The Small Business Retirement Exemption is a powerful tax concession within Australia’s capital gains tax (CGT) framework, offering eligible small business owners a valuable opportunity to reduce their tax liabilities upon the sale of business assets. While commonly associated with individuals, this exemption can also be applied by companies and trusts when the assets sold meet specific criteria. It forms part of the broader small business tax concessions available.
What is the Small Business Retirement Exemption?
The Small Business Retirement Exemption is part of the small business tax concessions found in the Income Tax Assessment Act 1997 (ITAA 1997). It allows qualifying small businesses to disregard capital gains on the sale of active assets, up to a lifetime limit of $500,000 per individual. Despite the name, retirement is not a strict requirement to access this concession.
This exemption is particularly useful for business owners seeking to restructure or exit, as it offers a substantial reduction in CGT obligations on assets that have appreciated in value.
Eligibility Criteria for Companies Accessing Small Business Tax Concessions
To be eligible for the Small Business Tax Exemption, a company must meet the following conditions:
Small Business Entity Test
The company must qualify as a small business entity (aggregated turnover under $2 million) or satisfy the maximum net asset value test (less than $6 million, including connected entities).
Active Asset Test
The asset must be actively used in the business for at least half of the ownership period, or for 7.5 years if held for more than 15 years.
Significant Individual Requirement
A company must have at least one significant individual who holds 20% or more of the voting rights. This individual must also meet the retirement exemption conditions.
CGT Concessions Pathway
The Small Business Retirement Exemption is one of four small business tax concessions. It may be used on its own or in combination with the 15-Year Exemption, the 50% Active Asset Reduction, or the Small Business Rollover.
Allocation of Proceeds
Companies must allocate the exempt amount to a shareholder who qualifies under the retirement exemption rules. For those under 55, the amount must be contributed to a superannuation fund.
How the Small Business Retirement Exemption Works for Companies
When a company disposes of a CGT asset and qualifies for the exemption, the process typically follows these steps:
- Determine the Capital Gain
The company calculates the capital gain and may apply the 50% Active Asset Reduction if eligible.
- Elect the Exemption
The company then applies the Small Business Retirement Exemption to some or all of the remaining gain (up to $500,000 per qualifying individual).
- Distribution to Significant Individuals
The exempt gain must be distributed to qualifying shareholders—either as a tax-free contribution to super (if under 55) or directly (if 55 or older).
Example Scenario
XYZ Pty Ltd is owned by John and Sarah, each holding 50% of the shares and qualifying as significant individuals. The company meets the small business entity test and owns a commercial property used in its business for over 10 years.
- Capital Gain: The property is sold with a $600,000 capital gain.
- Step 1: Apply the 50% Active Asset Reduction—reducing the gain to $300,000.
- Step 2: Apply the Small Business Retirement Exemption—fully eliminating the remaining gain.
- Step 3: Allocate the exempt amount equally to John and Sarah, each receiving $150,000 as a contribution to their superannuation funds.
Alternatively, the company could skip Step 1 and apply the full $600,000 exemption, allowing the total amount to be distributed tax-free. However, this would use more of each individual’s $500,000 lifetime cap.
Benefits of the Small Business Retirement Exemption Within the Small Business Tax Concessions
- Tax-Free Gain: Reduces or eliminates CGT liability when selling eligible assets.
- Succession and Exit Planning: Offers a flexible path for owners to exit or transition the business.
- Superannuation Growth: Helps boost shareholder super balances, contributing to long-term financial security.
Important Considerations
- Superannuation Contributions: Shareholders under 55 must receive the exempt amount via super contributions.
- Lifetime Cap: The $500,000 exemption is a lifetime cap per individual and must be tracked carefully.
- Record Keeping: Companies must maintain thorough documentation to prove eligibility and compliance.
- Interaction with Other Concessions: When combined with other small business tax concessions, careful planning is required to maximise overall tax outcomes.
Understanding Small Business Tax Concessions with MacMillan Cowan & Co.
The Small Business Retirement Exemption is a valuable tool within the broader range of small business tax concessions for companies looking to manage their tax obligations when disposing of assets. By meeting the eligibility requirements and strategically applying the exemption, companies can help significant shareholders reduce their tax burden and boost retirement savings. However, because eligibility and application can be complex, working with a tax professional or advisor is highly recommended to ensure compliance and maximise the benefits of these concessions.
To find out whether your company is eligible for the Small Business Retirement Exemption and how to structure your sale for the best outcome, we invite you to book a consultation with one of our experienced accountants at MacMillan Cowan & Co.
Contact us today to arrange an appointment and discuss your small business tax concession strategy.