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Guide to capital gains tax concessions for small business 2007-08
Guide to capital gains tax concessions for small business 2007-08
This guide provides general information about the capital gains tax (CGT) concessions available for small business and is current for the 2007-08 income year.
For CGT events which occurred in the 2006-07 income year refer to the previous edition of the Guide to capital gains tax concessions for small business (NAT 8384).
The concessions may apply to CGT events happening after 11.45am, by legal time in the Australian Capital Territory, on 21 September 1999.
When we refer to 'you' or 'your business' in this guide, we are referring to you as an individual (such as a sole trader), a partner in a partnership, a company or a trust that conducts a small business.
The guide assumes you have a basic understanding of how the CGT system works. It deals with the special CGT concessions available to you as a small business, not with your personal CGT obligations.
 More information
What is capital gains tax?
Capital gains tax (CGT) is the tax you pay on any capital gain you make that you include in your annual income tax return.
There is no separate tax on capital gains - rather, it is a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.
Your net capital gain is the difference between your total capital gains for the year and your total capital losses (from your business and other assets), less any relevant CGT discount or concessions. Any net capital gain you make for an income year must be included in your assessable income.
CGT events
A capital gain or capital loss is made when certain events or transactions (called CGT events) happen. Most CGT events involve a CGT asset.
Some CGT events, such as the disposal of a CGT asset, happen often and affect many different taxpayers. Other CGT events are rare and affect only a few taxpayers - for example, events concerned directly with capital receipts and not involving a CGT asset.
CGT assets
The most common CGT assets are land and buildings, shares in a company or units in a unit trust.
Less well-known CGT assets include contractual rights, options, foreign currency, leases, licences and goodwill.
Capital gains and losses
In general, you make a capital gain if you receive an amount from a CGT event (such as the sale of a CGT asset) that is more than your total costs associated with that event.
You make a capital loss if you receive an amount from a CGT event that is less than the total costs associated with that event.
In some cases, you are taken to have received the market value of the CGT asset even if you received a different amount or nothing at all. This may be the case, for example, when you give an asset away.
You can use a capital loss only to reduce a capital gain - not to reduce other income. You can generally carry forward any unused capital losses to a later income year and apply them against capital gains in that year.
Generally, you can disregard any capital gain or loss made on an asset you acquired before 20 September 1985.
Depreciating assets
There are special rules that apply to depreciating assets. A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Plant and equipment used in your business are examples of depreciating assets.
You make a capital gain or capital loss from a depreciating asset only to the extent you have used the depreciating asset for a non-taxable purpose (for example, for private purposes).
What CGT records do you need to keep?
You must keep records of everything that may be relevant to working out whether you have made a capital gain or capital loss from an asset.
This means you need records to substantiate the purchase and disposal of any asset, as well as other costs relating to the asset. Records can include contracts, valuations, and details of commissions and legal fees paid.
The records must:
- show the nature of the act, transaction, event or circumstance, and the date it happened
- be in English, or in a form that can be readily translated into English, and
- be kept for five years after you sell or otherwise dispose of an asset, unless you keep a CGT asset register (see below).
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It pays to keep good records
If you don't keep proper CGT records you may:
- incur extra expense in establishing the cost of an asset when you come to dispose of it, and
- have to pay more tax.
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CGT asset register
You may find that a simpler way to keep records of assets is to keep a CGT asset register. This is a register of information about your CGT assets that you've transferred from your CGT records (for example, invoices, receipts and contracts).
For most assets this information includes:
- the date the asset was acquired
- the cost of the asset
- a description, amount and date for each cost associated with purchasing the asset (for example, stamp duty and legal fees)
- the date the asset was disposed of
- the amount received on disposal of the asset, and
- any other information relevant to calculating your CGT obligation.
You can discard your CGT records five years after having an asset register entry certified if:
- you enter all the necessary information about an asset in your CGT asset register
- the entry is in English and is certified in writing by an approved person (for example, a registered tax agent), and
- the asset register entry is certified after 31 December 1997 (although the asset itself may have been acquired before this date).
If you don't keep an asset register, you generally have to keep CGT records for at least five years after you dispose of an asset. For example, if you hold an asset for 10 years and then sell it, you'd have to keep the records for 15 years.
Example: CGT asset register
Ethan is 25 and bought a business property on 1 January 1998.
His tax agent advised him to transfer the relevant CGT information from his records (for example, date he purchased the property, purchase price, stamp duty and legal expenses) to an asset register. Ethan did this and his agent certified the register on 1 July 1998.
Ethan sold the property on 15 September 2003.
Because Ethan had recorded the details of the property on an asset register, he had to keep records relating to the property only until 1 July 2003, rather than 15 September 2008.
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What CGT concessions are available for small business?
Overview of the CGT concessions for small business
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The government announced in the 2008-09 Budget that it will increase access to the small business capital gains tax (CGT) concessions for businesses with turnover less than $2 million via the small business entity test, for
- taxpayers owning a CGT asset used in a business by a related entity, and
- partners owning a CGT asset used in the partnership business.
The changes will apply with effect from the 2007-08 income year. At the time of publication of this guide, legislation to give effect to these changes had not been enacted. Access to the concessions as a result of these changes will not be available until the legislation is enacted.
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As part of the government's broader superannuation changes, certain consequential amendments have also been made to the retirement exemption by the Superannuation Legislation Amendment (Simplification) Act 2007 which apply to the 2007-08 or later income years.
The effect of these changes on the retirement exemption mean that a payment made under the retirement exemption is no longer an eligible termination payment (ETP) or taken to be an ETP, and there is no requirement to report the payment for reasonable benefit limit (RBL) purposes. ETPs and RBLs were abolished from 1 July 2007.
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The government introduced changes to the law in the Tax Laws Amendment (Small Business) Act 2007 (80 of 2007) which has made it easier for small business to claim tax concessions from 1 July 2007.
Small businesses with turnover less than $2 million a year are eligible to claim a range of tax concessions. This includes the capital gains tax concessions for small business.
The changes also mean that businesses with a turnover of $2 million or more can access the capital gains tax concessions for small business as long as they satisfy the net asset test. The threshold for this test has increased to $6 million. These businesses must, however, satisfy certain conditions.
These changes apply to CGT events in the 2007-2008 income year and beyond and are incorporated into this guide.
For more information about eligibility and the concessions available to small business entities, visit www.ato.gov.au/SBconcessions.
For more information about how the changes specifically affect the CGT concessions, see Changes to the capital gains tax concessions for small business 2007-08.
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If you made a capital gain from a CGT event (such as the disposal of a CGT asset) that happened after 11.45am on 21 September 1999, you may be able to reduce the capital gain using:
- the CGT discount, and/or
- one or more of the four CGT concessions available for small business.
CGT discount
- You may be eligible to use the CGT discount to calculate your capital gain if you owned the asset involved for at least 12 months.
The CGT discount isn't limited to capital gains from business assets.
The discount allows individuals (including partners in partnerships) and trusts to reduce their capital gain by 50%. There are more rules for beneficiaries who are entitled to a share of a trust capital gain. The discount for complying superannuation funds is 33 1/3 per cent. Companies can't use the CGT discount.
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When to apply the CGT discount
You apply the CGT discount after offsetting your capital losses against your capital gains, but before applying the small business CGT concessions (apart from the small business 15-year exemption).
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Small business CGT concessions
The following four CGT concessions are available only for small business.
- The small business 15-year exemption provides a total exemption for a capital gain on a CGT asset if you have continuously owned the asset for at least 15 years and the relevant individual is 55 or over and retiring, or is permanently incapacitated.
- The small business 50% active asset reduction provides a 50% reduction of a capital gain.
- The small business retirement exemption provides an exemption for capital gains up to a lifetime limit of $500,000. If the individual is under 55 just before they make the choice, the amount must be paid into a superannuation (or similar) fund.
- The small business rollover allows you to defer all or part of a capital gain on a business asset for a minimum of two years. If you acquire a replacement asset or make a capital improvement to an existing asset within the period allowed, the gain is deferred until the replacement or improved asset is disposed of or its use changes in particular ways. In this case, the deferred capital gain is in addition to any capital gain made when the replacement or improved asset is disposed of.
How the CGT concessions work
To be eligible for any of the concessions, you must first satisfy several basic conditions, which are outlined in step 1.
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Note:
- more than one of the four concessions may apply to the same capital gain if the conditions for each are satisfied
- they may apply in addition to the CGT discount if it also applies
- if the small business 15-year exemption applies, you can disregard the entire capital gain and, therefore, don't need to apply any further concessions
- with the exception of the small business 15-year exemption, you apply the small business concessions after reducing any capital gains by all available capital losses
- if you have more than one capital gain, you can choose the order in which to reduce capital gains by capital losses, and
- the small business CGT concessions don't apply to gains from depreciating assets.
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The flowchart below shows the order in which you apply capital losses and the CGT concessions to each capital gain.
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You don't necessarily have to go through each step. For example, if you qualify for the small business 15-year exemption, you can disregard the entire capital gain and, therefore, don't need to complete the remaining steps.
Also, you can choose not to apply the 50% active asset reduction and go straight to the small business retirement exemption or rollover.
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Throughout this guide we use the example of Lana, a sole trader, to illustrate how losses and the CGT concessions can be applied to a capital gain made by a small business.
Example: Lana - a sole trader
Lana operates a small manufacturing business as a sole trader. The net value of her CGT assets and those of certain other entities don't exceed $6 million.
Her husband Max carries on his own florist business, which is unrelated to Lana's manufacturing business. They regularly consult with each other in relation to their respective businesses and act in accordance with the other's directions or wishes in relation to their respective businesses.
Max owns the land and building from which Lana's manufacturing business is conducted and leases it to Lana.
Max owns 100% of the shares in Maxaco Pty Ltd, and Lana has no involvement in this company.
Lana has also owned a small parcel of nearby land for three years and has used it in her business for the last two years. She decides to sell the land and makes a capital gain of $17,000 when she disposes of it.
In the same year as Lana makes the $17,000 capital gain on the sale of the land, she also makes a capital loss of $3,000 from the sale of another asset.
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Flowchart
Step 1 Determine whether you satisfy the basic conditions for the small business CGT concessions
To qualify for any of the small business CGT concessions, you must first satisfy at least one of the following basic conditions:
In addition, the asset must satisfy the active asset test.
If the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied just before the CGT event:
In working out whether you are a small business entity, you need to consider whether you have any relevant entities.
What are relevant entities?
Relevant entities are:
- your affiliates, and
- any entities connected with you.
An individual or company is your affiliate if, in relation to their business affairs, they act or could reasonably be expected to act:
- in accordance with your directions or wishes, or
- in concert with you.
An entity is 'connected with' another entity if:
- either entity controls the other, or
- both entities are controlled by the same third entity.
Am I a small business entity?
You will be a small business entity if you are an individual, partnership, company or trust that:
- is carrying on a business, and
- has an aggregated turnover of less than $2 million.
Aggregated turnover is your annual turnover plus the annual turnovers of any businesses that are connected with you or that are your affiliates (these are known as relevant entities).
There are three alternative methods to work out whether you are a small business entity for the current year. However, most businesses will only need to consider the first method.
1. Previous year turnover
If your aggregated turnover for the previous income year was less than $2 million you are a small business entity.
2. Estimate your current year turnover
If you estimate that your aggregated turnover for the current year (worked out as at the first day of the income year) is likely to be less than $2 million, you will be a small business entity for the current year. However, you cannot estimate your current year turnover if your aggregated turnover for the two previous income years was $2 million or more.
3. Actual current year turnover
If you are unable to use the first two methods, you will need to calculate your aggregated turnover as at the end of the income year. If your actual aggregated turnover is less than $2 million, you will be a small business entity for that year.
Example: Lana - aggregated turnover
When Lana is calculating her aggregated turnover, she will include Max's turnover because Max is Lana's affiliate. She will also include the turnover of Maxaco, because she is connected to the company through her affiliate (Max).
Lana will not include any income from her transactions with Max or Maxaco.
When Max is calculating his aggregated turnover, he will include Lana's turnover because Lana is Max's affiliate. He will also include the turnover of Maxaco because he is connected with the company.
Max will not include any income from his transactions with Lana or Maxaco.
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The maximum net asset value test
To pass this test, the total net value of CGT assets must not exceed $6 million. You must add together the value of net assets for the following entities:
- you
- entities connected with you, or
- your affiliates, or entities connected with your affiliates.
The test must be met just before the CGT event that results in the capital gain.
The net value of the CGT assets of an entity is the total market value of its assets, less any liabilities relating to those assets. This value can be positive, negative or nil. The $6 million limit isn't indexed for inflation.
The maximum net asset value test allows the net asset value of an entity to be reduced by provisions for annual leave, long service leave, unearned income and tax liabilities.
If you are a partner in a partnership and the CGT event happens in relation to a CGT asset of the partnership (for example, disposal of a partnership asset), the maximum net asset value test only counts the assets of each relevant partner and not the assets of the partnership as a whole.
However, if you are connected with the partnership, you count all the partnership assets and you don't count the value of your interest in the partnership.
What assets are not included?
Do not include the following assets when calculating the net value of your CGT assets:
- shares, units or other interests (apart from debt) held in any entities connected with you or connected with your affiliates (because the net value of the CGT assets of connected entities has already been included)
- any assets of an affiliate or an entity connected with an affiliate unless they are used, or held ready for use, in a business carried on by you or by an entity connected directly with you (but do not include assets of an entity connected with you only through your affiliate)
- if you are an individual, assets that are solely for your personal use (or the personal use of your affiliates) or superannuation assets, and
- if you are an individual, your own home provided the home has never had any income producing use. If part of the home has been used to produce assessable income, you must make a reasonable apportionment having regard to the length of time and the percentage of income producing use. The percentage of private use is multiplied by the current market value and this amount is not included.
Example: calculating the net value of assets
The market value of Lana's CGT assets is:
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Land used in business
Business goodwill
Trading stock
Plant
Boat (used solely for personal use)
Home (used 50% for income producing activity with a market value of $600,000)
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$50,000
$200,000
$100,000
$50,000
$50,000
$600,000
$1,050,000
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Lana borrowed $20,000 to buy the boat.
Lana doesn't include the market value of her boat, or the liability relating to the boat, when calculating the net value of her CGT assets.
Lana includes 50% of the value of her home representing the income producing percentage
Therefore, the net value of her CGT assets is:
$1,050,000 - $350,000 = $700,000.
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Depreciating assets
Even though gains from depreciating assets may be treated as income (rather than a capital gain), depreciating assets are CGT assets and taken into account for the maximum net asset value test.
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Example: the maximum net asset value test
For the maximum net asset value test, Lana includes the market value of the land and building owned by her affiliate Max ($500,000), less any related liability ($400,000 mortgage). She does this because the land and building are used in her manufacturing business.
But she doesn't include Max's other assets used in his florist business because they aren't used in her manufacturing business. Nor does she include the assets of Maxaco because the assets are not used in her business and she is only connected to the company because of her affiliate (Max).
Accordingly, the net value of Max's CGT assets to be included is:
$500,000 - $400,000 = $100,000.
There are no other entities connected with Lana.
As the net value of Lana's CGT assets and those of her affiliates and connected entities doesn't exceed $6 million, she satisfies the maximum net asset value test.
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The active asset test
This test requires the CGT asset to be an active asset for:
- 7 1/2 years if owned for more than 15 years, or
- half of the test period if owned for 15 years or less.
In addition, the asset does not need to be an active asset just before the CGT event.
The test period begins when the asset is acquired and ends at the earlier of:
- the time of the CGT event, or
- when the business ceased (if that happened within 12 months of the event or if the Commissioner allows a longer time).
There are modified rules for CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or those relating to marriage breakdown.
A CGT asset is an active asset if it is owned by you and is:
- used or held ready for use in the course of carrying on a business by you, your affiliate, your spouse or child under 18 years, or an entity connected with you, or
- an intangible asset (for example, goodwill) inherently connected with a business carried on by you, your affiliate, your spouse or child under 18 years or a connected entity of yours.
In some circumstances, a share in a company or an interest in a trust can also be an active asset. However, certain CGT assets can't be active assets, even if they are used or held ready for use in the course of carrying on a business - for example, assets whose main use is to derive rent (unless the asset was rented to an affiliate or connected entity for use in their business).
Example: the active asset test
Lana has used the land in her business for at least half the period she owned it, that is, for two out of the three years she owned it.
Therefore, Lana satisfies the active asset test.
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Additional conditions if the CGT asset is a share in a company or an interest in a trust
One of these additional basic conditions must be satisfied just before the CGT event:
- the entity claiming the concession must be a CGT concession stakeholder in the company or trust, or
- the entity claiming the concession must pass the 90 per cent test.
CGT concession stakeholder
An individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust.
This participation percentage can be held directly or indirectly through one or more interposed entities. The percentages are worked out in the same way as for the significant individual test.
Significant individual test
An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. The 20% can be made up of direct and indirect percentages.
An entity's direct small business participation percentage in a company is the percentage of:
- voting power that the entity is entitled to exercise
- any dividend payment that the entity is entitled to receive, and
- any capital distribution that the entity is entitled to receive.
If an entity has different percentages in a company, their participation percentage is the smaller or smallest percentage. The same applies for a trust.
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The significant individual test is different from the control tests used to determine if an entity is 'connected with' another entity for the purposes of the $6 million maximum net asset value test or aggregated turnover test.
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Example: a significant individual
Lana has shares that entitle her to 30% of any dividends and capital distributions of Bean Co. The shares do not carry any voting rights.
Lana's direct small business participation percentage in Bean Co is zero percent because although she is entitled to 30% of dividends and capital distributions her percentage in the voting rights is zero and she must use the smallest percentage to calculate her small business participation percentage.
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An entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.
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An indirect interest can be held through one or more interposed entities.
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There are also rules about when an individual is a significant individual of a fixed trust (for example, unit trust) or a discretionary trust.
90 per cent test
This test only applies if there is an interposed entity between the CGT concession stakeholders and the company or trust in which the shares or interests are held.
The interposed entity satisfies the test if 90% of the participation percentages in that entity are held by CGT concessions stakeholders of the company or trust in which the shares or interests are held.
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As with the significant individual test, the participation percentage can be held directly or indirectly through multiple interposed entities.
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Step 2 Determine whether you qualify for the small business 15-year exemption
If you qualify for the small business 15-year exemption, you can disregard the capital gain entirely and don't need to apply any further concessions. There's no need to apply capital losses before you apply the 15-year exemption. This allows you to use these capital losses to offset other capital gains.
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Gains from depreciating assets
If the capital gain is from a depreciating asset, you can't use the 15-year exemption.
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Do you qualify?
You qualify for the small business 15-year exemption if:
- you satisfy the basic conditions for the small business CGT concessions (including the active asset test - in this case the asset must have been an active asset for at least 7 1/2 years during your period of ownership)
- you continuously owned the CGT asset for the 15-year period ending just before the CGT event, and
- where you are an individual in business, at the time of the CGT event you were 55 years or more and the event was connected with your retirement, or you were permanently incapacitated
- where you are an individual in business and the CGT asset is a share in a company or an interest in a trust, the company or trust had a significant individual for periods totalling at least 15 years during which the individual owned the shares or trust interests (not necessarily the same individual for the whole period), or
- where you are a company or trust, the company or trust had a significant individual for at least 15 of the years they owned the asset (not necessarily the same individual for the whole period). Further, at the time of the CGT event the significant individual must have been 55 years or more and the event must have been connected with their retirement, or they must have been permanently incapacitated.
For CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or those relating to marriage breakdown, there are modified rules about the requirement that the asset be continuously owned for at least 15 years.
Example: small business 15-year exemption
Lana doesn't qualify for the small business 15-year exemption as she has owned the land for only three years. However, she does have a capital loss and may qualify for the CGT discount and one or more of the other small business CGT concessions.
On the other hand, Lana's friends Ruth and Geoff do qualify for the exemption. They are partners in a partnership that conducts a farming business on land they purchased in 1986 and have owned continuously since that time. The net value of their CGT assets for the purpose of the maximum net asset value test is less than $6 million.
Ruth and Geoff decide to retire as they are both over 60 years of age. They sell the land (the major asset of the farming business) in 2003 for a total capital gain of $100,000.
As Ruth and Geoff qualify for the small business 15-year exemption in relation to the capital gain, they can disregard the entire gain. They don't need to apply any other concessions.
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Losses
If you make a capital loss from the CGT event, you can use the loss to reduce other capital gains.
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Step 3 Do you have any capital losses?
If you have any capital losses for the current year or losses carried forward from a previous year, you must use them to reduce the capital gain before applying any of the remaining concessions.
Example: capital losses
In the same year as Lana made the $17,000 capital gain on the sale of land, she also made a capital loss of $3,000 from the sale of another asset.
She must offset the loss against the gain before applying any of the remaining concessions, as follows:
$17,000 - $3,000 = $14,000
Lana may be able to reduce her capital gain further using the CGT discount and one or more of the other small business CGT concessions.
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Step 4 Determine whether you are eligible for the CGT discount
The CGT discount allows individuals (including partners in partnerships) and trusts to reduce their capital gain by 50%. Superannuation funds can reduce their gain by 33 ¹∕³ per cent. There are more rules for beneficiaries who are entitled to a share of a trust capital gain. Companies are not eligible for the CGT discount.
Note that the discount isn't limited to small business capital gains, but can also be applied to personal capital gains.
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Capital gains and depreciating assets
You make a capital gain from a depreciating asset only to the extent you have used the depreciating asset for a non-taxable purpose (for example, for private purposes). Such a gain may be eligible for the CGT discount.
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Are you eligible?
To be eligible for the CGT discount:
- you must be an individual, trust or complying superannuation fund, and
- you must have owned the asset involved for at least 12 months.
Certain CGT events, such as where new assets are created, don't qualify for the CGT discount because the 12-month rule wouldn't be satisfied.
If you are eligible for the CGT discount, reduce the capital gain by 50% (or
33 ¹∕³ per cent for complying superannuation funds)
Example: CGT discount
After offsetting her $3,000 capital losses against her $17,000 capital gain, Lana is left with a capital gain of $14,000. As she is eligible for the CGT discount, she can reduce the remaining capital gain by 50%, as follows:
$14,000 - (50% x $14,000) = $7,000
Lana may be able to reduce her capital gain further using one or more of the other small business CGT concessions.
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Step 5 Determine whether the capital gain is from a depreciating asset
You can make a capital gain or capital loss from the disposal of a depreciating asset only to the extent that you use the depreciating asset for a non-taxable purpose (for example, for private purposes).
If the capital gain is from a depreciating asset, you can't use any of the small business CGT concessions to reduce the gain any further. If it isn't from a depreciating asset, you may be able to reduce your capital gain further under the remaining small business CGT concessions.
Example: depreciating assets
The land that Lana disposed of was not a depreciating asset, so she can use the remaining small business CGT concessions to reduce her capital gain if she satisfies the relevant conditions.
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Step 6 Determine whether you qualify for the small business 50% active asset reduction
You can choose not to apply the 50% active asset reduction and go straight to the small business retirement exemption or rollover.
Do you qualify?
To qualify for the small business 50% active asset reduction on a capital gain, you need to satisfy only the basic conditions (see step 1).
This means that, if you satisfy the basic conditions, you can reduce the capital gain by 50% (after applying any current year capital losses and any unapplied net capital losses from a previous year).
If you are an individual or trust and both the CGT discount and the small business 50% active asset reduction apply, you reduce the capital gain by 50%, then 50% of the remainder - that is, a total of 75%.
Example: small business 50% active asset reduction
Lana qualifies for the small business 50% reduction because the basic conditions are satisfied. Therefore, she can reduce her capital gain by a further 50%, as follows:
$7,000 - (50% x $7,000) = $3,500
Lana may be able to reduce her capital gain further using the small business retirement exemption or the small business rollover.
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Step 7 Determine whether you qualify for the small business retirement exemption or rollover
You may choose the small business retirement exemption or the small business rollover for the remaining amount of capital gain if you satisfy the conditions. Alternatively, you may choose both concessions for different parts of the remaining capital gain.
Small business retirement exemption
The small business retirement exemption can be used to disregard all or part of a capital gain. You can choose to apply the retirement exemption to any amount of capital gain remaining after the other concessions have been applied or before any other concessions. The amount you choose to disregard is called the exempt amount.
Do you qualify?
Individuals in business
If you are an individual in business, you can use the small business retirement exemption to disregard all or part of a capital gain remaining after other concessions have applied if:
- you satisfy the basic conditions (see step 1)
- you keep a written record of the amount you have chosen to disregard (the exempt amount), and
- where you were less than 55 years old just before you made the choice to use the retirement exemption, a payment of an amount exempted must be made to a superannuation fund. (If you were 55 or more there's no requirement to pay any amount to a superannuation fund even though you may have been under 55 years when the capital proceeds were received.)
The amount you choose to disregard under this concession must not exceed your CGT retirement exemption limit. This is a lifetime limit of $500,000.
Companies and trusts
If you are a company or trust (other than a public entity), you can also use the small business retirement exemption to disregard all or part of a capital gain remaining after other concessions have applied if you:
- satisfy the basic conditions (see step 1)
- satisfy the significant individual test
- keep a written record of the amount you have chosen to disregard (the exempt amount) and, where there is more than one CGT concession stakeholder, of each stakeholder's percentage of the exempt amount (one may be nil, but together they must add up to 100%)
- make a payment to each of your CGT concession stakeholders based on each individual's percentage of the exempt amount. The payment must be made by the end of seven days after the company or trust chooses to disregard the capital gain or receives an amount of capital proceeds from the CGT event, whichever occurs later, and
- where a stakeholder is less than 55 years old just before receiving the payment, that amount must be contributed to a complying superannuation fund or retirement savings account (RSA).
The exempt amount mustn't exceed the $500,000 CGT retirement exemption limit of each individual receiving an eligible termination payment. As this is a lifetime limit, any previous retirement exemption payments must be taken into account to ensure the limit is not exceeded.
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Choosing the retirement exemption for a capital gain (subject to the $500,000 limit) without first applying the 50% active asset reduction might allow a company or trust to make larger tax-free payments to the CGT concession stakeholders of the company or trust.
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Example: small business retirement exemption
After offsetting her capital losses and applying the CGT discount and the small business 50% active asset reduction, Lana has a capital gain of $3,500.
Lana could choose the small business retirement exemption but, as she is under 55 years of age, she would need to pay the amount into a superannuation (or similar) fund.
Lana decides she needs the funds to reinvest in the business and so doesn't choose the retirement exemption.
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Small business rollover
The small business rollover allows you to defer all or part of a capital gain for two years, or longer if you acquire a replacement asset or incur expenditure on making capital improvements to an existing asset. There are roll-over conditions that must be met to defer the gain for longer than two years.
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If you apply the small business rollover after the small business 50% active asset reduction, you apply it to the remaining 50% of the gain. If the CGT discount has also applied, you apply the rollover to the remaining 25% of the capital gain.
This concession may be used for any gain remaining before or after any other concessions have been applied
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Do you qualify?
Your business qualifies to roll over a capital gain if you satisfy the basic conditions (see step 1). There are roll-over conditions that must also be met by the end of the replacement asset period. This period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the rollover.
To extend the rollover beyond two years, the following conditions must be met by the end of the replacement asset period:
- you must acquire a replacement asset or make a capital improvement to an existing asset, or do both, within the replacement asset period
- the replacement asset must be an active asset by the end of the replacement asset period, and
- if the replacement asset is a share in a company or an interest in a trust, by the end of the replacement asset period:
- you or an entity connected with you must be a CGT concession stakeholder in that company or trust, or
- CGT concession stakeholders in the company or trust must have a small business participation percentage in the entity of at least 90%.
- The cost of the replacement asset must be equal to or greater than the gain you deferred.
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You can choose the rollover even if you have not yet acquired a replacement asset or made a capital improvement to an existing asset, but a new capital gain will arise if the any of the following happens:
- you do not acquire an active asset, or make a capital improvement to an existing active asset by the end of the replacement asset period
- the cost of the replacement active asset or capital improvement (including incidental costs) is less than the amount of the capital gain that you disregarded, or
- a change happens to the replacement (or capital improved) asset after the replacement asset period (for example, you sell it or stop using it in your business).
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Example: small business rollover
Instead of choosing the retirement exemption, Lana decides that she will search for a suitable replacement asset to use in her business. As all basic conditions are met, she qualifies for the small business rollover.
This means she can reduce her capital gain remaining after all other concessions have applied ($3,500) to nil.
After six months, Lana acquires another small parcel of land immediately adjoining the main business premises for use in her business. The replacement land costs $10,000, and it was her active asset before the end of the replacement asset period, so the roll-over conditions are met.
Deferred capital gain
The $3,500 remaining capital gain disregarded under the small business rollover is only a deferral of the capital gain. This deferred capital gain may later become assessable if Lana sells the land or stops using it in her business. However, she could then choose a further small business rollover if she acquired another replacement active asset. Alternatively, Lana could choose the retirement exemption.
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Active asset
A CGT asset is an active asset if it is owned by you and is:
- used or held ready for use in the course of carrying on a business by you, your affiliate, your spouse or child under 18 years or an entity connected with you, or
- an intangible asset inherently connected with a business carried on by you, your spouse or child under 18 years, your affiliate, or an entity connected with you. Goodwill is an example of an intangible asset.
Active asset test
This test requires the CGT asset to be an active asset for half a particular period. It is one of the tests you must pass to satisfy the basic conditions for the small business CGT concessions.
Affiliate
An affiliate is any person who, in relation to their own business affairs acts, or could reasonably be expected to act:
- in accordance with your directions or wishes, or
- in concert with you.
Aggregated turnover
Aggregated turnover is your annual turnover plus the annual turnovers of any entities you are connected with or that are your affiliates. These are referred to as 'relevant' entities.
Assessable income
This is all the income you have received that should be included in your income tax return. Generally, it doesn't include non-assessable payments from a unit trust, including a managed fund.
Capital gain
You may make a capital gain (or profit) as a result of a CGT event - for example, when you sell an asset for more than you paid for it. You can also make a capital gain if a managed fund or other unit trust distributes a capital gain to you.
Capital gains tax
Capital gains tax (CGT) is the tax you pay on any capital gain you make and include in your annual income tax return. For example, when you sell (or otherwise dispose of) an asset, you may be subject to CGT.
Capital loss
Generally, you make a capital loss as a result of a CGT event if you sell an asset for less than you paid for it (including incidental costs).
Capital proceeds
Capital proceeds is the term used to describe the amount of money or the value of any property you receive or are entitled to receive as a result of a CGT event. For shares or units, capital proceeds may be:
- the amount you receive from the purchaser
- the amount you receive from a liquidator
- the amount you receive on a merger/takeover, or
- their market value if you give them away.
CGT asset
CGT assets include shares, units in a unit trust, collectables (such as jewellery), assets for personal use (such as furniture or a boat) and other assets (such as an investment property).
CGT asset register
This is a register of information about your CGT assets that you've transferred from your CGT records (for example, invoices, receipts and contracts).
CGT concession stakeholder
A CGT concession stakeholder of a company or trust means:
- a significant individual of the company or trust, or
- a spouse of a significant individual where the spouse has a small business participation percentage in the company or trust.
CGT discount
The CGT discount allows eligible individuals (including partners in partnerships) and trusts to reduce their capital gain by 50%. There are more rules for beneficiaries who are entitled to a share of a trust capital gain. Companies can't use the CGT discount.
CGT event
A CGT event happens when a transaction takes place, such as the sale or purchase of a CGT asset. The result is usually a capital gain or capital loss.
Connected with
A business is connected with you if:
- you control or are controlled by that entity, or
- both you and that entity are controlled by a third entity.
Depreciating asset
A depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used. Depreciating assets include computers, electric tools, furniture and motor vehicles.
Maximum net asset value test
To pass this test, you and certain other entities mustn't own assets with a total net value of more than $6 million just before the CGT event that results in the capital gain. It is one of the tests you must pass to satisfy the basic conditions for the small business CGT concessions.
NAT number
Most of our publications have a NAT number (our catalogue number), which we generally show in brackets after the title of the publication - for example, Tax basics for small business (NAT 1908).
Net capital gain
The net capital gain is the difference between your total capital gains for the year and your total capital losses (including net capital losses from prior years), less any CGT discount or other concessions which you are entitled to.
Net value
The net value of the CGT assets of an entity is the total market value of its assets (whether positive, negative or nil), less any liabilities relating to those assets.
Relevant entity
Relevant entities include:
- any of your affiliates, and
- any entities connected with you.
Significant individual
An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%.
Small business entity
You will be a small business entity if you are a sole trader, partnership, company or trust that:
- is carrying on a business, and
- has an aggregated turnover of less than $2 million.
Small business 15-year exemption
This is one of the CGT concessions available to small business. Generally, it allows you to disregard the capital gain made on an asset you have owned for 15 years if you satisfy all the conditions.
Small business 50% reduction
This is one of the CGT concessions available to small business. Generally, it allows you to reduce your capital gain by 50% if you satisfy the basic conditions.
Small business retirement exemption
This is one of the CGT concessions available to small business. Generally, it provides an exemption of capital gains up to a lifetime limit of $500,000 if you satisfy all the conditions. If you are under 55 when you choose the exemption, the amount must be paid into a superannuation (or similar) fund.
Small business rollover
This is one of the CGT concessions available to small business. Generally, it allows you to defer all or part of a capital gain from a CGT event that happens in relation to a small business asset for two years, or longer if you acquire a replacement asset or make an improvement to an existing asset and meet certain conditions.
Internet
- www.ato.gov.au/onlineservices to find out about our range of online services, including the Business Portal
- business.gov.au for easy access to business information, services and transactions with government. There are links to Tax Office applications to register for an ABN and GST, or to apply for a tax file number.
Phone
- 13 28 66 (general business enquiries) for information about most small business tax matters, including GST, ABN, pay as you go (PAYG) instalments, amounts withheld from wages, business deductions, lodging and paying activity statements, activity statement accounts, wine equalisation tax, luxury car tax, fringe benefits tax and matters for non-profit organisations
- 13 10 20 (superannuation enquiries) for information about the superannuation guarantee, choice of superannuation fund and the super co-contribution.
- 13 28 61 (personal tax enquiries) for information about individual income tax and general personal enquiries.
- 1300 720 092 to order Tax Office publications.
Free seminars
- We run small business seminars on a range of topics, including GST, PAYG, activity statements and record keeping - visit Tax basics seminar program or phone 1300 661 104 to find out whether there is a seminar near you or to make a booking.
Other services
- If you do not speak English well and want to talk to a tax officer, phone the Translating and Interpreting Service on 13 14 50 for help with your call.
- If you have a hearing or speech impairment and have access to appropriate TTY or modem equipment, phone 13 36 77. If you do not have access to TTY or modem equipment, phone the Speech to Speech Relay Service on 1300 555 727.
For more general information about how capital gains tax works, see:
Last Modified: Thursday, 10 November 2011
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