Small business retirement exemption

The rules covering the small business reti rement 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 choose the small business rollover instead of the retirement exemption if the conditions are satisfied, or you may choose both concessions for different parts of the remaining capital gain.

Conditions you must meet

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 ju st 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).

The contribution must be made:

• when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or
• 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, there is no requirement to pay any amount to a complying superannuation fund or RSA even though you may have been under 55 years of age when you received the capital proceeds.

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 fund or RSA by the relevant date. 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.

This requirement applies to payments made as a consequence of choices made, and capital proceeds received, after 30 June 2007. Payments made on or before 30 June 2007 were required to be rolled over.

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.

If the gain arises as a result of CGT events J5 or J6 happening (about the replacement asset conditions not being met for the small business rollover concession) you can choose the retirement exemption for those gains without having to satisfy the basic conditions again. This is because you would have already satisfied the basic conditions at the time you chose the rollover.

If you receive the capital proceeds in instalments the above requirements about making a contribution apply to each instalment (up to the asset’s CGT exempt amount).

Death and the retirement exemption

You may be eligible for the concessions if you make a capital gain on an asset within two years of a person’s death, if that asset is or was part of that individuals estate, and you are a:

• beneficiary of the deceased estate
• legal personal representatives (executor), or
• trustee or beneficiary of the testamentary trust (trusts created by a will).

You may also be eligible if you, together with the deceased, owned the asset as joint tenants.

You will be eligible for the 15-year exemption to the same extent that the deceased would have been just prior to their death, except that there is no requirement for the deceased to contribute an amount to a complying superannuation fund or a retirement savings account.

The Commissioner can extend the two year period.

See ‘Basic conditions’ on page 11 and ‘Death and the small business CGT concessions’ on page 58.

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 to at least one of your CGT concession stakeholders worked out by reference to each individual’s percentage of the exempt amount
• the payment must be 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).

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 fund or retirement savings account (RSA) on their behalf. The company or trust must notify the trustee of the fund or the RSA at the time of the contribution that the contribution is being made in accordance with the requirements of the retirement exemption.

If the stakeholder was 55 or more there is no requirement to make this contribution.

Payments must be made:

• seven days after you choose to disregard the capital gain if you choose the retirement exemption for a J2, J5 or J6 event, or
• in any other case, 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.
   

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.

This is an important requirement. Failure to immediately make a payment into a complying superannuation fund or RSA 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.

The requirement to make a payment to a complying fund or RSA applies to payments made to a qualifying fund after 30 June 2007. Payments made on or before 30 June 2007 were required to be rolled over.

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.

If the gain arises as a result of CGT events J5 or J6 happening (about the replacement asset conditions not being met for the small business rollover concession) you can choose the retirement exemption for those gains without having to satisfy the basic conditions again. This is because you would have already satisfied the basic conditions at the time you chose the rollover.

The requirement for companies and trusts to make a payment to at least one CGT concession stakeholder was modified by the June 2009 amendments. These entities can now make a retirement exemption payment directly, or indirectly, through one or more interposed entities to a CGT concession stakeholder. The amendments ensure there is no tax impact on the interposed entity that receives and passes on the payments.

The amendments apply to payments made on or after 23 June 2009.

Termination of employment not required

Payments made by a company or trust to an employee of an amount exempted under the retirement exemption are deemed to be payments in respect of the termination of employment of the employee. There is no need for an actual termination of employment.

Where such payments are made by a company or trust to a CGT concession stakeholder who is not an employee, the stakeholder is not required to cease any activity or office holding. Also see Deemed dividends.

For an individual choosing the retirement exemption, there is no requirement to terminate any activity or cease their business.

Payments made on or after 23 June 2009 to a CGT concession stakeholder who is an employee, to satisfy the retirement exemption requirements, are no longer deemed to be in consequence of termination of employment. Also see Deemed dividends.

Such payments also ceased to be treated as eligible termination payments from 2007–08.

Deemed dividends

Where a payment is made by a comp any or trust under the retirement exemption to a CGT concession stakeholder who is an employee of that entity, the payment is deemed (for the purposes of section 109 of the Income Tax Assessment Act 1936) to have been made in consequence of the termination of employment of the stakeholder.

If the payment from a private company to the employee CGT concession stakeholder is excessive (after considering all the circumstances), section 109 of the Income Tax Assessment Act 1936 deems the excessive remuneration to be a dividend.

Consideration of what is unreasonable or excessive is not restricted to the retirement exemption limit of $500,000. Any opinion formed should also have regard to the length of service and level of contribution to the business by the CGT concession stakeholder/employee.

There are no such implications for payments made to CGT concession stakeholders who are not employees of the company or trust.

Payments made on or after 23 June 2009 to a CGT concession stakeholder who is an employee, to satisfy the retirement exemption requirements, are no longer deemed to be in consequence of termination of employment for the purposes of section 109 of the ITAA 1936 (about excessive payments to shareholders, directors and associates being deemed to be dividends).

Division 7A of the ITAA 1936 also no longer applies to treat such payments made by a company or trust as dividends.

Such payments also ceased to be treated as eligible termination payments from 2007–08 onwards.

Payments made on or after 23 June 2009 to satisfy the retirement exemption requirements are not treated as a dividend nor a frankable distribution provided:

• you are a company making a payment to:
  • a CGT concession stakeholder or
  • an interposed entity, or
   
• you are an interposed entity receiving a payment and passing that payment on.

See Interposed entities receiving or making payments on or after 23 June 2009.

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 a payment to at least one of its concession stakeholders on receipt of each instalment, up to the CGT exempt amount. As mentioned earlier, the payment must be made by the later of seven days after the choice is made or seven days after an instalment of the capital proceeds is received.

In this situation, the total amount of each instalment must be paid until the total of the payments equals the capital gain being disregarded. In other words, the requirement to make a payment 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.

If an individual receives capital proceeds in instalments, each instalment is treated as a separate payment. This means that each instalment is looked at separately and in succession in applying the exemption up to the individual’s CGT exempt amount.

Receiving actual capital proceeds not required

It is not essential to receive actual capital proceeds from the CGT event to be able to choose the retirement exemption. The retirement exemption is available where a capital gain is made when an active asset is gifted and the market value substitution rule has applied, or where CGT event J2, J5 or J6 happens.

In order to access the exemption on a gain made by a company or trust for which there are no actual proceeds, the company or trust must make a payment of the disregarded capital gain to at least one of its CGT concession stakeholders.

In 2005–06 and earlier years, the taxpayer needed to have received actual capital proceeds from the CGT event to qualify for the retirement exemption. If the market value substitution rule applied to increase the capital proceeds taken to be received, the retirement exemption was available only to the extent of the actual capital proceeds received. Also where a taxpayer made a capital gain from CGT event J2 or J3 in the 2005–06 or prior year, following an earlier small business rollover, they can only disregard the capital gain under the retirement exemption if the original capital gain involved actual capital proceeds.

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 a payment.

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. This includes amounts disregarded under former (repealed) retirement exemption provisions. For a company or trust with eight CGT concession stakeholders (four significant individuals and their four spouses where the spouse has a business participation percentage greater than zero), the limit is effectively $4 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 (see below).

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.

The amount of any capital gain that exceeds the CGT exempt amount does not qualify for this exemption.

Payments made to CGT concession stakeholder

If you are a CGT concession stakeholder, a payment you receive from a company or trust to satisfy 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. A tax loss must first be offset against net exempt income.

If you are a company or trust making the payment, it is not able to be deducted from your assessable income.

Interposed entities receiving or making payments on or after 23 June 2009

If you ar e a company or trust receiving a payment (whether directly or indirectly through one or more interposed entities) that another company or trust made to satisfy the retirement exemption requirements and you are passing that payment on to a CGT concession stakeholder or another interposed entity:

• the payment you receive is not included in your assessable income and is not exempt income, and
• the payment you make is not deductible from your assessable income.

Amounts which are not assessable income and not exempt income have no implications for tax losses of previous years.

A payment you make to satisfy the retirement exemption requirements is not treated as a dividend nor a frankable distribution provided:

• you are a company making a payment to
  • a CGT concession stakeholder, or
  • an interposed entity, or
   
• you are an interposed entity receiving a payment and passing that payment on.

This is the case despite section 109 of the ITAA 1936 which can treat excessive payments to shareholders, directors and associates as dividends. Therefore section 109 no longer has any application to these payments.

Division 7A of the ITAA 1936 also no longer applies to treat such payments made by a company or trust as dividends.

For payments made prior to 23 June 2009 the company or trust is required to make the payment directly to the CGT concession stakeholder.

Superannuation consequences

The Superannuation Legislation Amendment (Simplification) Act 2007 has abolished ETPs and RBLs 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).

A payment or contribution made under the retirement exemption from the 2007–08 year is not required to be reported.

Small business rollover

The rules covering the small business rollover are contained in Subdivision 152-E of the Income Tax Assessment Act 1997.

The small business rollover allows you to defer all or part of a capital gain made from a CGT event happening to an active asset.

Interaction with other concessions

You may choose to apply the small business rollover to as much of the capital gain as you decide:

• 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 you have applied capital losses, or
• instead of the small business 50% active asset reduction – that is, to the capital gain remaining after you have applied any capital losses and CGT discount. Making this choice might ultimately allow a company or trust to make larger tax-free payment under the small business retirement exemption if they choose the retirement exemption after the deferred capital gain has crystallised – for example, when the replacement asset is later sold.

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

Basic conditions

To qualify for the small business rollover you need to satisfy the basic conditions that apply to all the CGT small business concessions. There are rollover conditions that must also be met.

Consequences of choosing the rollover

If you choose the rollover, all or part of the capital gain will not be included in your assessable income until a change in circumstances happens, for example you don’t meet the rollover conditions within the specified time period. One of the rollover conditions is that you must acquire a replacement asset or incur capital expenditure on improving an existing asset.

If your use of the replacement or improved asset changes (for example, you no longer use it in the business or you sell it) this is a change in circumstances.

When a change in circumstances happens the deferred capital gain will crystallise – that is, all or part of the capital gain previously deferred will become assessable.

You can choose to apply certain concessions to this gain. If there is any amount of the capital gain left after applying all the concessions you choose, this amount will be included in your assessable income.

Cost base of replacement asset

There is no reduction in the cost base of the replacement asset when the capital gain is rolled over.

Rollover conditions

There are rollover conditions that must be satisfied by the end of the replacement asset period. This period starts one year before and ends two years after the last CGT event that occurs in the income year for which you choose the roll over.

If the rollover conditions are not met within the replacement asset period the gain will become assessable.

You satisfy the rollover conditions if:

• you acquire one or more CGT assets as replacement assets or make a capital improvement to one or more existing assets, or both, within the replacement asset period, and the replacement asset, or the asset to which the capital improvement was made, is an active asset at the end of the replacement asset period. A depreciating asset such as plant can be a replacement asset
• the replacement asset is a share in a company or an interest in a trust, at the end of the replacement asset period – you, or an entity connected with you, must be a CGT concession stakeholder in the company or trust, or – CGT concession stakeholders in the company or trust have a small business participation percentage in the interposed entity of at least 90%
• the capital gain that is being rolled over is not more than the sum of the following
  • the amount paid to acquire the replacement asset – that is, the first element of the cost base of the replacement asset
  • any incidental costs incurred in acquiring that asset (which can include giving property) – that is, the second element of the cost base of the replacement asset, and
  • the amount expended on capital improvements to one or more assets that were acquired or already owned – that is, fourth element expenditure.
   

As the share or interest also needs to be an active asset, the company or trust must satisfy the 80% test. That is, the market value of the active assets and certain financial instruments of the company or trust must be 80% or more of the total of the market value of all the assets of the company or trust.

You can choose to obtain a rollover even if you have not yet acquired a replacement asset or incurred expenditure on a capital improvement to an existing asset.

The Commissioner has the discretion to allow a longer replacement asset period by granting you an extension of time.

When the gain crystallises

Failure to acquire a replacement asset and make a capital improvement after a rollover (CGT event J5)

CGT event J5 happens if you choose to obtain a rollover, and by the end of the replacement asset period:

• you have not acquired a replacement asset, and have not made a capital improvement to an existing asset
• the replacement or capital improved asset is not your active asset (for example you have sold it, it has become your trading stock or it is no longer used in the business), or
• if the replacement asset is a share in a company or an interest in a trust
  • the share or trust interest fails the 80% test (unless the failure is only of a temporary nature)
  • you, or an entity connected with you, are not a CGT concession stakeholder in the company or trust, or
  • CGT concession stakeholders in the company or trust do not have a small business participation percentage in the interposed entity of at least 90%.
   

Consequences of CGT event J5

When CGT event J5 happens, you make a capital gain equal to the amount of the capital gain previously disregarded under the small business rollover.

The time of the event is at the end of the replacement asset period.

The Commissioner may extend the replacement asset period.

A capital gain from CGT event J5 may be eligible for the retirement exemption if you meet the relevant conditions. You don’t need to meet the basic conditions again but you must meet the retirement exemption conditions. However you cannot apply the 50% discount, small business 50% active asset reduction or the 15-year exemption to reduce this gain.

A transitional provision provides that where you chose a rollover in the 2005–06 or earlier year, and did not subsequently acquire a replacement asset, you are not precluded from accessing the retirement exemption on a capital gain. That is, if a replacement asset was not acquired, it would be as though the rollover was never chosen and the capital gain was not disregarded.

CGT event J6

CGT event J6 happens if you choose to obtain a rollover, and by the end of the replacement asset period you satisfy all of the rollover conditions, except that the total of the following amounts are less than the amount you chose to rollover:

• the amount paid to acquire the replacement asset – that is, the first element of the cost base of the replacement asset
• any incidental costs incurred in acquiring that asset (which can include giving property) – that is, the second element of the cost base of the replacement asset, and
• the amount expended on capital improvements to one or more assets that were acquired or already owned – that is, fourth element expenditure.

Consequences of CGT event J6

When CGT event J6 happens, you make a capital gain equal to the difference between the amount of the capital gain disregarded under the small business rollover, and the amount incurred on the replacement asset or capital improvements.

The time of the event is at the end of the replacement asset period.

The Commissioner may extend the replacement asset period.

When CGT event J6 occurs, you may be eligible for the retirement exemption, provided you meet the relevant conditions for that exemption. You don’t need to meet the basic conditions again. However you cannot apply the 50% discount, small business 50% active asset reduction or the 15-year exemption to reduce this gain.

CGT event J2

A CGT event (CGT event J2) happens if, after the end of the replacement asset period there is a change in the status of a replacement or capital improved asset you chose for the small business rollover.

Some examples of when CGT event J2 happens include:

• the replacement or capital improved asset stops being your active asset – for example, you dispose of the asset or you stop using it or holding it ready for use in your business
• the replacement or capital improved asset becomes your trading stock
• you start to use the replacement or capital improved asset solely to produce exempt income, or
• If the replacement asset is a share in a company or an interest in a trust
  • the share or interest stops being an active asset, that is, the share or trust interest fails the 80% test (and the failure is more than just temporary in nature)
  • a liquidator or administrator of the company declares the shares worthless (CGT event G3)
  • you, or an entity connected with you, cease to be a CGT concession stakeholder in the company or trust, (or that entity is no longer connected with you), or
  • CGT concession stakeholders in the company or trust cease to have a small business participation percentage in the interposed entity of at least 90%.
   

Consequences of CGT event J2

When CGT event J2 happens to your replacement or capital improved asset, you make a capital gain equal to the gain previously disregarded under the small business rollover.

If there was more than one replacement or capital improved asset and a change happens to only some of the assets, the capital gain is the difference between the amount that was originally rolled over and the relevant expenditure on the remaining replacement or improved assets that satisfied the relevant conditions.

The time of the event is when the change happens.

A capital gain from CGT event J2 may qualify for:

• further rollover, if you acquire another replacement asset, or
• the retirement exemption.

This is provided you meet the relevant conditions for the rollover or exemption. You cannot apply the CGT discount, the 15-year exemption or the small business 50% active asset reduction to reduce this capital gain.

If you dispose of a replacement or capital improved asset, another CGT event (CGT event A1) happens in addition to CGT event J2. Any capital gain you make from CGT event A1 on the disposal of the replacement or capital improved asset may qualify for any of the small business CGT concessions if the relevant conditions are satisfied.

If CGT event J6 had previously happened in relation to the rollover, the capital gain is the same as calculated above, less the capital gain previously made under CGT event J6.

If CGT event J2 has previously happened in relation to the rollover, the capital gain is the same as calculated above, less the capital gain previously made under CGT event J2.

Death and the small business CGT concessions

Assets and death

When a person dies, their assets devolve (that is, are transferred) to their legal personal representative (LPR) or are acquired by a surviving joint tenant where the deceased owned those assets as joint tenants with another person. In effect, there is a change of ownership of the assets and therefore a CGT event (being a disposal). However, any capital gain or capital loss from this CGT event is disregarded (as is any capital gain or loss the LPR makes when the asset passes to a beneficiary in the estate or that is made as a result of the asset being acquired by a surviving joint tenant).

The LPR, beneficiary or surviving joint tenant is taken to have acquired the assets on the date of death. Generally the cost base of the assets is transferred to the assets in the hands of the LPR, beneficiary or joint tenant (however market value is used if the deceased acquired the assets before 20 September 1985).

In effect, with the disregarding any capital gain upon death and transferring the cost base upon death of the asset owner, any unrealised capital gain is deferred until a later sale of the asset by the LPR, beneficiary or joint tenant.

The LPR or beneficiary of the deceased estate will be eligible for the small business CGT concessions where:

• the asset is disposed of within two years of the date of death (although the Commissioner may allow a longer period by granting an extension of time), and
• the asset would have qualified for the small business CGT concessions if the deceased had disposed of the asset immediately before his or her death.

Provided these conditions are satisfied, the CGT small concessions are also available to the trustee of a trust established by the will of the deceased; a beneficiary of such a trust; and a surviving joint tenant.

Amendments to the law to allow surviving joint tenants, trustees and beneficiaries of trusts (established by the will of the deceased) to choose the concessions, were enacted in June 2009 and apply for 2006–07 and later years.

If you became eligible for the concessions as a result of the June 2009 amendments you have until the later of:

• the day the entity lodges its income tax return for the income year in which the relevant CGT event happened
• 12 months after the day on which these amendments receive royal assent, or
• a later day allowed by the Commissioner.

The extension of time to make a choice applies to CGT events happening before the 23 June 2009.

For the retirement exemption, there is no need for the amount to be paid into a superannuation fund, even if the deceased was less than 55 years of age just before his or her death.

The 15-year exemption can also be chosen if the deceased had met the requirements, except that it is not necessary for the CGT event to have happened in relation to the retirement of the individual.

Asset disposed of after the two-year time limit

If a person carrying on a business dies and their assets devolve to their LPR, beneficiary, surviving joint tenant or trustee or beneficiary of a testamentary trust (the transferee), the active asset test is applied to the transferee in relation to any capital gain made on a sale of the assets after the two-year time limit (or such further time that the Commissioner allows). This means that if the transferee does not continue to carry on the deceased’s business, or use the asset is another business, after the two-year time limit, the active asset test may not be satisfied and the small business concessions may not be available.

Death and a previous small business rollover

If, just before dying, a person still owned a replacement or capital improved asset from an earlier small business rollover, CGT event J2 will happen upon the person’s death. This is because the replacement or capital improved asset will stop being the deceased’s active asset, having devolved to their LPR.

However, the general rules concerning death, in addition to disregarding any capital gain made on the replacement asset from CGT event A1, will also disregard the capital gain from CGT event J2. Although any capital gain from CGT event A1 is effectively deferred until a later sale of the asset by the LPR or beneficiary, the capital gain from CGT event J2 is not transferred to the LPR or beneficiary. This means that the capital gain from CGT event J2 is permanently disregarded under the general rules concerning death.