Distributions of the exemption amount
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 is:
- not included in the assessable income of the CGT concession stakeholder, and
- not deductible to the company or trust
if certain conditions are satisfied.
The conditions are:
- the company or trust must make a payment within two years after the CGT event that resulted in the capital gain or, in appropriate circumstances, such further time as allowed by the Commissioner
- the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event, and
- 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.
The CGT concession stakeholder's participation percentage is:
- for a company or a trust (where entities have entitlements to all the income or capital of the trust), the stakeholder's small business participation percentage in the company or trust just before the CGT event, and
- for a trust (where entities do not have entitlements to all the income or capital of the trust), the amount (expressed as a percentage) worked out using the formula:
where N is the number of CGT concession stakeholders of the trust just before the CGT event.
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 and both Joe and Anne are planning to retire.
Six 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: 40% of $10,000 = $4,000
For Anne: 60% of $10,000 = $6,000
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
The beneficiaries of the M family discretionary trust are the members of the M family and two employees of the family business carried on by the trustee of the trust. Mrs M and Mr M and their 3 children are the 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 M is 58 years old and plans to retire from the family business. In the next income year, the trustee distributes that amount equally to Mrs M and Mr M and to their three children.
As CGT concession stakeholders, Mrs M and Mr M and their three children are each able to treat the distribution of $10,000 as an exempt amount.End of example
Impact on superannuation
From 1 July 2007, if you are contributing a 15-year exemption amount to a superannuation 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 superannuation CGT cap instead ($1.355m for 2014–15), you must notify the fund on the Capital gains tax cap election (NAT 71161). You must complete this election by no later than the time you make the contribution.
Small business 50% active asset reduction
The rules covering the small business 50% active asset reduction are contained in Subdivision 152-C of the Income Tax Assessment Act 1997.
Interaction with other concessions
If you do not qualify for the small business 15-year exemption, the small business 50% active asset reduction may apply to reduce the capital gain.
Unlike the other small business concessions, the small business 50% active asset reduction applies automatically if the basic conditions are satisfied, unless you choose for it not to apply.
For example, you might prefer for it not to apply, and instead choose the small business retirement exemption or the small business rollover. Making this choice allows you to achieve the best result for your circumstances, for example, a company or trust may make larger tax-free payments under the small business retirement exemption.
Otherwise, the small business retirement exemption or the small business rollover (or both) may apply to the capital gain that remains after applying the small business 50% active asset reduction.
Conditions you must meet
To apply the small business 50% active asset reduction, you need to satisfy only the basic conditions. There are no further requirements.
Example: Small business 50% active asset reduction
Lana qualifies for the small business 50% reduction because she meets the basic conditions. Therefore, she can reduce her capital gain by a further 50%, as follows:
$7,000 – (50% x $7,000) = $3,500
Lana may be able to reduce her capital gain further using the small business retirement exemption or the small business rollover.End of example