Conditions to be satisfied
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If you are an individual, you can choose to disregard all or part of a capital gain if:
- you satisfy the basic conditions
- you keep a written record of the amount you chose to disregard (the CGT exempt amount)
- if you were under 55 years of age just before you received an amount of capital proceeds from the CGT event, you roll over an amount equal to the exempt amount under the ETP provisions. (If you were 55 or older, there is no requirement to roll over any amount).
If you choose an amount to disregard under the small business retirement exemption, the capital proceeds from the CGT event (to the extent of the exempt amount) are taken to be an ETP paid to you at the later of when you made the choice and when you received the capital proceeds.
Therefore, if you choose the retirement exemption after you have received the capital proceeds (for example, when you lodge your income tax return) you are not required to rollover any amount until you make the choice. Accordingly, you may use the capital proceeds for other purposes before making the choice. However, once you make the choice you must immediately roll over an amount equal to the ETP if you were under 55 just before you received the capital proceeds.
To satisfy the immediate rollover requirement you must pay the amount into a complying superannuation (or similar) fund no later than the day you choose the retirement exemption.
This is an important requirement. Failure to immediately roll over the amount in accordance with the ETP provisions will mean the conditions are not satisfied and the retirement exemption will not be available.
Taxation Determination TD 96/36 further discusses the circumstances in which an ETP will be accepted as having been 'immediately' paid to a rollover fund. However, the circumstances referred to in the Determination that might give rise to a further period being allowed to make the rollover do not arise where an amount is deemed to be an ETP in the individual's hands.
Company or trust
If you are a company or trust, other than a public entity, you can also choose to disregard all or part of a capital gain if:
- you satisfy the basic conditions
- you satisfy the controlling individual test
- you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are two CGT concession stakeholders, each stakeholder's percentage of the exempt amount (one may be nil but together they must add up to 100%)
- you make an ETP in relation to each of your CGT concession stakeholders, worked out by reference to each individual's percentage of the exempt amount
- the ETPs are made by the later of
- seven days after you choose to disregard the capital gain
- seven days after you receive the capital proceeds from the CGT event
- if a stakeholder is under 55 years of age just before receiving the ETP, an amount equal to that payment must be immediately rolled over under the ETP provisions. (If the stakeholder was 55 or more there is no requirement to roll over the amount.)
Therefore, if you choose the retirement exemption after you have received the capital proceeds (for example, when you lodge your income tax return) there is no requirement to make any ETPs until you have made the choice. Accordingly, you may use the capital proceeds for other purposes before choosing. However, once you choose, you must make the ETPs by the end of seven days after making the choice.
If a stakeholder is under 55 just before receiving an ETP, an amount equal to that ETP must be immediately rolled over, that is, paid to a complying superannuation (or similar) fund.
This is an important requirement. Failure to immediately rollover an ETP into a complying superannuation (or similar) fund in accordance with the ETP provisions will mean the conditions are not satisfied and the retirement exemption will not be available. Generally, to satisfy the immediate roll over requirement, the funds need to be transferred direct from the payer of the ETP to the nominated fund and it is only in certain circumstances that a transfer of the funds direct to a stakeholder before being transferred to the nominated fund will be accepted as satisfying the requirement.
For more information on the circumstances in which an ETP is accepted as having been immediately rolled over see Taxation Determination TD 96/36.
Termination of employment required
As already stated, a company or trust choosing the retirement exemption must make an actual ETP in relation to each of its CGT concession stakeholders. This means that the payment must qualify as an ETP under the ETP provisions. That is, it must be a payment made in respect of the stakeholder in consequence of the termination of any employment of the stakeholder.
As 'employment' includes the holding of an office, this part of the requirement is satisfied (for a company) if the stakeholder resigns/retires in a bona fide manner either as an employee or as a director. If there is no termination of any employment, the retirement exemption cannot be chosen.
For an individual choosing the retirement exemption there is no requirement to terminate any activity or cease their business. This is because there is no requirement to make an actual ETP. Rather, the exempt amount is simply taken to be an ETP.
Capital proceeds received in instalments
If a company or trust receives the capital proceeds from a CGT event in instalments and chooses the retirement exemption, it must make an ETP in relation to each of its concession stakeholders on receipt of each instalment. As mentioned earlier, the ETPs must be made by the later of seven days after the choice is made and seven days after an instalment of the capital proceeds is received.
In this situation, the total amount of each instalment must be paid as ETPs until the total of the ETPs equals the capital gain being disregarded. In other words, the requirement to make ETPs must be satisfied to the greatest extent possible out of the initial instalments rather than in some other way, such as an apportionment across all the instalments received.
A company sells an active asset for $500,000 making a $110,000 capital gain. The company chooses to disregard the capital gain under the retirement exemption. The sale agreement provides that the purchaser must pay $100,000 at settlement (1 January 2003) and a further $100,000 a year for the next four years (on 1 January 2004, 1 January 2005, 1 January 2006 and 1 January 2007). The company chooses the retirement exemption when it lodges its tax return on 1 October 2003.
ETPs totalling $100,000 must be made by 8 October 2003 (that is, seven days after 1 October 2003, given the choice was made after the first instalment was received). As well, further ETPs totalling $10,000 must be made by 8 January 2004 (that is, seven days after the second instalment was received).
None of the following alternatives are permissible:
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- ETPs of $22,000 each paid by 8 October 2003, 8 January2004, 8 January 2005, 8 January 2006 and 8 January 2007 respectively
- ETPs of any amount paid by 8 October 2003, 8 January 2004, 8 January2005, 8 January 2006 and 8 January 2007 respectively providing they total $110,000, or
- ETPs totalling $110,000 paid by 8 January2007.
Actual capital proceeds required
You must receive actual capital proceeds from the CGT event to be able to choose the retirement exemption. If the market value substitution rule has applied to increase the capital proceeds to the market value of the CGT asset, the retirement exemption is available only to the extent of the actual capital proceeds you receive.
In 2003 Harry retires from farming and transfers the farm (which he acquired in 1993) to his son for no consideration. As Harry did not receive any capital proceeds, the market value substitution rule applies to deem the capital proceeds to equal the market value of the farm. Accordingly, Harry makes a capital gain.
No amount of the gain is eligible for the retirement exemption as Harry did not receive any capital proceeds. However, the capital gain may be eligible for the CGT discount and the 50% active asset reduction if the relevant conditions are satisfied.
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CGT retirement exemption limit
The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your 'CGT retirement exemption limit' or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving an ETP.
An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. For a company or trust with two CGT concession stakeholders, the limit is effectively $1 million ($500,000 for each stakeholder).
A company or trust may determine the percentage of the exempt amount attributable to each stakeholder, having regard to each stakeholder's retirement exemption limit (or remaining limit) and their reasonable benefit limit.
Last modified: 10 Sep 2007QC 27357
Daryl and his wife Mary each own 50% of the shares in a company and are both controlling individuals of the company. The company makes a capital gain and specifies Daryl's percentage of the exempt amount to be 90% (which means that the percentage specified for Mary must be 10%). Daryl's retirement exemption limit is $500,000.
To determine whether his exemption limit is exceeded, Daryl would take 90% of the exempt amount, add that to amounts previously specified and see whether the total exceeds $500,000.
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