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Small business 15-year exemption

How to claim the small business 15-year exemption on a business asset to reduce or disregard CGT.

Last updated 5 June 2023

How it works

You will not pay CGT when you dispose of an active asset if all of the following are true:

  • You meet the basic eligibility conditions.
  • You or the significant individual (if you are a company or trust) is
    • 55 years or older and the event happened in connection with your retirement, or
    • permanently incapacitated (no age requirement).
     
  • You continuously owned the CGT asset for the 15-year period ending just before the CGT event happened.
  • A CGT event happening in connection with an individual's retirement depends on the 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 their present activities to be regarded as a retirement. The timing may precede or proceed actual retirement.

There are modified rules about the requirement that the asset is continuously owned for at least 15 years for CGT assets acquired:

  • or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed
  • due to marriage or relationship breakdown.

You must choose to apply the small business 15-year exemption and apply it first.

You do not have to apply capital losses against your capital gain before applying the small business 15-year exemption.

If you make a capital loss from the CGT event, you may use the capital loss to reduce other capital gains.

Significant individual test

A company or trust must have a significant individual for a total of at least 15 years of the whole period of ownership of the CGT asset.

The significant individual does not have to be the same individual.

Modified rules - involuntary disposals and relationship breakdown rollover

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 due to marriage or relationship breakdown.

For the purpose of determining whether the 15-year requirement has been met 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.

If you acquired a replacement asset to meet 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.

Example: small business 15-year exemption and relationship breakdown rollover

Cesar and Therese are both 65 years old and were married for 30 years. During their marriage, Cesar owned a farm where he operated a dairy farming business.

When Cesar and Therese divorced, the farm was transferred to Therese under the relationship breakdown rollover provisions.

Therese has operated the dairy business for the past 5 years.

Therese decides to sell the farm to retire. She can apply the 15-year exemption because she chooses to include Cesar’s ownership period to determine her ownership and active asset periods.

End of example

Separate 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 same CGT asset

On 1 December 2002, Janet purchased a 40% interest in a 400-hectare parcel of grazing land.

On 1 December 2007, she purchased the remaining 60% interest in the land.

On 15 December 2020 (Janet's 60th birthday), she sold the land and retired.

Janet owned the:

  • 40% interest she purchased in 2002 for at least 15 years
  • 60% interest she purchased in 2007 for just over 13 years.

The 2 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 example

Extra conditions - company or trust claiming exemption

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.

Exempt distributions

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 are not:

  • included in the assessable income of the CGT concession stakeholder
  • deductible to the company or trust.

This applies if certain conditions are met. The conditions are:

  • the company or trust must make a payment before the later of    
    • 2 years after the relevant CGT event that resulted in the capital gain
    • 6 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
    • further time allowed by us in certain cases
     
  • 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.

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
  • both Joe and Anne are planning to retire.

6 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 Malik family discretionary trust are:

  • the members of the Malik family
  • 2 employees of the family business run by the trustee of the trust.

Mrs. and Mr. Malik and their 3 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. Malik is:

  • 58 years old
  • plans to retire from the family business.

In the next income year, the trustee distributes the $50,000 capital gain equally to Mrs. and Mr. Malik, and their 3 children.

As CGT concession stakeholders, Mrs. and Mr. Malik and their 3 children are each able to treat the distribution of $10,000 as an exempt amount.

End of example

Effects on superannuation

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, you must notify the fund on the CGT cap election form. You must complete this form by no later than the time you make the contribution.

When to make super contributions

If you're 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.

Death and the small business 15-year exemption

You may be eligible for the small business 15-year exemption if you make a capital gain on an asset within 2 years of a person's death, if that asset is or was part of the deceased individual’s estate, and you're a:

  • beneficiary of the deceased estate
  • legal personal representative (LPR)
  • 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'll 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 2-year period. You will need to apply for an extension on a capital gain rollover.

QC52288