Small business 15-year exemption explained

Before getting too excited, it’s important to know there are both basic conditions and some specific conditions you need to meet before you qualify for this exemption.

1. Basic conditions for any small business CGT exemption

You must be one of the following:

• A small business entity with an aggregated turnover of less than $2 million
• Not carrying on a business (other than as a partner), but the asset you are selling is used in a closely connected small business
• A partner in a partnership that is a small business entity, and the asset is either:
  • An interest in a partnership asset
  • An asset you own that is not an interest in a partnership asset, but is used in the partnership’s business
• You satisfy the maximum net asset value test.

In addition, the asset you’re selling must meet the ATO’s active asset test, which requires the asset to be used in the course of carrying on a business, or held for that purpose, or to be an intangible asset inherently connected with your business.

You will meet the active asset test if the asset you owned for more than 15 years was active for at least 7.5 years. For an active asset you owned 15 years or less, the asset must have been active for at least half the test period, which begins when you acquired it and ends either at the CGT event, or when the business ceases if this occurs in the 12 months before the CGT event.

These minimum periods don’t need to be continuous, provided the asset is active for the minimum amount of time in total.

If the asset is a share in a company or interest in a trust, it must meet additional conditions.

If your situation involves a CGT event related to a partnership and the CGT event involved ending your right or interest, it must be a membership interest in the partnership immediately before the CGT event happens. For all other cases, your right or interest must be a membership interest in the partnership immediately after the CGT event happens.

2. Specific conditions you need to meet for the 15-year CGT exemption

• You (or the significant individual if you are a company or trust) must be
  • 55 years or older and the event happened in connection with retirement, or
  • Permanently incapacitated (no age requirement)
• You must have continuously owned the CGT asset for the 15-year period ending just before the CGT event happened

A company or trust must have a significant individual for a total of at least 15 years of the whole period of ownership of the CGT asset.

The significant individual does not have to be the same individual for the entire period.

Other rules apply in the case of relationship breakdowns and death. For details, see the ATO website.

Contributing to your super using the 15-year exemption

If you’re eligible for the 15-year CGT exemption, you can also take advantage of the many benefits of saving for your retirement through the super system. These include a tax rate of 15% on investment earnings in the accumulation phase and 0% in the retirement phase, which compares to your marginal tax rate (plus the Medicare levy) for assets held outside super. In addition, once you reach age 60, withdrawals from your super account are tax free.

If you use money eligible for the 15-year CGT exemption when you contribute to your super account, you’re not limited by the normal annual contributions cap applying to non-concessional super contributions.

To make personal super contributions you must be aged below 75. Your super fund is able to accept your contribution up to 28 days after the end of the month in which you turn age 75. After this point you are ineligible to make further non-concessional super contributions.

How do I elect to exclude contributions into my super account?

If you plan to use money eligible for the small business 15-year CGT exemption as a contribution into your super account, you need to fill out the CGT cap election form. This form allows you to make a personal contribution using proceeds from the sale of your small business asset and to exclude them from your non-concessional contributions cap.

This is the same process that applies to the small business retirement exemption.

The completed form must be given to your super fund before or at the time you make the relevant contribution. If you elect to exclude your contributions after they are contributed, the election will be deemed invalid and the contributions will be included in your non-concessional contributions cap.

After you make your election, your super fund will check if it’s valid before recording it. Your fund will then report these contributions separately from your other personal super contributions.

Q&A: Can I still put money into super using the 15-year CGT exemption if I already have $2 million in super?

Q: If I am eligible for the 15 year CGT exemption but I already have $2 million in superannuation accounts can I still deposit the money that is eligible for the CGT exemption into super?

A: It is possible to make contributions to super using the CGT cap election when your total super balance (TSB) is higher than the transfer balance cap (currently $2 million). 

Although the non-concessional contribution cap for the following financial year is zero for individuals who have a TSB higher than the transfer balance cap on 30 June, any contributions made using the CGT cap election are not counted towards the non-concessional cap.

However, making a contribution using the CGT cap election does not increase the amount you may transfer into income streams for retirement. 

It is also important to consider the introduction of additional tax on balances above $3 million.