12.1a CGT Concessions for small business - order of application

There are several CGT concessions that apply to small businesses. One or more of these concessions may be used to reduce or eliminate the CGT on the sale of business assets. The following illustrates the order in which the concessions may be applied.

Source: Rainmaker Technical Services Team

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

12.2 Lifetime CGT cap

A member can elect for proceeds from the sale of an asset to be used towards the CGT lifetime limit. The proceeds that qualify for either the 15-year exemption or the retirement exemption ($500,000 lifetime limit applies) may qualify to be excluded from the non-concessional cap.

For a contribution to qualify as a CGT cap contribution the member must notify the superannuation fund (CGT cap election form) before or at the time of making the contribution. This form can be obtained from the ATO or a superfund may have its own version for members to use.

Financial year	Lifetime cap amount	Source of contribution
2023-24	$1,705,000	Exempt capital gains and/or sale proceeds
2022-23	$1,650,000	Exempt capital gains and/or sale proceeds

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

12.3 Basic conditions

There are four small business CGT concessions that may apply to eliminate or reduce the CGT payable on a CGT event (Division 152).

15-year exemption

50% active asset reduction

Retirement exemption

Rollover

To qualify for the four small business capital gains tax (CGT) concessions, you must satisfy the basic conditions that are common to all the concessions:

Basic conditions for entitlement

There are two basic conditions that must be met for entitlement to any of the small business CGT concessions:

i. Maximum net asset value test -  there is a limit of $6 million on the net value of the taxpayer's assets, or the taxpayer must be a small business entity with turnover of less than $2 million in the income year, and

ii. Active asset test - The CGT asset disposed of must be an active asset. If the active assets are shares or interest in a trust, there are additional conditions.

You must satisfy the active asset test

The concessions apply to the sale of active assets (but not depreciating assets).

An active asset is an:

• asset which is used or held ready for use in a business carried on by the entity and related entities
• intangible asset e.g. goodwill that is inherently connected with the business carried on by the entity or related entities.

For an asset to be held ready for use it needs to be functionally operative. A premise under construction or a block of land upon which it is intended to construct a business premises would not be considered ready for use and therefore would not be active assets.

Meeting the active asset test
An asset passes the active asset test if it has been an active asset of yours for at least:

• 7.5 years during the test period (if you've owned it for more than 15 years)
• Half of the test period (if you've owned it for 15 years or less).

The test period begins when the asset is acquired and ends when it is either sold or the business ceases if this occurs before the asset is sold. The shorter test period will generally apply where the asset is sold within 12 months of the business ceasing. The asset does not need to be an active asset at the time of disposal.

Shares and interests in a trust may be active assets

Where the asset being sold is a share in a company or interest in a trust, the asset must satisfy the active asset test. A share in a company or interest in a trust in a trust is an active asset if 80% or more of the market value of all assets of the company or trust are active assets. This includes cash and financial instruments inherently connected with the business carried on by the company or trust (these are not active assets but are included in the 80%). Depreciating assets e.g. plant and equipment which are active assets may be included in the 80% test.

Certain assets cannot be active assets

Certain assets cannot be active assets even though they may be used or held ready for use in carrying on a business. These include:

• assets mainly used to derive rent (or passive income)
• shares in a companies or interests in trusts that do not satisfy the 80% test
• financial instruments e.g. bank accounts, loans, debentures, bonds, futures, shares options (unless they are inherently connected with the business and are therefore included in the 80% test).

Additional conditions where the asset is a share in a company or interest in a trust

This is only applicable if the CGT asset is a share in a company or interest in a trust.

To satisfy the basic conditions, one of the following must apply just before the share or interest is sold:

• the entity claiming the concession must be a CGT concession stakeholder in the company or trust
• if there is an interposed entity between the CGT concession stakeholder and the company or trust in which the shares or interests are held. the CGT concession stakeholder must have at least 90% of the voting power, receipt of dividends/income distributions or capital distributions of the interposed entity.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

12.4 Small business 15-year exemption

The 15-year exemption is the most favourable of the concessions.

This is because:

• the entire capital gain is disregarded
• claiming the 15-year exemption does not utilise any capital losses
• the entire proceeds from the sale of the asset up to the CGT Cap lifetime limit (indexed) may be contributed to superannuation and be exempt from the non-concessional contribution cap

Financial year	Lifetime cap amount
2023-24	$1,705,000
2022-23	$1,650,000

Additional conditions for the 15-year exemption

To qualify for this exemption, specific conditions must be met in addition to the basic conditions. These are:

• the entity must continuously own the asset for the 15-years before the sale
• if an individual owns the assets:
  • they are at least age 55 and the sale of the asset is in connection with their retirement or they are permanently incapacitated at the time the asset is sold, and
  • if the asset is a share in a company or interest in a trust, the company or trust must have a significant individual for a total period of 15 years (does not need to be the same significant individual
• If a company or trust own the asset:
  • the company or trust must have a significant individual for a total period of 15 years (does not need to be the same significant individual), and
  • the individual who was a significant individual just before the asset is sold was at least age 55 and the sale occurred 'in connection with their retirement' or they were permanently incapacitated at the time the asset is sold.

In connection with retirement

The sale of an asset is in connection with an individual's retirement if there is a significant:

• reduction in the individual's working hours; and
• change in the nature of the activities undertaken by the individual.

An asset sold either before (e.g. as part of winding down the business) or after the individual's retirement may still be considered to be in connection with their retirement.

Distribution of 15-year exemption amount from a company or trust:

If a company or trust claims the 15-year exemption or sells a pre-CGT asset (acquired before 20 September 1985), the proceeds from sale are payable to the company or trust. The company or trust may distribute the sale proceeds to individuals who are CGT concession stakeholders, who will not include the amount in their assessable income if certain conditions are met: They are:

• the company or trust must make the payment(s) within 2 years of the asset being sold to an individual who is a CGT concession stakeholder individual who is CGT concession stakeholder just before the asset is sold.
• the amount distributed to each CGT concession stakeholder does not exceed their control or participation percentage multiplied by the exempt amount.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

12.5 Small business 50% active asset reduction

Where the entity does not qualify for the 15-year exemption, it may qualify for the 50% active asset reduction if the basic conditions are met. There are no additional conditions that must be met to qualify for the 50% active asset reduction.

The 50% active asset reduction is automatically applied. However, the entity may choose not to apply the 50% active asset reduction. This could be beneficial, for instance, where a member chooses not to apply the 50% active asset reduction to maximize the capital gain to which the retirement exemption is applied.

Before applying the 50% active asset reduction:

• apply current year and carried forward capital losses against the capital gain
• apply the 50% CGT discount, if the asset is owned by an individual or trust and it is held for at least 12 months

Applying the 50% CGT discount and the 50% active asset reduction effectively reduces the capital gain by 75%.

Example: David sells an active asset which he has owned as an individual for five years. He makes a capital gain of $50,000 and qualifies for the 50% CGT discount and 50% active asset reduction. He has carried forward capital losses of $5,000. His net capital gain is worked out as follows: How to apply small business 50% active asset reduction Step 1: Apply any capital losses $50,000 - $5,000 = $45,000 Step 2: Apply 50% CGT discount (if applicable) $45,000 x 50% = $22,500 Step 3: Apply 50% active asset reduction $22,500 x 50% = $11,250 David may choose the retirement exemption to disregard the remaining $5,000 capital gain. Special rules apply to work out the net capital gain of beneficiaries of trusts.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

12.6 Small business retirement exemption

The retirement exemption allows an entity to disregard a capital gain up to $500,000 (individual lifetime limit, not indexed) if the basic conditions and additional conditions are satisfied.

The additional conditions generally require the exempt capital gain to be contributed to superannuation where the individual is under age 55. However, there is no requirement for an individual to cease their business activities and retire in order to choose the retirement exemption.

If the choice is made to apply the retirement exemption and the conditions are satisfied:

• the entity can disregard the capital gain
• a payment made by a company or trust to a CGT concession stakeholder is exempt from tax and is not deductible to the company or trust

Additional conditions for the retirement exemption

The conditions which must be satisfied in addition to the basic conditions are:

Entity selling the asset is:	Additional conditions to apply retirement exemption
Individual	if the individual is under age 55*, the individual contributes the exempt amount to superannuation; and the contribution is made by (the later of) the day the individual lodges their tax return or when the proceeds are received.
Company or trust	the company or trust has a significant individual just before the asset is sold; and the company or trust pays the exempt amount ** to a CGT concession stakeholder by (the later of) 7 days after the entity lodges its tax return or 7 days after capital proceeds are received; and if the CGT concession stakeholder is under age 55 when the payment is made, the amount must be contributed to superannuation by the company or trust on behalf of the individual#

* When the choice to apply the retirement exemption is made

** Amount does not have to be related to the individual's percentage of control of the company or participation in the income or distribution from the trust

# While the contribution is made by the company or trust, the contribution is considered to be made by the individual for tax purposes. A contribution of the exempt capital gain by or for an individual under age 55 is a CGT cap contribution and a tax deduction cannot be claimed in respect of the contribution.

Individuals aged 55 or over If the individual is age 55 or over, there is no requirement to contribute the exempt capital gain to superannuation. If they wish to contribute the exempt capital gain to superannuation, they have the option of making a: CGT cap contribution Non-concessional contribution Concessional contribution (personal tax-deductible contribution, if eligible)

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

12.7 Small business rollover

The small business rollover concession defers the capital gain on the sale of an asset where a replacement asset is acquired or capital is expended to improve an existing asset. The basic conditions and additional conditions must be met to apply the small business rollover concession.

The rollover concession is generally applied after the 50% CGT discount (if applicable) and 50% active asset reduction. It can be applied to the remaining capital gain instead of the retirement exemption or in conjunction with the retirement exemption but on different parts of the capital gain.

The deferred capital gain crystallises when the replacement asset or improved asset is no longer an active asset (ie no longer used in the business) or it is sold. When this happens, all or part of the capital gain which has been deferred becomes assessable. However, the entity may choose to apply the 50% active asset reduction (if not already claimed) and/or the retirement exemption to the capital gain at this later date.

This is example is extracted from the ATO website: Instead of choosing the retirement exemption, Liz decides that she will search for a suitable replacement asset to use in her business. As she meets all basic conditions, she qualifies for the small business rollover. This means she can defer her capital gain remaining after all other concessions have applied ($3,500). After six months, Liz acquires another small parcel of land immediately adjoining the main business premises to use in her business. The replacement land costs of $10,000, and it is her active asset before the end of the replacement asset period, so she meets the further conditions. This deferred capital gain of $3,500 may later become assessable if Liz: sells the land stops using it in her business. However, she could then choose a further small business rollover if she acquires another replacement active asset. Alternatively, Liz could choose the retirement exemption.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.

12.8 CGT cap contributions

CGT cap contributions arise from the application of the:

• Small business 15-year exemption, and
• Small business retirement exemption

CGT cap contributions are not counted against the non-concessional contributions cap (or the concessional cap) and a lifetime limit (indexed) applies:

Financial year	Lifetime cap amount
2024-25	$1,780,000
2023-24	$1,705,000

Contributions relating to 15-year exemption

Individuals

Where an individual disregards a capital gain by applying the small business 15-year exemption, an amount up to the capital proceeds can be contributed to superannuation as a CGT cap contribution.

The CGT cap contribution must be made before the later of:

• the day that the taxpayer is required to lodge their tax return* for the income year in which the capital gain was realised
• within 30 days after the receipt of the capital proceeds.

*Generally an individual taxpayer is required to lodge their tax return by 31 October of the following financial year, or for those that used a tax agent in the previous year and will utilise that tax agent again, by 31 March.

Company or trust

Where a company or trust disregards a capital gain by applying the small business 15-year exemption (or could have assuming that a capital gain was made in the case of a pre-CGT asset or capital loss) and makes a payment to a CGT concession stakeholder equal to or up to their control or participation percentage (within two years after the CGT event), the individual can make a contribution equal to or up to this payment as a CGT cap contribution. This contribution must be made within 30 days after the payment is made by the company or trust.

Contributions relating to retirement exemption

Where a company or trust disregards a capital gain by applying the small business retirement exemption and pays the amount to an individual, the individual can make a contribution up to the amount disregarded as a CGT cap contribution. This contribution must be made within 30 days after the payment is made by the company or trust.

Note:

To satisfy the additional conditions required to apply the retirement exemption, a company or trust must contribute the amount to a superannuation fund, on behalf of an individual who is under age 55 when the payment is made.  The company or trust is required to notify the trustee of the fund as to whom the contribution relates. For the purposes of excluding the contribution from the non-concessional cap, the individual is still required to complete the 'Capital gains tax cap election' form and provide this to the fund before or at the time the contribution is made.

This technical resource is intended for the use of financial advisers only. It is current as at the date of publication but may be subject to change. This publication has been prepared without taking into account a potential investor's objectives, financial situation, needs or objectives. Before making a recommendation based on this material, you should consider its appropriateness based on the client's objectives, financial situation and needs. Rainmaker Group is not a registered tax agent under the Tax Agent Services Act 2009. Your client should refer to a registered tax agent before relying on information published herein that may impact their tax obligations, liabilities or entitlements.