Small business 15-year exemption
If your business has continuously owned an active asset for 15 years and you're aged 55 or over and are retiring or permanently incapacitated, you won’t have an assessable capital gain when you sell the asset (assuming the basic conditions for the small business concessions are satisfied).
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Interaction with other concessions
If you qualify for the small business 15-year exemption, you can entirely disregard the capital gain and don't need to apply any other concessions. Also, you don't have to apply capital losses against your capital gain before applying the 15-year exemption.
If the conditions are satisfied and you make a capital loss from the CGT event, you may use the capital loss to reduce other capital gains.
Conditions you must meet
You can disregard a capital gain from a CGT event happening to a CGT asset if you:
- satisfy the basic conditions for the small business CGT concessions (the active asset test requires the asset to have been an active asset for at least 7.5 years of the whole period of ownership)
- continuously owned the CGT asset for the 15-year period ending just before the CGT event happened.
If you are an individual you must also meet the following conditions:
- when the CGT event happened you were
- permanently incapacitated, or
- at least 55 years old and the event happened in connection with your retirement
- if the CGT asset is a share in a company or an interest in a trust, that company or trust must have had a significant individual for periods totalling at least 15 years during the entire time you owned the share or interest, even if it was not the same significant individual during the whole period.
If you are a company or trust you must also meet the following conditions:
- you had a significant individual for a total of at least 15 years of the whole period of ownership (even if it was not the same significant individual during the whole period), and
- the individual who was a significant individual just before the CGT event was
- at least 55 years old at that time and the event happened in connection with their retirement, or
- permanently incapacitated at that time.
For CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or those relating to marriage or relationship breakdown, there are modified rules about the requirement that the asset be continuously owned for at least 15 years.
Example
Ruth and Geoff are partners in a partnership that conducts a farming business on land they purchased in 1990 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 are both over 60 years old and wish to retire. As they have no children, they decide to sell the major asset of the farming business, the land. They sell the land for a total capital gain of $100,000. Both Ruth and Geoff qualify for the small business 15-year exemption in relation to the capital gain.
End of exampleIn determining whether you meet the conditions, you may also need to consider the following circumstances:
Death and the 15-year exemption
You may be eligible for the concessions if you make a capital gain on an asset within two years of a person's death, if that asset is or was part of that individual’s estate, and you are a:
- beneficiary of the deceased estate
- legal personal representative (executor), or
- trustee or beneficiary of the testamentary trust (trusts created by a will).
You may also be eligible if you, together with the deceased, owned the asset as joint tenants.
You will be eligible for the 15-year exemption to the same extent that the deceased would have been just prior to their death, except that:
- the CGT event does not need to be in connection with the retirement of the deceased
- the deceased needs to have been 55 or older immediately before their death, rather than at the time of the CGT event.
We can extend the two-year period.
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Discretionary trusts with tax losses or no net income
For the CGT event year, if a discretionary trust has no net income (or had a tax loss) and did not make a distribution of income or capital, it may work out the small business participation percentages by focusing on the most recent year in which a distribution was made prior to the CGT event year.
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Event in connection with retirement
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.
Example: Sale of business connected with retirement
Nicolas is 57 when he sells his small business. Under the terms of the sale, he agrees to be employed by the new owner for a few hours each week for two years.
The sale of the business would be in connection with Nicholas' retirement. He has permanently or indefinitely ceased being self-employed and has begun gainful employment on a much reduced scale with another party, although still performing similar activities.
End of example
Example: Sale of business not connected with retirement
Mai Loan and her spouse, Diem, are both pharmacists, both over 55 years old, and carry on a small business through two pharmacies. They sell one (making a capital gain) and, accordingly, reduce their working hours from 60 hours per week each to 45 and 35 hours per week respectively.
There has been some change to their activities in terms of hours worked and location, but there has not been a significant reduction in the number of hours or a significant change in the nature of their activities; therefore, there has been no ‘retirement’.
If, on the other hand, one spouse stopped working altogether, 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.
End of exampleA CGT event may be ‘in connection with your retirement’ even if it occurs at some time before retirement. Whether particular cases satisfy the conditions depends very much on the facts of each case.
Example: Sale of assets prior to retirement
Hannah is a small business operator who is over 55 years old. She sells some business assets as part of a wind-down in business activity ahead of selling the business. Within six months, she sells the business and ends her present activities.
If it can be shown that the earlier CGT event was integral to Hannah's plan to cease her activities and retire, the CGT event may be accepted as happening in connection with retirement.
End of exampleSimilarly, the words ‘in connection with’ can apply where the CGT event occurs sometime after retirement. Again, this would depend on the particular facts, and would need to be considered on a case-by-case basis.
Example: Sale of assets after retirement
A small business operator retires and his children take over the running of the business. Within six months, they sell some business assets and make a capital gain.
Several reasons may have prompted the sale of the assets. If there is no relevant connection with the small business operator’s retirement, the requirement would not be satisfied. However, if it can be shown that the reason for the disposal of the assets is connected to retirement and the later sale is integral to the small business operator’s retirement plan, the sale may be accepted as happening in connection with retirement.
End of examplePermanent incapacity
Whether an individual is permanently incapacitated at the time of the CGT event depends on the particular circumstances of each case. Based on the meaning of the term 'permanent incapacity' in retirement and superannuation law, an indicative description is:
- Ill health (whether physical or mental), where it is reasonable to consider that the person is unlikely, because of the ill health, to engage again in gainful employment for which the person is reasonably qualified by education, training or experience. The incapacity does not necessarily need to be permanent in the sense of everlasting.
Example: Permanent incapacity
Jack had been in business for many years. He developed severe health problems that continued to deteriorate to the point where he was incapable of operating the business and, as a result, he sold it.
At the time he sold the business, Jack’s doctor provided a written statement that Jack suffered ill health to the extent that he was unlikely to be able to engage again in gainful employment for which he was reasonably qualified. Jack was under 55 years old when he sold the business.
Having regard to all the circumstances, Jack would be considered to be permanently incapacitated at the time the business was sold. As a result, he may qualify for the small business 15-year exemption if he satisfies other conditions.
End of example
Example: Incapacity not permanent
Fred had been running a landscape gardening business for over 20 years. One day, Fred fell out of a tree and badly broke both arms and a leg. He was in hospital for several weeks, then continued his recovery at home for several more weeks. The doctor said his recovery would take some time. Fred underwent extensive physiotherapy for several months, and it was nearly a year before he regained full use of his arms and legs and was able to undertake normal activities again.
During this time, as Fred could not operate the business effectively, he sold it. He was under 55 years old at the time of the sale.
Although Fred suffered a serious injury that required an extensive period of rehabilitation, he was always expected to regain his physical capabilities. Having regard to all the circumstances, it could not be said that Fred was permanently incapacitated at the time he sold the business. The 15-year exemption would not be available in this case.
End of example
Example: Incapacity expected to be permanent
Yoko had been in business for many years. She suffered a severe stroke that left her paralysed down one side of her body and confined to a wheelchair. Because of the extent of the damage, the doctors thought it unlikely that she would regain much movement in her affected limbs.
As Yoko was incapable of operating her business, she sold it. She was under 55 years old at the time of the sale.
Yoko underwent an extensive program of physiotherapy and exercises over an extended period. After 18 months, she had surpassed expectations and regained most of her movement.
Even allowing for her remarkable recovery, at the time Yoko sold her business the prevailing medical opinion was that she was unlikely to be able to engage again in gainful employment for which she was reasonably qualified. Considering all the circumstances, Yoko would be considered to be permanently incapacitated at the time the business was sold.
End of exampleInvoluntary disposals
A requirement of the small business 15-year exemption is that you must have continuously owned the CGT asset for at least 15 years. However, there are modified rules for CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or to marriage or relationship breakdown.
See also:
- Subdivisions 124-B and 126-A Income Tax Assessment Act 1997
If you acquired a replacement asset to satisfy the rollover requirements for the compulsory acquisition, loss or destruction of a CGT asset, the replacement asset is treated as if you acquired it when you acquired the original asset.
If you have a CGT asset transferred to you because of a marriage or relationship breakdown, and the capital gain arising from that transfer was rolled over under the marriage or relationship breakdown rollover provisions, for the purpose of determining whether the 15-year requirement has been satisfied you can choose to:
- include the ownership period of your former spouse, or
- begin the ownership period from the time the asset was transferred to you.
If you choose to include your former spouse’s ownership period of the CGT asset, that asset is treated as if you acquired it when your former spouse acquired the asset.
Example: Relationship breakdown rollover
Cameron and Therese were married for 10 years, during which time Cameron owned a farm on which he operated a dairy business. Since their divorce, Therese has owned the farm. It was transferred to her in circumstances under which Cameron obtained a rollover under the marriage or relationship breakdown rollover provisions. Therese has operated the dairy business for the past five years.
Therese can sell the farm and obtain the 15-year exemption (if she is 55 years old or older and sells the farm to retire or is incapacitated) if she chooses to adopt Cameron’s ownership and active asset periods.
End of exampleSeparate interests in the same CGT asset
If you own separate interests in the same CGT asset and sell those interests together, the 15-year exemption applies only to interests in the asset that you have owned continuously for at least 15 years. The exemption does not apply to any interest you have owned for less than 15 years. This is because interests in an asset acquired at different times are separate CGT assets.
Example: Separate interests in asset
On 1 December 1992, Janet purchased a 40% interest in a 400-hectare parcel of grazing land. On 1 December 1997, she purchased the remaining 60% interest in the land. On 15 December 2010 (Janet's 60th birthday), she sold the land and retired.
While Janet owned the 40% interest she purchased in 1992 for at least 15 years, she owned the 60% interest she purchased in 1997 for just over 13 years. The two interests are separate CGT assets and, accordingly, the capital gain made on the sale of the 60% interest is not eligible for the 15-year exemption (it may be eligible for other CGT concessions).
End of exampleConsequences of applying the exemption
Distributions of the exemption amount
If a capital gain made by a company or trust is disregarded under the small business 15-year exemption, or would have been except that the capital gain was disregarded anyway because the relevant CGT asset was acquired before 20 September 1985, any distributions made by the company or trust of that exempt amount to a CGT concession stakeholder is:
- not included in the assessable income of the CGT concession stakeholder, and
- not deductible to the company or trust
if certain conditions are satisfied.
The conditions are:
- the company or trust must make a payment before the later of
- two years after the relevant CGT event that resulted in the capital gain
- six months after the latest time a possible financial benefit becomes or could become due under the look-through earnout right relating to the CGT asset and the disposal
- in appropriate circumstances, such further time as allowed by us
- the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event
- the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's participation percentage by the exempt amount.
The CGT concession stakeholder's participation percentage is:
- for a company or a trust (where entities have entitlements to all the income or capital of the trust): the stakeholder's small business participation percentage in the company or trust just before the CGT event, and
- for a trust (where entities do not have entitlements to all the income or capital of the trust), the amount (expressed as a percentage) worked out using the formula 100 ÷ N (where N is the number of CGT concession stakeholders of the trust just before the CGT event).
Example: Exempt distribution from a company
Joe is a significant individual of Company X, owning 60% of the shares in the company. Joe's wife, Anne, owns the remaining 40% of shares in the company. The company makes a capital gain of $10,000, which it can disregard under the small business 15-year exemption because Joe is 56 and both Joe and Anne are planning to retire.
Six months after the CGT event, the company distributes the amount of the exempt capital gain to the shareholders. As CGT concession stakeholders, Joe and Anne both qualify for the small business 15-year distribution exemption. The amount that is exempt is calculated as follows:
- For Joe: 60% of $10,000 = $6,000
- For Anne: 40% of $10,000 = $4,000
If it is decided to distribute $8,000 each to Joe and Anne, they can exclude from their assessable incomes for the income year an amount of $6,000 and $4,000 respectively. The balance is likely to be assessable as a dividend.
End of example
Example: Exempt distribution from a discretionary trust
The beneficiaries of the M family discretionary trust are the members of the M family and two employees of the family business carried on by the trustee of the trust. Mrs M and Mr M and their three children are significant individuals of the discretionary trust and are, therefore, CGT concession stakeholders.
The trustee of the trust sells a CGT asset of the business and makes a capital gain of $50,000. The gain qualifies for the small business 15-year exemption because Mr M is 58 years old and plans to retire from the family business. In the next income year, the trustee distributes that amount equally to Mrs M and Mr M, and their three children.
As CGT concession stakeholders, Mrs M and Mr M and their three children are each able to treat the distribution of $10,000 as an exempt amount.
End of exampleImpact on super
From 1 July 2007, if you are contributing a 15-year exemption amount to a super fund or retirement savings account (RSA), the amount is generally a non-concessional contribution. To exclude the amount from your non-concessional contributions cap and have it count towards your CGT cap amount instead ($1,415,000 for 2016–17), you must notify the fund on the Capital gains tax cap election. You must complete this election by no later than the time you make the contribution.
Effect of look-through earnout rights on contributions relating to a 15-year exemption amount
If you are an individual who disregarded the capital gain under the small business 15-year exemption and you are contributing some or all of the capital proceeds to super, the contribution must be made on or before the later of
- the day you lodge your income tax return for the income year in which the relevant CGT event happened
- 30 days after you received capital proceeds.
If you receive a 15-year exemption amount from a company or trust the contribution must be made within 30 days after the entity made the payment to you.
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If your business has continuously owned an active asset for 15 years and you're aged 55 or over and are retiring or permanently incapacitated, you won’t have an assessable capital gain when you sell the asset.