There are a number of capital gains tax (CGT) concessions available when it comes to the sale of business assets. These are known as small business CGT concessions.
One such small business CGT concession is the CGT small business retirement exemption, which is what this article explores.
What is the CGT Retirement Exemption?
The CGT Retirement Exemption allows capital gains of up to $500,000 resulting from the sale of an active asset to be exempt for capital gains tax purposes.
In order to apply the CGT Retirement Exemption, the asset sold needs to meet the definition of an active asset. You also need to understand the differing applications depending on whether you are over or under age 55 and how the $500,000 cap is calculated.
You do not need to cease business operations or terminate employment arrangements in order to apply the CGT Retirement Exemption.
What is the Definition of an Active Asset?
The definition of an active asset is an asset owned by you and used (or ready for use) in the course of running a business, whether alone or in partnership. The asset can be tangible or intangible.
If intangible (i.e. goodwill), it needs to be inherently connected with the business.
A CGT asset is also considered an active asset if it is used for the purpose of carrying on a business by your affiliate, spouse or child under age 18, or an entity connected with you.
However, there are certain assets that are not classified as active assets, such as:
- Shares in a company not meeting the 80% test
- Financial instruments such as bank account, loans and bonds
- Assets mainly used to derive interest or rent, etc.
A comprehensive definition of an active asset can be found here ITAA 1997 Section 152.40
CGT Retirement Exemption Under 55
If you utilise the CGT Retirement Exemption while under age 55, the exempt amount resulting from the disposal of the active asset must be contributed to a regulated superannuation fund and will be subject to standard superannuation preservation rules.
CGT Retirement Exemption Over 55
If you are aged 55 or over when you make the choice to apply the CGT Retirement Exemption, you are not required to contribute the exempt amount to a superannuation fund, even if you were under age 55 when you received the sale proceeds.
CGT Retirement Exemption Contribution to Super
Contributing the CGT Retirement Exemption amount to super will not count towards either the general non-concessional contribution cap or the concessional contribution cap. However, it will count towards the tax-free component of your super for all intents and purposes.
Also, even though you are not required to contribute the exempt amount to super if you are 55 or over, you are permitted to do so – without it counting towards the concessional or non-concessional contribution cap.
CGT Retirement Exemption Election Form
The CGT Retirement Exemption election form should be completed to ensure that the exempt amount contributed to your superannuation fund is not counted towards the superannuation contribution caps. Failure to complete this form could result in your contribution counting towards general contribution caps and excess contributions, which would result in excess contributions tax of up to 47%.
The CGT Retirement Exemption election form can be found here.
CGT Retirement Exemption Time Limit
To apply for the CGT Retirement Exemption, you need to understand the timing of the contribution, as well as the time limit that the $500,000 is calculated over.
Firstly, the $500,000 is a lifetime cap. That is, you are only able to exclude a cumulative amount over your lifetime of $500,000 worth of capital gains resulting from the sale of an active asset under the CGT Retirement Exemption provisions.
The super contribution must be made the later of when you make a choice to use the retirement exemption or when you receive the proceeds.
Applying Multiple CGT Concessions
You are permitted to apply for more than one small business CGT concession. However, they must be applied in a particular order. Specifically, they must be applied in the following order:
- Small Business 15-Year Exemption
- Offset capital losses against the capital gain
- Apply the 50% active asset reduction
- Apply the Small Business CGT Retirement Exemption or Small Business CGT Rollover
A more detailed explanation of choosing and applying the small business CGT concessions can be found here.
Generally, it is best to seek advice from your tax accountant and financial planner prior to selling an active asset, applying for a CGT concession or making a contribution to super. Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
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