The rules covering the small business 15-year exemption are contained in Subdivision 152-B of the Income Tax Assessment Act 1997.
Interaction with other concessions
If you qualify for the small business 15-year exemption, you can entirely disregard the capital gain and do not need to apply any other concessions. Further, you do not have to apply capital losses against your capital gain before applying the 15-year exemption.
If the conditions are satisfied and a capital loss is made from the CGT event, you may use the capital loss to reduce other capital gains.
Conditions to be satisfied
You can disregard a capital gain from a CGT event happening to a CGT asset you have owned for at least 15 years if you satisfy the basic conditions for the small business CGT concessions
The active asset test requires the asset to have been an active asset for at least half of the relevant 15-year period and not half of the full period of ownership.
- continuously owned the CGT asset for the 15-year period ending just before the CGT event happened
- are an individual who is
- at least 55 years old at the time of the CGT event and the event happens in connection with your retirement, or
- permanently incapacitated at the time of the CGT event
- are an individual and the CGT asset is a share in a company or an interest in a trust and that company or trust had a controlling individual for the entire time you owned the share or interest (even if it was not the same controlling individual during the whole period), and
- are a company or trust, and had a controlling individual for the entire time you owned the CGT asset (even if it was not the same controlling individual during the whole period), and the individual who was a controlling individual just before the CGT event was
- at least 55 years old at that time and the event happened in connection with their retirement, or
- permanently incapacitated at that time.
Ruth and Geoff are partners in a partnership that conducts a farming business on land they purchased in 1986 and have owned continuously since that time. The net value of their CGT assets for the purpose of the maximum net asset value test is less than $5 million.
Ruth and Geoff wish to retire as they are both over 60 years of age. As they have no children, they decide to sell the major asset of the farming business (the land). They sell the land in 2002, for a total capital gain of $100,000. Both Ruth and Geoff qualify for the small business 15-year exemption in relation to the capital gain.End of example
Exception for discretionary trusts with tax losses
In relation to the controlling individual requirement, there is an exception for discretionary trusts that have tax losses in an income year. The requirement that there be a controlling individual for the whole of a period does not apply to an income year in which a discretionary trust did not make a distribution of income or capital if the trust had a tax loss for that income year. This is because the trust might not have had the funds to make a distribution during that income year, which would prevent it from having a controlling individual in that year.
This exception applies only for the small business 15-year exemption and not for any of the other small business concessions. Further, there must still be a controlling individual just before the CGT event, so this exception does not apply in the year the CGT event happens.
In connection with an individual's retirement
Whether a CGT event happens in connection with an individual's retirement depends on the particular circumstances of each case. The following examples provide a guide as to the likely scope of the term.
The first example indicates where the CGT event would be 'in connection with retirement' for the purposes of the 15-year exemption:
A small business operator, aged over 55, sells his business. Under the terms of the sale, he agrees to be employed by the new owner for a few hours each week for two years. The sale of the business would be in connection with the small business operator's retirement. He has permanently or indefinitely ceased being self-employed and has commenced gainful employment on a much reduced scale with another party, although still performing similar activities.End of example
On the other hand, the following example indicates where the CGT event would not be 'in connection with retirement':
A small business operator and spouse are both pharmacists, are both aged over 55 and carry on business through two pharmacies. They sell one (and make a capital gain) and, accordingly, reduce their working hours from 60 hours a week each to 45 and 35 hours a week respectively. So there has been some change to their present activities in terms of hours worked and location. But there has not been a significant reduction in the number of hours or a significant change in the nature of their activities and therefore there has been no 'retirement'.
If, on the other hand, one spouse reduced their hours to nil and stopped working, there would be a significant reduction in the number of hours (that is, to nil) that spouse was engaged in the business activities. The sale would be in connection with the retirement of that spouse.End of example
A CGT event may be 'in connection with your retirement' even if it occurs at some time before retirement. Whether particular cases satisfy the conditions depends very much on the facts of each case, but here is an example.
A small business operator, aged over 55, sells some business assets as part of a wind down in business activity ahead of selling the business. Within six months she sells the business and ends her present activities. If it can be shown that the earlier CGT event was integral to the business operator's plan to cease her activities and retire, the CGT event may be accepted as happening in connection with retirement.End of example
Similarly, the words 'in connection with' can apply where the CGT event occurs sometime after retirement. Again, this type of case would depend on its own particular facts and cases would need to be considered on a case-by-case basis, but here is an example.
A small business operator 'retires' and his children take over the running of the business. Within six months, some business assets are sold and a capital gain is made. Several reasons may have prompted the sale of the assets. If there is no relevant connection with the small business operator's business, the requirement would not be satisfied. If it can be shown that the reason for disposing of the assets is connected to retirement and the later sale is integral to the small business operator's retirement plan, the sale may be accepted as happening in connection with retirement.End of example
Whether an individual is permanently incapacitated at the time of the CGT event depends on the particular circumstances of each case. The following example provides an indication of the meaning of the term for the purposes of the small business 15-year exemption.
Jack had been carrying on business for many years. Unfortunately, he developed severe health problems that continued to deteriorate to the point where he was incapable of operating the business and, as a result, he sold the business.
At the time the business was sold, Jack's doctor provided a written statement that Jack suffered ill health to the extent that he was unlikely to be able to engage again in gainful employment for which he was reasonably qualified. Jack was under 55 years of age when he sold the business.
Having regard to all the circumstances, Jack would be considered to be permanently incapacitated at the time the business was sold. He may therefore qualify for the small business 15-year exemption if he satisfies the other conditions.End of example
Continuing time periods for the exemption for involuntary disposals
A requirement of the small business 15-year exemption is that you must have continuously owned the CGT asset for at least 15 years before the CGT event. However, there are modified rules to determine if this requirement is satisfied for CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or to marriage breakdown (Subdivisions 124-B and 126-A of the Income Tax Assessment Act 1997 respectively).
If you acquired a replacement asset to satisfy the rollover requirements in respect of 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.
If you have a CGT asset transferred to you because of a marriage breakdown, and the capital gain arising from that transfer was rolled over under the marriage breakdown rollover provisions, for the purpose of determining whether the 15-year requirement has been satisfied you can choose to:
- include the ownership period of your former spouse, or
- commence 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.
Cameron and Therese were married for 10 years, during which time Cameron owned a farm on which he operated a dairy business. Since their divorce, Therese has owned the farm (it was transferred to her in circumstances under which Cameron obtained a rollover under the marriage breakdown rollover provisions) and operated the dairy business for the past five years.
Therese can sell the farm and obtain the 15-year exemption (if she is 55 or over and sells the farm to retire or is incapacitated) if she chooses to adopt Cameron's 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.
On 1 December 1985 Janet purchased a 40% interest in a 400-hectare parcel of grazing land. On 1 December 1990 she purchased the remaining 60% interest in the land. On 15 December 2003 (Janet's 60th birthday) Janet sold the land and retired.
While Janet owned the 40% interest she purchased in 1985 for at least 15 years, she owned the 60% interest she purchased in 1990 for just over 13 years. The two 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