Unit Trust as each of them own 50% of the units in the Unit Trust. Therefore, the third condition in paragraph 152-110(1)(c) is satisfied.

The fourth condition in paragraph 152-110(1)(d) requires the individual to be either 55 or over at the time of the CGT event and the event happened in connection with the individual's retirement. This condition is met as both B and C are over 55 and the CGT event is in connection with their retirement.

Therefore, the A Unit Trust will satisfy all the conditions in subsection 152-110(1) and can disregard the capital gain it will make on the disposal of the land to B and C.

Question 2

Is the CGT event that will happen for B be deemed to be in connection with their retirement thereby satisfying the requirements in subparagraph 152-105(d)(i)?

Summary

The CGT event that will happen to B is considered to be in connection with their retirement, thereby satisfying the requirements in subparagraph 152-105(d)(i).

Detailed reasoning

Section 152-105 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 that 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.

B will satisfy the basic conditions in paragraph 152-105(a) as:

(a)          CGT event A1 will happen when B sells their share in the X hectares of land

(b)          the event will result in a capital gain being made

(c)           B is a partner in a partnership which is a small business entity and which satisfies the conditions in subsection 152-10(1B)

(d)          the relevant CGT asset being the land, is used by the Partnership in the course of carrying on its business. As B has owned the land for more than X years, the land will satisfy the active asset test in section 152-35.

With B owning the land for more than 15 years, they will satisfy the second condition in paragraph

152-105(b).

The third condition in paragraph 152-105(c) is not applicable, as the CGT asset is not a share in a company or an interest in a trust.

The fourth condition in subparagraph 152-105(d)(i) requires B to be 55 or over at the time of the CGT event, and for the event to happen in connection with theirretirement.

As B is over 55 years of age, the first element of subparagraph 152-105(d)(i) is met.

Whether a CGT event happens in connection with an individual's retirement depends 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 isn't necessary for there to be a permanent and everlasting retirement from the workforce.

After the proposed sale of land, B has stated that their hours of work in the Partnership business will reduce substantially from G to H hours per week. The Partnership business will also reduce the number of stock it owns from the current X to approximately Y and the land used will reduce from X hectares to K. The estimated turnover of the Partnership business will also reduce from the current $X to $C to approximately $X to $M. The Partnership will also cease its X business after the proposed sale and have no employees.

Based on the above, B will meet the second element of the requirements in subparagraph 152-105(d)(i).

Question 3

Is the CGT event that will happen for C be deemed to be in connection with their retirement thereby satisfying the requirements in subparagraph 152-105(d)(i)?

Summary

The CGT event that will happen for C is considered to be in connection with their retirement, thereby satisfying the requirements in subparagraph 152-105(d)(i).

Detailed reasoning

Section 152-105 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 that 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.

C will satisfy the basic conditions in paragraph 152-105(a) as:

(a)          CGT event A1 will happen when C sells their share in the X hectares of land

(b)          the event will result in a capital gain being made

(c)           C is a partner in a partnership which is a small business entity and which satisfies the conditions in subsection 152-10(1B)

(d)          the relevant CGT asset being the land, is used by the Partnership in the course of carrying on its business. As C has owned the land for more than X years, the land will satisfy the active asset test in section 152-35.

With C owning the land for more than 15 years, they will satisfy the second condition in paragraph

152-105(b).

The third condition in paragraph 152-105(c) is not applicable, as the CGT asset is not a share in a company or an interest in a trust.

The fourth condition in subparagraph 152-105(d)(i) requires C to be 55 or over at the time of the CGT event, and for the event to happens in connection with their retirement.

As C is over 55 years of age, the first element of subparagraph 152-105(d)(i) is met.

Whether a CGT event happens in connection with an individual's retirement depends 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 isn't necessary for there to be a permanent and everlasting retirement from the workforce.

After the proposed sale of land, C has stated that their hours of work in the Partnership business will substantially reduce from G to H hours per week. The Partnership business will also reduce the number of stock it owns from the current X to approximately M and the land used will reduce from X hectares to N. The estimated turnover of the Partnership business will also reduce from the current $X to $P to approximately $C to $D. The Partnership will also cease its X business after the proposed sale and have no employees.

Based on the above, C will meet the second element of the requirements in subparagraph 152-105(d)(i).