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;

2. The taxpayer must have continuously owned the CGT asset for the 15-year period ending just before the CGT event;

3. If the taxpayer is an individual and the CGT asset is a share in a company or an interest in a unit trust, then the company or unit trust must have had a significant individual for a total of at least 15 years during the period in which the taxpayer owned the share in the company or interest in the unit trust.  The 15 years need not be continuous and the significant individual need not be the same individual during the 15-year period;

4. If the taxpayer is a company or trust, then similarly the taxpayer must have had a significant individual for a total of at least 15 years during the period in which the company or trust owned the CGT asset.  Again, the 15 years need not be continuous and the significant individual need not be the same individual during the 15-year period;

5. If the taxpayer is an individual, the individual must be over 55 years of age at the time of the CGT event and the event must happen in connection with the individual’s retirement, or the individual is permanently incapacitated at the time of the CGT event;

6. If the taxpayer is a company or trust, the company or trust must have a significant individual just before the CGT event, and that significant individual must be over 55 years of age at the time of the CGT event and the event must happen in connection with that significant individual’s retirement, or that significant individual is permanently incapacitated at the time of the CGT event.

   There isn’t a lot of guidance in relation to whether a CGT event happens in connection with an individual’s retirement, but there is some.  In this regard, the Commissioner considers that it depends on the particular circumstances of each case but, to be regarded as a retirement, there would need to be at least a significant reduction in the number of hours the individual works or a significant change in the nature of their present activities.  But, it is not necessary for there to be a permanent and everlasting retirement from the workforce; and

7. The choice to apply the small business 15-year exemption 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.  And the way the income tax return is prepared is sufficient evidence of the making of the choice.

What the exemption is

Where the small business 15-year exemption applies, it completely disregards the capital gain from the CGT event.

For taxpayers that are individuals, that’s pretty much the end of the exemption – there’s nothing more required.

But for taxpayers that are companies or trusts there’s more, particularly around distributing the disregarded capital gain to shareholders or beneficiaries.

Payments of the disregarded capital gain from the company or trust can be disregarded in the hands of the recipient where:

1. The payments are made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event; and

2. The payments are made to that individual within 2 years after the CGT event.

However, there are limits to the amount of the payments that can be disregarded.

For payments from a company or unit trust, the limit is the CGT concession stakeholder’s small business participation percentage in the company or unit trust multiplied by the amount of the disregarded capital gain.

But for payments from a discretionary trust, the limit is the CGT concession stakeholder’s equal share as amongst all CGT concession stakeholders in the discretionary trust multiplied by the amount of the disregarded capital gain.

So if there are 4 CGT concession stakeholders then each stakeholder can only disregard a maximum of 25% of the disregarded capital gain, regardless of their small business participation percentage.

Now this can give rise to strange outcomes.  For example, if 1 of the 4 CGT concession stakeholders had a 30% small business participation percentage they would only be able to disregard an amount equal to 25 divided by 30 multiplied by the payment they receive that relates to the disregarded capital gain.

The small business 15-year exemption can also apply to allow for payments from a company or trust be disregarded in the hands of the recipient either where the capital gain is disregarded because the CGT asset is a pre-CGT asset or where the capital gain is reduced or eliminated on pre-CGT assets that have been deemed to be post-CGT assets with a market value tax cost base at that time.

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.