Receiving actual capital proceeds not required
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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.
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.
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. Even though 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).
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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.