Capital gains from the disposal of active assets may be disregarded up to a lifetime limit of $500,000 per individual, or CGT concession stakeholder for a company or trust.
You may choose to disregard all or part of a capital gain if you meet:
- the basic eligibility conditions
- extra conditions specific to the small business retirement exemption.
You do not need to end your:
- business office holdings
- business activities.
If you choose this exemption, you disregard the amount of the capital gain you have chosen as the CGT exempt amount.
The amount of any capital gain that exceeds the CGT exempt amount does not qualify for this exemption.
You must keep a written record of the amount you choose to disregard (the CGT exempt amount).
A company or trust must also keep a written record of each stakeholder's percentage if there is more than one CGT concession stakeholder.
You may choose to apply the small business retirement exemption (if you're not eligible for the small business 15-year exemption):
- where there has been a change in status of a CGT asset and the asset was
- a replacement or capital improved asset in a roll-over under subdivision 152-E (CGT event J2)
- a share in a company or an interest in a trust that was a replacement asset in a roll-over under subdivision 152-E (CGT event J2)
- where you chose the roll-over under subdivision 152-E and by the end of the relevant period you had not acquired a replacement asset, or made any capital improvements (CGT event J5)
- where you chose the roll-over under subdivision 152-E and by the end of the relevant period the amount you incurred on a replacement asset was less than the amount chosen for the roll-over (CGT event J6).
Unless the capital gain arises from CGT event J5 or J6, you may choose the small business roll-over instead of the retirement exemption (if all conditions are met) or you may choose both concessions for different parts of the remaining capital gain.
CGT events J5 or J6
If the capital gain arises as a result of CGT events J5 or J6 (about the replacement asset conditions not being met for the small business roll-over concession), you can choose the small business retirement exemption for those capital gains without having to meet the basic eligibility conditions again. This is because you would have already met the basic eligibility conditions at the time you chose the small business roll-over.
Receiving actual capital proceeds not required
You do not have to receive actual capital proceeds from the CGT event to be able to choose the small business retirement exemption. For example, this could happen with non-arms length transactions and when an active asset is gifted and proceeds (if any) are less than market value. In this case, the market value substitution rule would apply.
You can choose the small business retirement exemption where CGT event J2, J5 or J6 happens.
Example: capital proceeds not received for small business retirement exemption
In December 2006, Harry retired from farming and transferred 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.
The cost base of the farm was $600,000, so Harry made a capital gain of $400,000.
Harry reduced 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 has not received 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 met).End of example
A company or trust must make a payment of the disregarded capital gain to at least one of its CGT concession stakeholders to access the retirement exemption on a gain for which there are no actual proceeds.
You or the CGT concession stakeholder is under 55
The CGT exempt amount from the proceeds on disposal of the asset must be paid into a complying superannuation fund or a retirement savings account (RSA).
The amount is generally a non-concessional contribution if you're an individual contributing a retirement exemption amount to a super fund or RSA.
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 using the CGT cap election form. You must complete this form by no later than the time you make the contribution.
At the time of the super contribution, the company or trust must notify the trustee of the fund or the RSA that the contribution is being made in accordance with the requirements of the small business retirement exemption.
When to make super contributions and payments
If you choose the small business retirement exemption for CGT events J2, J5 or J6:
- individuals must make the contribution when choosing to use the small business retirement exemption
- companies and trusts must make payments 7 days after choosing to disregard the capital gain.
In any other case:
- individuals must make contributions when choosing to use the retirement exemption, or when proceeds are received (whichever is later)
- companies and trusts must make payments by the later of 7 days after:
- choosing to disregard the capital gain
- receiving the capital proceeds from the CGT event.
If you choose the retirement exemption after you've received the capital proceeds (for example, when you lodge your income tax return), you're not required to make the contribution until you make the choice.
You may use the capital proceeds for other purposes before making the choice.
However, once you make the choice:
- individuals must immediately make a contribution of an amount equal to the exempt amount
- companies or trusts must make the payment within 7 days.
Capital proceeds received in instalments
If capital proceeds from a CGT event are received in instalments:
- an individual is required to make contributions to super upon receipt of each instalment (up to the CGT exempt amount)
- a company or trust must make a payment
- on behalf of at least one of its CGT concession stakeholders to super on receipt of each instalment, up to the CGT exempt amount
- to the greatest extent possible in the initial instalments, instead of spreading payment evenly across all instalments.
You are treated as receiving capital proceeds in instalments if your capital proceeds from the disposal of a CGT asset are increased by one or more financial benefits that you receive under a look-through earnout right relating to that CGT disposal.
You or the CGT concession stakeholder is 55 years old or older
There is no requirement to pay any amount to a complying super fund or RSA, if:
- an individual is over 55 just before choosing the retirement exemption (even if under 55 years old when receiving the capital proceeds)
- a CGT concession stakeholder is over 55 just before a payment is made to the super fund on their behalf.
If you're a company or trust, other than a public entity, you must also meet the following conditions:
- you meet the significant individual test
- you make a payment (based on each individual's percentage of the exempt amount) to at least one of your CGT concession stakeholders
- the payment is equal to the exempt amount or the amount of capital proceeds (whichever is less).
The requirement to make a payment to at least one CGT concession stakeholder can be met by making the payment directly, or indirectly, through one or more interposed entities to a CGT concession stakeholder.
There are no tax consequences for the interposed entity that receives and passes on the payments.
Payments to a CGT stakeholder to meet the retirement exemption requirements are not:
- assessable income
- exempt income
- deductible from your assessable income
- treated as a dividend or frankable distribution, if you are:
- a company making a payment to a CGT concession stakeholder
- a company making a payment to an interposed entity
- an interposed entity receiving a payment and passing that payment on.
This is the case despite section 109 of the ITAA 1936, which can treat excessive payments to shareholders, directors and associates as dividends. Therefore, section 109 does not apply to these payments.
Division 7A of the ITAA 1936 also does not apply to treat such payments made by a company or trust as dividends.
You may be eligible for the small business retirement exemption if you make a capital gain on an asset within 2 years of a person's death, 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 (a trust 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 small business retirement exemption to the same extent that the deceased would have been just prior to their death, except that there is no requirement for the amount to be paid into a super fund or RSA. This is even if the deceased was less than 55 years old just before death.
We can extend the 2-year period in certain circumstances.How to claim the small business retirement exemption to reduce or disregard CGT on active assets.