Small business retirement exemption

The rules covering the small business retirement exemption are contained in Subdivision 152-D of the Income Tax Assessment Act 1997.

Interaction with other concessions

You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions.

This concession interacts with the eligible termination payment (ETP) provisions. Broadly, it requires amounts to be paid (rolled over) into a complying superannuation fund, a complying approved deposit fund or a retirement savings account under the ETP provisions if the recipient is younger than 55.

You may choose to apply the small business retirement exemption:

• after the small business 50% active asset reduction - that is, to the remaining 50% (or if the CGT discount has also applied, the remaining 25%) of the capital gain after capital losses have been applied, or
• instead of the small business 50% active asset reduction - that is, to the capital gain that remains after you have applied any CGT discount and capital losses. Making this choice might allow a company or trust to make larger tax-free ETPs under the small business retirement exemption.

You may instead choose the small business rollover if its conditions are satisfied or you may choose both concessions for different parts of the remaining capital gain.

Conditions to be satisfied

Individual

If you are an individual, you can choose to disregard all or part of a capital gain if:

• you satisfy the basic conditions
• you keep a written record of the amount you chose to disregard (the CGT exempt amount)
• if you were under 55 years of age just before you received an amount of capital proceeds from the CGT event, you roll over an amount equal to the exempt amount under the ETP provisions. (If you were 55 or older, there is no requirement to roll over any amount).

If you choose an amount to disregard under the small business retirement exemption, the capital proceeds from the CGT event (to the extent of the exempt amount) are taken to be an ETP paid to you at the later of when you made the choice and when you received the capital proceeds.

Therefore, if you choose the retirement exemption after you have received the capital proceeds (for example, when you lodge your income tax return) you are not required to rollover any amount until you make the choice. Accordingly, you may use the capital proceeds for other purposes before making the choice. However, once you make the choice you must immediately roll over an amount equal to the ETP if you were under 55 just before you received the capital proceeds.

To satisfy the immediate rollover requirement you must pay the amount into a complying superannuation (or similar) fund no later than the day you choose the retirement exemption.

This is an important requirement. Failure to immediately roll over the amount in accordance with the ETP provisions will mean the conditions are not satisfied and the retirement exemption will not be available.

Taxation Determination TD 96/36 further discusses the circumstances in which an ETP will be accepted as having been 'immediately' paid to a rollover fund. However, the circumstances referred to in the Determination that might give rise to a further period being allowed to make the rollover do not arise where an amount is deemed to be an ETP in the individual's hands.

Company or trust

If you are a company or trust, other than a public entity, you can also choose to disregard all or part of a capital gain if:

• you satisfy the basic conditions
• you satisfy the controlling individual test
• you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are two CGT concession stakeholders, each stakeholder's percentage of the exempt amount (one may be nil but together they must add up to 100%)
• you make an ETP in relation to each of your CGT concession stakeholders, worked out by reference to each individual's percentage of the exempt amount
• the ETPs are made by the later of
  • seven days after you choose to disregard the capital gain
  • seven days after you receive the capital proceeds from the CGT event
   
• if a stakeholder is under 55 years of age just before receiving the ETP, an amount equal to that payment must be immediately rolled over under the ETP provisions. (If the stakeholder was 55 or more there is no requirement to roll over the amount.)

Therefore, if you choose the retirement exemption after you have received the capital proceeds (for example, when you lodge your income tax return) there is no requirement to make any ETPs until you have made the choice. Accordingly, you may use the capital proceeds for other purposes before choosing. However, once you choose, you must make the ETPs by the end of seven days after making the choice.

If a stakeholder is under 55 just before receiving an ETP, an amount equal to that ETP must be immediately rolled over, that is, paid to a complying superannuation (or similar) fund.

This is an important requirement. Failure to immediately rollover an ETP into a complying superannuation (or similar) fund in accordance with the ETP provisions will mean the conditions are not satisfied and the retirement exemption will not be available. Generally, to satisfy the immediate roll over requirement, the funds need to be transferred direct from the payer of the ETP to the nominated fund and it is only in certain circumstances that a transfer of the funds direct to a stakeholder before being transferred to the nominated fund will be accepted as satisfying the requirement.

For more information on the circumstances in which an ETP is accepted as having been immediately rolled over see Taxation Determination TD 96/36.

Termination of employment required

As already stated, a company or trust choosing the retirement exemption must make an actual ETP in relation to each of its CGT concession stakeholders. This means that the payment must qualify as an ETP under the ETP provisions. That is, it must be a payment made in respect of the stakeholder in consequence of the termination of any employment of the stakeholder.

As 'employment' includes the holding of an office, this part of the requirement is satisfied (for a company) if the stakeholder resigns/retires in a bona fide manner either as an employee or as a director. If there is no termination of any employment, the retirement exemption cannot be chosen.

For an individual choosing the retirement exemption there is no requirement to terminate any activity or cease their business. This is because there is no requirement to make an actual ETP. Rather, the exempt amount is simply taken to be an ETP.

Capital proceeds received in instalments

If a company or trust receives the capital proceeds from a CGT event in instalments and chooses the retirement exemption, it must make an ETP in relation to each of its concession stakeholders on receipt of each instalment. As mentioned earlier, the ETPs must be made by the later of seven days after the choice is made and seven days after an instalment of the capital proceeds is received.

In this situation, the total amount of each instalment must be paid as ETPs until the total of the ETPs equals the capital gain being disregarded. In other words, the requirement to make ETPs must be satisfied to the greatest extent possible out of the initial instalments rather than in some other way, such as an apportionment across all the instalments received.

Actual capital proceeds required

You must receive actual capital proceeds from the CGT event to be able to choose the retirement exemption. If the market value substitution rule has applied to increase the capital proceeds to the market value of the CGT asset, the retirement exemption is available only to the extent of the actual capital proceeds you receive.

CGT retirement exemption limit

The amount of the capital gain that you choose to disregard (that is, the CGT exempt amount) must not exceed your 'CGT retirement exemption limit' or, in the case of a company or trust, the CGT retirement exemption limit of each CGT concession stakeholder receiving an ETP.

An individual's lifetime CGT retirement exemption limit is $500,000, reduced by any previous CGT exempt amounts the individual has disregarded under the retirement exemption. For a company or trust with two CGT concession stakeholders, the limit is effectively $1 million ($500,000 for each stakeholder).

A company or trust may determine the percentage of the exempt amount attributable to each stakeholder, having regard to each stakeholder's retirement exemption limit (or remaining limit) and their reasonable benefit limit.