Step 2 Work out whether you qualify for the 15-year exemption
If you qualify for the small business 15-year exemption, you can disregard the capital gain entirely and you do not need to apply any further concessions. There is no need to apply capital losses before you apply the 15-year exemption. This means you may use these capital losses to offset other capital gains.
If the capital gain is from a depreciating asset, you cannot use the 15-year exemption.
Do you qualify?
You qualify for the small business 15-year exemption if you:
- meet the basic conditions for the small business CGT concessions, including the active asset test (in this case the asset must have been an active asset for at least 7.5 years during your period of ownership)
- continuously owned the CGT asset for the 15-year period ending just before the CGT event, where you are
- an individual in business and at the time of the CGT event you were 55 years old or older and the event was connected with your retirement, or you were permanently incapacitated
- an individual in business and your CGT asset is a share in a company or an interest in a trust and the company or trust had a significant individual, for periods totalling at least 15 years, during which the individual owned the shares or trust interests (not necessarily the same individual for the whole period), or
- a company or trust and the company or trust had a significant individual for at least 15 of the years they owned the asset (not necessarily the same individual for the whole period) and at the time of the CGT event, the significant individual was 55 years old or older and the event was connected with their retirement, or they were permanently incapacitated.
For CGT assets acquired or transferred under the rollover provisions relating to assets compulsorily acquired, lost or destroyed, or those relating to marriage breakdown, there are modified rules about the requirement that the asset be continuously owned for at least 15 years.
Superannuation consequences
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 ($1.315m for 2013-14), 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.
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Example: small business 15-year exemption
Lana does not qualify for the small business 15-year exemption as she has owned the land for only three years. However, she does have a capital loss and may qualify for the CGT discount and one or more of the other small business CGT concessions.
On the other hand, Lana’s friends Ruth and Geoff do qualify for the exemption. They are partners in a partnership that conducts a farming business on land they purchased in 1994 and have owned continuously since that time. The net value of their CGT assets for the purpose of the maximum net asset value test is less than $6 million.
Ruth and Geoff decide to retire as they are both over 60. They sell the land (the major asset of the farming business) in 2012 for a total capital gain of $100,000.
As Ruth and Geoff qualify for the small business 15-year exemption for the capital gain, they can disregard the entire gain. They do not need to apply any other concessions.
End of exampleIf you make a capital loss from the CGT event, you can use the loss to reduce other capital gains.
Step 3 Work out whether you have any capital losses
If you have any capital losses for the current year or losses carried forward from a previous year, you must use them to reduce the capital gain before applying any of the remaining concessions.
Example: capital losses
In the same year as Lana made the $17,000 capital gain on the sale of land, she also made a capital loss of $3,000 from the sale of another asset.
She must offset the loss against the gain before applying any of the remaining concessions, as follows:
$17,000 – $3,000 = $14,000
Lana may be able to reduce her capital gain further using the CGT discount and one or more of the other small business CGT concessions.
End of exampleStep 4 Work out whether you may claim the CGT discount
The CGT discount allows individuals (including partners in partnerships) and trusts to reduce their capital gain by 50%. Superannuation funds can reduce their gain by 33.33%. There are more rules for beneficiaries who are entitled to a share of a trust capital gain. Companies are not eligible for the CGT discount.
The discount is not limited to small business capital gains, but can also be applied to personal capital gains.
Capital gains and depreciating assets
You make a capital gain from a depreciating asset only to the extent you have used the depreciating asset for a non-taxable purpose (for example, for private purposes). Such a gain may be eligible for the CGT discount.
Are you eligible?
To be eligible for the CGT discount you must meet both of the following:
- be an individual, trust or complying superannuation fund
- have owned the asset involved for at least 12 months.
Certain CGT events, such as where new assets are created, do not qualify for the CGT discount because the 12-month rule would not be satisfied.
If you are eligible for the CGT discount, reduce the capital gain by 50% (or 33.33% for complying superannuation funds).
Example: CGT discount
After offsetting her $3,000 capital losses against her $17,000 capital gain, Lana is left with a capital gain of $14,000. As she is eligible for the CGT discount, she can reduce the remaining capital gain by 50%, as follows:
$14,000 – (50% x $14,000) = $7,000
Lana may be able to reduce her capital gain further using one or more of the other small business CGT concessions.
End of exampleStep 5 Work out whether the gain is from a depreciating asset
If the capital gain is from a depreciating asset, you cannot use any of the small business CGT concessions to reduce the gain any further. If it is not from a depreciating asset, you may be able to reduce your capital gain further under the remaining small business CGT concessions.
Example: depreciating assets
The land that Lana disposed of was not a depreciating asset, so she can use the remaining small business CGT concessions to reduce her capital gain if she meets the relevant conditions.
End of exampleStep 6 Work out whether you may claim the 50% active asset reduction
You may choose not to apply the 50% active asset reduction and go straight to the small business retirement exemption or rollover.
To qualify for the small business 50% active asset reduction on a capital gain, you need to meet only the basic conditions (see step 1).
This means that, if you meet the basic conditions, you may reduce the capital gain by 50% after applying in the following order, any:
- current year capital losses
- unapplied net capital losses from a previous year.
If you are an individual or trust and both the CGT discount and the small business 50% active asset reduction apply, you reduce the capital gain by 50%, then 50% of the remainder, that is, a total of 75%.
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 exampleStep 7 Work out whether you qualify for the small business retirement exemption or rollover
You may choose the small business retirement exemption or the small business rollover for the remaining amount of capital gain if you meet the conditions. Alternatively, you may choose both concessions for different parts of the remaining capital gain.