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  • Step 7 Determine whether you qualify for the small business retirement exemption or rollover

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

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    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

    This concession interacts with the eligible termination payment provisions. Broadly, it requires amounts to be paid (rolled over) into a complying superannuation fund, a complying approved deposit fund or a retirement savings account under the eligible termination payment provisions if the recipient is under 55.

    If you apply the small business retirement exemption after the small business 50% active asset reduction, you apply the exemption to the remaining 50% of the gain. If the CGT discount has also applied, you apply the exemption to the remaining 25% of the capital gain.

    If you choose this concession, you can disregard only the amount of capital gain equal to your exempt amount (that is, the amount chosen to be disregarded). You can't disregard any capital gain that exceeds 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 under 55 years just before you received the capital proceeds from the CGT event, you roll over an amount equal to the exempt amount under the eligible termination payment provisions. (If you were 55 or more there's no requirement to roll over any amount.)

    The exempt amount you choose to disregard under this concession is taken to be an eligible termination payment paid to you. It must not exceed your CGT retirement exemption limit.

    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 controlling individual test
    • keep a written record of the amount you have chosen to disregard (the exempt amount) and, where there are two CGT concession stakeholders, of each stakeholder's percentage of the exempt amount (one may be nil, but both must add up to 100%)
    • make an eligible termination payment for 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 under 55 years just before receiving the eligible termination payment, roll over an amount equal to that payment under the eligible termination payment provisions.

    The exempt amount mustn't exceed the CGT retirement exemption limit of each individual receiving an eligible termination payment.

    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 eligible termination payments.

    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.

    End of example

    More information:

    Small business rollover

    The small business rollover allows you to defer making a capital gain from a CGT event that happens in relation to a small business asset if you acquire a replacement asset and meet certain conditions.

    If the way a replacement asset is used changes or there is a change in circumstances, the deferred capital gain will 'crystallise'. This means that you will make a capital gain equal to the deferred gain. You may defer this crystallised capital gain by choosing a further small business rollover. However, you can't apply the CGT discount or the small business 50% active asset reduction.

    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.

    Do you qualify?

    Your business qualifies to roll over a capital gain if:

    • you satisfy the basic conditions (see step 1)
    • you choose one or more CGT assets as replacement assets within the period starting one year before and ending two years after the last CGT event happens in the income year you are choosing the rollover for
    • you acquire the replacement asset within that same period (the Commissioner may extend the time limit)
    • the replacement asset is an active asset when it is acquired or an active asset by the end of two years after the last CGT event happens in the income year you are choosing the rollover for, and
    • if the replacement asset is a share in a company or an interest in a trust, you or an entity connected with you must be a controlling individual of that company or trust just after you acquire the share or interest.

    If you meet these conditions and choose the rollover, you can reduce the amount of any remaining gain by up to the cost of the replacement asset (including any incidental costs).

    Example: small business rollover

    Instead of choosing the retirement exemption, Lana acquires a replacement active asset (another small parcel of land immediately adjoining the main business premises) for use in her business. As all the necessary conditions are met, she qualifies for the small business rollover.

    The replacement land costs $10,000, so she can reduce her remaining capital gain by up to that amount. This means she can reduce her capital gain remaining after all other concessions have applied ($3,500) to nil.

    End of example

    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.

    More information:

    See Advanced guide to capital gains tax concessions for small business (NAT 3359) for more information about circumstances involving the disposal or changed use of a replacement asset, or a change in circumstances relating to a company or trust.

    Last modified: 14 Jul 2020QC 17086