Small business retirement exemption explained

Despite its name, the retirement exemption does not require you to leave work or retire. It can be applied to disregard capital gains of up to $500,000 during your lifetime when you sell active small business assets. For example, if you have previously excluded $300,000 of gains using the retirement exemption, you may choose to exclude up to a further $200,000 of gains using the same exemption for the sale of another asset.

The retirement exemption can also be used to disregard capital gains if you previously chose the roll over exemption and did not acquire a replacement asset or make any capital improvements during the relevant period or the cost of the replacement asset was less than the amount you chose to roll over (CGT events J5 and J6).

If you decide to use this exemption and you are under age 55, you must use the amount you have disregarded to make a contribution to a complying super fund. This contribution is not counted towards your non-concessional contribution cap.

If you are aged 55+, you can choose whether to make a super contribution with all or part of the amount you have chosen to disregard using the retirement exemption.

Am I eligible for the small business retirement exemption?

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 retirement exemption

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

As previously mentioned, any person who is under 55 when they use the retirement exemption must contribute the amount that was diregarded for CGT purposes to their super fund.

A super contribution is optional if you’re aged 55 or more.

In the case of companies and trusts, you must: 

• Be a significant individual, that is, own 20% or more of the company or trust
• Make a payment (based on each individual’s percentage of the exempt amount) to at least one of your CGT concession stakeholders
• Make a payment that is equal to the exempt amount or the amount of capital proceeds (whichever is less)

Contributing to super using your retirement exemption

Under 55

If you are under 55 just before choosing the retirement exemption, you must contribute the excluded amount to super.

If you’re contributing as an individual, the contribution generally 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. Companies and trusts have an additional 7 days to contribute.

If your contribution relates to the change in status of a CGT asset that was a replacement asset under a previous rollover or CGT events J5 or J6 (previously mentioned), then the contribution must be made when you make the choice to use the exemption, or within 7 days of this decision for companies and trusts.

If capital proceeds from a CGT event are received in instalments:

• An individual is required to make contributions to super upon receipt of each instalment (up to the CGT exempt amount)
• A company or trust must make a payment on behalf of at least one of its CGT concession stakeholders to super on receipt of each instalment, up to the CGT exempt amount and to the greatest extent possible in the initial instalments, instead of spreading payment evenly across all instalments. You could also be eligible for a retirement exemption if you inherit an asset and that asset is sold within two years. You would be eligible to the same extent that the deceased would have been before they died.

If you choose the retirement exemption after you’ve received the capital proceeds (for example, when you lodge your income tax return), you’re not required to make the contribution until you make the choice.

You may use the capital proceeds for other purposes before making the choice.

Aged 55 or more

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 contribute, you need to do it by the day you lodge your tax return for the income year the CGT event occurred.

Case studies

How do I elect to exlude 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 15-year 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.