The rules covering the small business retirement exemption are contained in Subdivision 152-D of the Income Tax Assessment Act 1997.
You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. For an individual choosing the retirement exemption, there is no requirement to terminate any activity or cease business. This concession allows you to provide for your retirement. Also, CGT concession stakeholders receiving payments under the retirement exemption are not required to terminate their employment with the company or trust.
Interaction with other concessions
You may choose to apply the small business retirement exemption (if you are not eligible for the 15-year 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
- 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 payments under the small business retirement exemption
- where there has been a change in status of a CGT asset that was a replacement or capital improved asset in a rollover under subdivision 152-E (CGT event J2)
- where a change happens in circumstances where a share in a company or an interest in a trust was a replacement asset in a rollover under subdivision 152-E (CGT event J2)
- you chose the rollover 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), or
- you chose the rollover 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 rollover (CGT event J6).
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), and
- if you were under 55 years of age just before you choose to use the retirement exemption, you make a personal contribution equal to the exempt amount to a complying superannuation fund or retirement savings account (RSA). (If you were 55 or older at the time you make the choice to access the retirement exemption, notwithstanding you may have been under 55 years of age when the capital proceeds were received, there is no requirement to pay any amount to a complying superannuation fund or RSA).
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 make the contribution 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 make a contribution of an amount equal to the exempt amount if you were under 55 just before you made the choice.
To satisfy this 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 contribute the amount will mean the conditions are not satisfied and the retirement exemption will not be available.
For the 2006-07 income year the amount disregarded under the retirement exemption was taken to be an ETP, however ETP's have been abolished from 1 July 2007.
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 significant individual test
- you keep a written record of the amount you choose to disregard (the exempt amount) and, if there are more than one 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 a payment in relation to each of your CGT concession stakeholders, worked out by reference to each individual's percentage of the exempt amount
- the payments are made by the later of
- seven days after you choose to disregard the capital gain, and
- seven days after you receive the capital proceeds from the CGT event, and
- seven days after you choose to disregard the capital gain, and
- where a CGT concession stakeholder is under 55 years of age just before receiving the payment, an amount equal to that payment must be immediately .contributed on their behalf to a complying superannuation fund or RSA. (If the stakeholder was 55 or more there is no requirement to make this contribution.)
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 payment 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 payment by the end of seven days after making the choice.
If a CGT concession stakeholder is under 55 just before receiving a payment, an amount equal to that payment must be immediately paid to a complying superannuation (or similar) fund.
This is an important requirement. Failure to immediately make a payment into a complying superannuation (or similar) fund will mean the conditions are not satisfied and the retirement exemption will not be available. Generally, to satisfy the requirement, the funds need to be transferred direct from the payer of the payment to the nominated fund. A transfer of the funds direct to a stakeholder before being transferred to the nominated fund will only be accepted as satisfying the requirement in certain circumstances.