The small business retirement exemption explained

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What is it?
How does it work?
What are the eligibility requirements?
Case studies
How do you go about claiming it?

What is it?

Small businesses have several capital gains tax (CGT) exemptions and concessions available to them when it comes to selling assets, but only two can be used to boost super.

These concessions generally apply to any active asset your business owns and sells at a profit, provided your annual turnover is below $2 million.

There is the CGT 15-year exemption, which exempts the capital gain on the sale of a business asset you have owned for at least 15 years if you are aged 55 or over and are retiring or permanently incapacitated. These sale proceeds can be contributed to your super and are generally a non-concessional contribution. To exclude the amount from your non-concessional contributions cap and have it count towards your CGT cap amount ($1,615,000 for 2021–22), you must notify your super fund.

But in acknowledgment that many small businesses use their business as their retirement nest egg, there is also the small business retirement exemption for business owners who meet certain requirements.

For this exemption the business owner is exempt from paying CGT if they contribute the capital gain from the sale of an active asset to superannuation. There is a lifetime limit of $500,000 on these contributions. There is no age limit but if you are under 55 you must roll the amount into a super fund. Business owners can choose to disregard all or part of a capital gain under this exemption.

How does it work?

When you sell an active business asset and make a capital gain, a decision must be made as to what to do with that gain once any capital losses are also applied.

If you decide to use the small business retirement exemption and you are under age 55, you must make the contribution to a complying super fund, which includes self-managed superannuation funds (SMSFs) and retirement savings accounts (RSAs). Importantly, you don’t need to be retired or have stopped work. What’s more, this contribution is not counted as a non-concessional contribution up to the combined CGT cap amount of $1,615,000 for 2021–22.

Need to know: The CGT cap

There is a lifetime limit on the small business retirement exemption of $500,000 and a CGT cap amount for the 15-year CGT exemption and retirement exemption combined of $1,615,000 for 2021–22.

This is the maximum amount of CGT-related super contributions you can exclude from your non-concessional contribution limits. The cap amount is indexed annually but the $500,000 small business exemption is not indexed. Both of these caps are lifetime caps.

The contribution needs to be made when you receive the funds from the sale of the asset or when you make the decision to use the retirement exemption, whichever is later.

You must notify your super fund trustee of your CGT retirement election before or at the time you make the contribution to your fund. This is necessary to get the timing right with larger funds, so they don’t incorrectly treat the amount as a non-concessional contribution.

If you are under 55 and decide to use the retirement exemption after you have received the funds – and possibly used the funds for other purchases – all is not lost. The Australian Tax Office (ATO) says you can still use the retirement exemption if you make an equivalent contribution to a super fund or RSA on the day you make the decision. It is generally advised that the choice is made by the time you need to lodge your tax return for the financial year the CGT event happens.

If you are over 55 when you make the decision, there is no requirement to make the contribution to a super fund. However, if you do want to make a contribution, you need to do it by the later of:

The day your tax return must be lodged for the year in which the CGT event occurred
Within 30 days after you receive the proceeds of the CGT event.

If you are aged between 67 and 75 you also need to meet the work test if you wish to make the contribution of the CGT exempt amount to your super fund. After 75 it’s not possible to contribute the CGT exempt amount to your fund.

What are the eligibility requirements?

There are a number of conditions that need to be meet to be eligible for any small business CGT concessions or exemptions.

First, one of the following must be met:

You must be a small business entity with annual aggregated turnover of $2 million or less
You are not carrying on a business but your asset is used in a closely connected small business
You are a partner in a partnership that is a small business entity and the asset is either an interest in a partnership asset or an asset that is used in the business of the partnership
The CGT assets owned by you and certain entities cannot exceed $6 million just before the CGT event for which concessions are sought.

The asset must also be an active asset, which means it is used in the course of carrying on a business, or held for that purpose, or it is an intangible asset inherently connected with the business.

The active asset test is met if the asset was active for at least 7.5 years of the 15 years of ownership, or half of the period owned if owned for 15 years or less. These minimum periods need not be continuous, provided the asset is active for the minimum amount of time in total.

Need to know: Shares in companies or trusts have additional conditions – read the ATO steps here.

In addition to the general small business CGT conditions, you also need to keep a written record of the capital gains amounts you chose to disregard to be eligible for the retirement exemption.

If payments from the sale of an asset are received in instalments, the conditions apply to each instalment.

You could also be eligible for a retirement exemption if you inherit an asset, provided that asset is sold within two years. You would be eligible to the same extent that the deceased would have been before they died.

In the case of companies and trusts, you must:

Be a significant individual, that is, own 20% or more of the company or trust
Keep a written record of the CGT amount to be disregarded and how that will be divided between CGT concession stakeholders
Make payments to at least one CGT concession stakeholder seven days after they receive the proceeds of the sale of the asset, or seven days after they make the decision, whichever is latest.

Case studies

Example 1

Jeff is 47 and was a self-employed retailer with an aggregated annual turnover of $1.5 million. He recently sold his business and made a taxable capital gain of $200,000. Jeff is eligible to claim the small business retirement exemption from CGT because his aggregated annual turnover is less than $2 million.

Instead of paying CGT on his capital gain of $200,000, he arranges to transfer it into his SMSF. He has not previously claimed any amounts under the small business retirement exemption, so he is well under the $500,000 lifetime limit. He therefore won’t pay any CGT on the capital gain from his small business sale.

Example 2

Sally is 52 and has run a number of profitable small businesses over her career. She makes a taxable capital gain of $325,000 on her latest business sale and is eligible to claim the small business retirement exemption for it.

However, she has previously claimed $350,000 in capital gains exemptions from her previous small business sales. She did this by transferring the capital gain amounts to her super fund each time she sold one of her businesses. Sally is therefore only entitled to claim $150,000 of the capital gain from the sale of her latest business before she reaches her $500,000 lifetime limit.

She decides to transfer $150,000 into her super fund to reduce her CGT obligation. For the other $175,000, Sally is eligible for the general 50% CGT discount, as she has owned the asset for over 12 months, as well as the small business active asset reduction. As a result, she will only pay CGT on $43,750 of the proceeds of the sale.

The 50% CGT reduction and active asset reduction can be applied either before or after the small business retirement exemption is claimed, depending on your objectives.

If Sally were to apply the 50% CGT discount and active asset reduction first, her capital gain would be reduced to $81,250 that she could contribute to super. She would not be paying any CGT, but the amount she is able to contribute to super is much lower.

Example 3

Iman is 56 and has just sold his small business and related assets. He has made a total capital gain of $1.8 million. Of that, $300,000 qualifies under the small business retirement exemption and $1.5 million qualifies under the CGT 15-year exemption.

Iman decides to put the $300,000 that qualifies under the small business retirement exemption into super and tops that up with $1.315 million ($300,000 plus $1.315 million equals the CGT cap of $1.615 million) from the amount that qualifies under the 15-year exemption.

How do you go about claiming it?

To make an election for the small business retirement exemption you need to fill out the capital gains tax cap election form available online, with instructions from the ATO.

That signed and dated form must be given to your super fund with the contribution on or before it is made. It won’t be valid if you have already made the contribution. You then need to complete the relevant sections in your SMSF annual return.