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Small Business Retirement Exemption

This article explains the small business retirement exemption.

Particularly, the requirements that must be satisfied for the exemption to be available, and what the exemption is.

Requirements

The requirements that must be satisfied for the exemption to be available are:

  1. The basic conditions for the Small Business CGT Concessions must be satisfied.  They relate to things like the CGT Small Business Entity Test, the Maximum Net Asset Value Test, the Active Asset Test and the four additional tests for shares in a company or units in a unit trust.

    An exception to this requirement is where the capital gain is a result of CGT event J5 or J6;

  2. If the taxpayer is a company or trust, then the company or trust must satisfy the significant individual test, which requires that the company or trust have at least one significant individual just before the CGT event;

  3. The choice to apply the small business retirement exemption must be made in writing, must specify the CGT exempt amount, and must be made by the day the taxpayer lodges their income tax return for the relevant year in which the capital gain arose, or a longer period if allowed by the Commissioner.  This is one of those times where the way the income tax return is prepared is not sufficient evidence of the making of the choice;

  4. If the taxpayer is a company or trust that has more than one CGT concession stakeholder, then the choice must also specify the percentage of each CGT asset’s CGT exempt amount that is attributable to each of those individuals;

  5. If the taxpayer is a company or trust, then the company or trust must make a payment, directly or indirectly, to its CGT concession stakeholders.

    The amount of the payment must equal the lessor of the capital proceeds received or the CGT exempt amount.

    However, it the capital gain arose from CGT event J2, J5 or J6, then the amount of the payment must equal the lessor of the amount of the capital gain or the CGT exempt amount;

  1. If the taxpayer is a company or trust, then the amount paid to each CGT concession stakeholder must be worked out by reference to each individual’s percentage of the CGT exempt amount;

  2. If the taxpayer is a company or trust, then the payment must be made by the later of 7 days after the company or trust makes the choice and 7 days after the company or trust receives an amount of the capital proceeds.

    However, if the capital gain arose from CGT event J2, J5 or J6, then the payment must be made 7 days after the company or trust makes the choice;

  1. If the taxpayer is an individual that is under 55 years of age just before the choice to apply the small business retirement exemption is made, then the individual must contribute an amount equal to the CGT exempt amount to a complying superannuation fund; and

  2. If the taxpayer is a company or trust and the relevant CGT concession stakeholder is under 55 years of age just before the relevant payment is made, then the payment must be made to a complying superannuation fund of their behalf rather than to them directly or indirectly, and the company or trust must notify the superannuation fund that the payment is made in respect of the small business retirement exemption.

What the exemption is

The small business retirement exemption applies after applying capital losses and any discount for discount capital gains.

If both the small business retirement exemption and the small business roll-over could apply, the taxpayer can choose which order to apply them.

Also, the small business retirement exemption does not apply where the small business 15-year exemption applies.

Where the small business retirement exemption applies, it disregards all or part of the capital gain.

The amount that is disregarded is called the CGT exempt amount, and the CGT exempt amount cannot exceed the relevant individual’s CGT retirement exemption limit, which is $500,000 reduced by any amounts previously disregarded by the small business retirement exemption.

If the taxpayer is a company or trust, then the relevant payment made by the company or trust should not be taken to be a dividend or a frankable distribution, should not be deductible to the company or trust, and should not be assessable income or exempt income of the CGT concession stakeholder.  This also applies to interposed entities that pass on the payment to the CGT concession stakeholder.

If the taxpayer is a company or trust that is required to make a payment to a complying superannuation fund, then the contribution should be treated as though it was a contribution made by the CGT concession stakeholder.

Disclaimer – The above is intended as commentary and general information only.  It should not be relied upon as taxation advice.  Formal taxation advice should be sought for particular transactions or on matters of interest arising from the above.

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NEWS ARTICLES IN RELATION TO THE SMALL BUSINESS RETIREMENT EXEMPTION