• Step 7 - Work out 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.

    End of attention

    You may choose the small business retirement exemption or the small business rollover for the remaining amount of capital gain if you meet the conditions. Alternatively, you may choose both concessions for different parts of the remaining capital gain.

    Small business retirement exemption

    You can use your small business retirement exemption 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 you have applied the other concessions or before any other concessions.

    The amount you choose to disregard is called the exempt amount. The amount of any capital gain that exceeds the CGT exempt amount does not qualify for this exemption. The exempt amount must not exceed your CGT retirement exemption limit. This is a lifetime limit of $500,000.

    Working out whether 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 you have applied the other concessions if:

    • you meet the basic conditions (see step 1)
    • you keep a written record of the amount you have chosen to disregard (the exempt amount)
    • where you were less than 55 years old just before you made the choice to use the retirement exemption, you made a payment equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA).

    You must make the contribution to a complying superannuation fund or RSA when:

    • you make the choice to use the retirement exemption or when you received the proceeds (whichever is later)
    • you made the choice to use the retirement exemption if the relevant event is CGT event J2, J5 or J6.

    If you are 55 years old or older when you make the choice to access the retirement exemption, you do not have to pay any amount to a complying superannuation fund or RSA, even though you may have been under 55 years old when you received the capital proceeds.

    If you receive the capital proceeds in instalments, the requirement to contribute an amount by a particular date applies to each instalment (up to the asset's CGT exempt amount).

    If you make the gain as a result of CGT events J5 or J6, you can choose the retirement exemption for those gains without having to meet the basic conditions again. This is because you would have already met the basic conditions at the time you chose the rollover.

    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 you have applied the other concessions, if all of the following are met:

    • you meet the basic conditions (see step 1)
    • you meet the significant individual test
    • you 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%)
    • you make a payment to at least one of your CGT concession stakeholders where you have chosen to use the retirement exemption
    • where you make a payment to a CGT concession stakeholder, the payment is equal to the exempt amount or the amount of capital proceeds, whichever is less
    • where you receive the capital proceeds in instalments, you make a payment to a CGT concession stakeholder for each instalment in succession (up to the asset's CGT exempt amount).

    In the instance where you make a payment to more than one CGT concession stakeholder, you work out the amount by referring to each individual's percentage of the exempt amount.

    • You must make your payment by either of the following:
    • seven days after you choose to disregard the capital gain if you choose the retirement exemption for a J2, J5 or J6 event
    • in any other case, by the later of seven days after you
      • choose to disregard the capital gain, or
      • receive the capital proceeds from the CGT event.
       

    Where a stakeholder is under 55 years old just before receiving the payment, you must immediately contribute that amount to a complying superannuation fund or retirement savings account (RSA) and advise the trustee of the fund or the RSA that a contribution has been in accordance with the relevant section.

    Further Information

    If you must make a retirement exemption payment through one or more interposed entities to a CGT concession stakeholder, see Advanced guide to capital gains tax concessions for small business 2011-12 (NAT 3359).

    End of further information

    If you made your gain because of CGT events J5 or J6 happening, you can choose the retirement exemption for those gains without having to meet the basic conditions again. This is because you would have already satisfied the basic conditions at the time you chose the rollover.

    The exempt amount must not exceed the $500,000 CGT retirement exemption limit of each individual receiving an eligible termination payment. As this is a lifetime limit, you must consider any previous retirement exemption payments to make sure you do not exceed the limit.

    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.

    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 younger than 55 years old, 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 does not choose the retirement exemption.

    Termination of employment not required

    If you choose the retirement exemption, you do not have to:

    • end any activity
    • wind up your business.

    Where you are a company or trust and you make payments to a CGT concession stakeholder who is not an employee, the stakeholder does not have to end any activity or office holding.

    Further Information

    For more information, see the Advanced guide to capital gains tax concessions for small business 2011-12 (NAT 3359).

    End of further information
    Consequences of choosing the exemption

    If you choose this exemption, you disregard the amount of the capital gain you have chosen as the CGT exempt amount.

    Payments you make to a CGT concession stakeholder

    If you are a CGT concession stakeholder, a payment you receive from a company or trust to meet the retirement exemption requirements is exempt from income tax. This has implications for any tax losses from prior years (not capital losses) you are entitled to claim as a deduction.

    If you are a company or trust making the payment, you cannot deduct this amount from your assessable income.

    Superannuation consequences

    From 1 July 2007, if you are contributing a retirement exemption amount to a superannuation fund or 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 $1 million (indexed annually from 2007-08) superannuation CGT cap instead, you must notify the fund on Capital gains tax cap election (NAT 71161). You must complete this form by no later than the time you make the contribution.

    Further Information

    For more information about the superannuation contributions caps, see Super contributions - too much super can mean extra tax.

    End of further information

    .

    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 do either of the following:

    • acquire a replacement asset
    • incur expenditure on making capital improvements to an existing asset.

    You must meet certain rollover conditions to defer the gain for longer than two years.

    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 you have also applied the CGT discount, you apply the rollover to the remaining 25% of the capital gain.

    You can use this concession for any gain remaining before or after you have applied any other concessions.

    Do you qualify?

    Your business qualifies to roll over a capital gain if you meet the basic conditions (see step 1). There are rollover 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.

    Rollover conditions

    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
    • 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.

     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
    • 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
    • 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).

    If a new capital gain arises because you have not met the rollover conditions by the end of the replacement asset period (two years) you can choose the retirement exemption instead. For those gains you do not need to meet the basic conditions again but you must meet the retirement exemption conditions.

    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 she meets all basic conditions, 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 to 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 she meets the rollover conditions.

     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 does all of the following:

    • sells the land
    • 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.

    Last modified: 28 Jun 2012QC 25843