Small business rollover

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 super fund or retirement savings account (RSA).

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

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

If you are 55 or older when you make the choice to access the retirement exemption, you do not have to pay any amount to a complying super fund or RSA, even though you may have been under 55 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
  • receive the capital proceeds from the CGT event.
   

Where a stakeholder is under 55 just before receiving the payment, you must immediately contribute that amount to a complying super 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.

If you must make a retirement exemption payment through one or more interposed entities to a CGT concession stakeholder, refer to Advanced guide to capital gains tax concessions for small business 2009–10 (NAT 3359).

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.

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.

Find out more:

• Advanced guide to capital gains tax concessions for small business 2009–10 (NAT 3359).

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.

Find out more:

• Super contributions caps – too much super can mean extra tax.

Under superannuation laws, ETPs and RBLs were abolished from 1 July 2007.

For the 2006–07 and earlier years, exempt amounts that were taken to be ETPs (for small business individuals) or paid as ETPs (for companies and trusts) were not subject to tax in the hands of the individual unless they exceeded the recipient's reasonable benefit limit (RBL).

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.