Advanced guide to capital gains tax concessions for small business 2010-11

Receiving actual capital proceeds not required

It is not essential to receive actual capital proceeds from the CGT event to be able to choose the retirement exemption. The retirement exemption is available where a capital gain is made when an active asset is gifted and the market value substitution rule has applied, or where CGT event J2, J5 or J6 happens.

Example

In December 2006, Harry retires from farming and transfers the farm (which he acquired in 1996) to his son for no consideration. The market value of the farm was $1 million so the market value substitution rule applies to deem the capital proceeds to equal the market value of the farm. As the cost base of the farm was $600,000, Harry made a capital gain of $400,000 (assuming the other retirement exemption conditions are satisfied.

Harry reduces his capital gain by the 50% CGT discount to $200,000 and then further by the 50% active asset reduction to $100,000. Notwithstanding that he did not receive any capital proceeds, Harry may choose the retirement exemption for the full amount of the remaining $100,000 capital gain (assuming the other retirement exemption conditions are satisfied).

In order to access the exemption on a gain made by a company or trust for which there are no actual proceeds, the company or trust must make a payment of the disregarded capital gain to at least one of its CGT concession stakeholders.

In 2005-06 and earlier years, the taxpayer needed to have received actual capital proceeds from the CGT event to qualify for the retirement exemption. If the market value substitution rule applied to increase the capital proceeds taken to be received, the retirement exemption was available only to the extent of the actual capital proceeds received. Also where a taxpayer made a capital gain from CGT event J2 or J3 in the 2005-06 or prior year, following an earlier small business rollover, they can disregard the capital gain under the retirement exemption only if the original capital gain involved actual capital proceeds.

Sections within Small business retirement exemption

• Interaction with other concessions
• Conditions you must meet
• Termination of employment not required
• Deemed dividends
• Capital proceeds received in instalments
• Receiving actual capital proceeds not required
• CGT retirement exemption limit
• Consequences of choosing the exemption
• Superannuation consequences