CGT small business concessions - retirement exemption - requirement to make ETP requires termination of employment

Can the taxpayer, a private company, make an eligible termination payment (ETP) under subsection 152-325(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to its CGT concession stakeholders, without them terminating any employment with the company?

No. A private company cannot make an ETP under subsection 152-325(1) of the ITAA 1997 in relation to its CGT concession stakeholders without them terminating any employment with the company. To qualify as an ETP, the payment must be in consequence of the termination of an employment with the company.

The taxpayer, a private company, sold part of a business which was acquired after 20 September 1985. A capital gain arose on the sale of a CGT asset of the business.

The taxpayer is controlled by two individuals, both of whom are directors and employees of the company. The individuals are both also CGT concession stakeholders of the company.

The taxpayer has continued to carry on the business after the sale of the CGT asset

and the two individuals have continued as employees and directors of the company.

The taxpayer satisfies the maximum net asset value test.

A company or trust can choose to disregard all or part of a capital gain under the small business retirement exemption if, among other things, the conditions set out in subsection 152-325(1) of ITAA 1997 are satisfied. This provision requires a company or trust to make an ETP in relation to each of its CGT concession stakeholders, each time it receives an amount of capital proceeds from a CGT event for which it has chosen the retirement exemption.

An ETP in relation to a person means (subject to certain exceptions) any payment made in respect of the person in consequence of the termination of any employment of the person (paragraph (a) of the ETP definition in subsection 27A(1) of the Income Tax Assessment Act 1936 (the ITAA 1936)). 'Employment' includes the holding of an office (subsection 27A(1)).

Accordingly, to qualify as an ETP there must be a termination of an employment by the person. As 'employment' includes the holding of an office, this requirement will be satisfied if the person resigns/retires in a bona fide manner either as an employee or as a director.

In the taxpayer's situation, the CGT concession stakeholders are continuing in both their employee and director capacities after the sale of the CGT asset. There is no termination of either capacity and, in these circumstances, any payment made does not qualify as an ETP under subsection 27A(1) of the ITAA 1936. Accordingly, the requirement in subsection 152-325(1) of the ITAA 1997 to make an ETP in relation to each of the company's CGT concession stakeholders is not satisfied and the retirement exemption is not available.

Note: If a business is carried on by an individual there is no requirement for the individual to cease their business activities and retire in order to choose the retirement exemption. Rather, the amount an individual chooses for the retirement exemption is taken to be an ETP under subsection 152-310(2) of the ITAA 1997 and paragraph (jaa) of the definition of ETP in subsection 27A(1) of the ITAA 1936.