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. If you are an individual who chooses the retirement exemption, you do not need to terminate any activity or cease business. This concession allows you to provide for your retirement. If you are a CGT concession stakeholder and receive payments under the retirement exemption, you are not required to terminate your 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 (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)
- where 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
- where 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).
Unless the capital gain arises from CGT event J5 or 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 are under 55 years old 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).
- You must make the contribution:
- when you made the choice to use the retirement exemption, or when you received the proceeds (whichever is later), or
- when you made the choice to use the retirement exemption if the relevant event is CGT event J2, J5 or J6.
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 years old 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.
If you are 55 years old, 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 old when you received the capital proceeds.
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 individual's estate, and you are a:
- beneficiary of the deceased estate
- legal personal representative (executor), or
- trustee or beneficiary of the testamentary trust (trust 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 retirement 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 (RSA).
The Commissioner can extend the two-year period.
See Basic conditions for the small business CGT concessions 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 where you meet all the following conditions:
- 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 is more than one CGT concession stakeholder, 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 is equal to the exempt amount or the amount of capital proceeds, whichever is less, and
- 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).
You must make payments:
- if you choose the retirement exemption for a J2, J5 or J6 event, seven days after you choose to disregard the capital gain
- 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.
If a CGT concession stakeholder is under 55 years old just before a payment is made in relation to them, the company or trust must make the payment to the CGT concession stakeholder by contributing it to a complying superannuation fund or 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.
There is no requirement to make this contribution if the stakeholder was 55 years old or older.
Therefore, if you choose the retirement exemption after you have received the capital proceeds (for example, when you lodge your 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 make a payment by the end of seven days after making the choice to a CGT concession stakeholder (if they are 55 years old or older) or into a complying superannuation fund or RSA (if the stakeholder is under 55 years old) will mean the conditions are not satisfied and the retirement exemption will not be available.
If the gain arises as a result of CGT events J5 or J6 happening (when the replacement asset conditions have not been 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 can be satisfied by making the 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.