The capital gains tax (CGT) retirement exemption allows your small business to sell active business assets and disregard some or all of the resulting capital gain – meaning also disregarding the associated CGT – as long as you use the money from the sale in connection with your retirement.
You, your business and the asset sale (known as the "CGT event") have to meet a range of conditions to be eligible for this CGT retirement exemption.
As for all of the small business concessions, you need to be considered a "small business entity" for the income year, which means you must be a sole trader, partnership, company or trust that operates a business during the income year and has an aggregated turnover of less than $2 million.
The asset sold must be an "active business asset", which generally means it needs to be used (or held ready to be used) in carrying on your small business, and must have been "active" in this way for a sufficient period (as specified in the tax law).
Although this concession's called the "retirement exemption", no age limit applies and there's no requirement for you to retire or stop doing business.
Here are some other important factors:
- You can choose to apply the exemption to all or part of the capital gain you make from a CGT event, up to a lifetime maximum of $500,000 worth of gains. You can't apply the concession for capital gains beyond this amount.
- Although this concession is called the "retirement exemption", no age limit applies for choosing it, and there's no requirement for you to retire or stop doing business.
- If you're aged under 55 at the time you choose to apply the concession, you must "roll over" the disregarded capital gain amount into a superannuation fund or a retirement savings account (to satisfy the "connected with retirement" condition). On the other hand, if your age is 55 or over at the time you choose the exemption, you can take the capital gain tax-free.
- Where you have to make a rollover to a super fund or retirement savings account, that generally has to happen by the time when you choose the concession (when lodging your tax return for the income year) or when you receive the money from the asset sale, whichever event happens later.
The other conditions to meet for the CGT retirement exemption are different depending on whether you own the business asset as an individual or it's owned by a company or a trust. The company and trust conditions are somewhat more complicated, because they need to ensure the CGT concession can be passed along to benefit the retirement of the individual people who own or control the company or the trust.
Where a company or trust owns and makes a capital gain on an active business asset, and it wants to apply the CGT retirement exemption:
- there must be at least one "significant individual" who has an interest of 20% or more in the company or trust;
- the company or trust must pay out the entire disregarded capital gain amount to the significant individual(s) or their spouse(s), specifying what percentage each person will receive;
- if any of these people (known as "CGT concession stakeholders") is under 55 when they receive the payment, the company or trust needs to pay it into a superannuation fund or a retirement savings account; and
- there are also important rules about when the payments must be made to CGT concession stakeholders
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If you have any questions about the above article, please contact our Private Business experts:
BEC, CA, M.TAX, DIP.FS, FP, DIPFP
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