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.

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 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).

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 ETPs 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 and Death and the small business CGT concessions.

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 ETPs 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.