The 15-year CGT exemption: the whole gain, if you can prove you stepped back

The small business 15-year exemption is the most generous of the four small business CGT concessions. Meet the conditions and the whole capital gain is disregarded. Not reduced by half, not capped at $500,000. The whole thing.

It also has a condition that most owners read past, and it is the one we want to put in front of you.

Passing fifteen years of ownership is not enough on its own. Unless you are permanently incapacitated, the ATO also needs the sale to have happened in connection with your stepping back, and it does not accept a date on a form as proof of that. It looks for a significant reduction in the hours you work or a significant change in what you do.

Which sets up a problem worth seeing early. An owner whose business cannot run without them is an owner who cannot meaningfully reduce their hours. The concession asks you to demonstrate the exact thing that owner dependency prevents.

How the small business 15-year exemption works

The ATO sets out three requirements, and all of them have to be true:

Two mechanical points follow from that. The ATO states you must choose to apply this exemption and apply it first, ahead of the others. And you do not have to apply capital losses against the gain before applying it, which means losses stay available to reduce other gains.

Where you qualify, nothing else is needed. our guide to tax when you sell a business covers the order the concessions are applied in.

What connected with your stepping back means for the 15-year exemption

This is the condition that decides cases, and the ATO's wording is unusually plain about how much judgement is involved:

Read that as a test of facts rather than intentions. Hours, and what you spend them doing.

Now hold it next to the position a lot of owners are in when they sell. The buyer wants them to stay on for a transition. There is an earn-out that depends on the business performing. Nobody else can price the complicated jobs, so the calls keep coming. Twelve months after settlement the hours have barely moved.

We are not going to tell you how the ATO would view your particular circumstances, because that is your accountant's judgement and yours. What we can say is that the ability to reduce your hours substantially, and to prove it, is built long before the sale. It is the same work that raises the price and shortens the deal. Here it also affects whether the most generous concession in the set is available at all.

What if you are under 55?

Then this exemption is not available to you on age grounds, unless you are permanently incapacitated, in which case the ATO states there is no age requirement.

The retirement exemption is the one to look at instead. It has a $500,000 lifetime limit rather than disregarding the whole gain, and for anyone under 55 the exempt amount has to go into super. our guide to the retirement exemption covers how that works and when the money has to be contributed.

If you are within a few years of both 55 and fifteen years of ownership, the arithmetic on timing is worth doing properly with your accountant rather than approximately on your own.

The fifteen year clock, and the trap in it

The requirement is continuous ownership for the fifteen year period ending just before the CGT event. Continuous, and ending at the sale, not fifteen years at any point in the past.

Here is the part that catches people, and it is worth checking before you assume you qualify. The ATO treats interests in an asset acquired at different times as separate CGT assets:

So if you bought out a partner, took over a departing shareholder's stake, or acquired the second half of a property later, the clock on that portion started when you acquired it. You can own something for twenty years and still find that part of the gain does not qualify.

There are modified rules where an asset came to you through a relationship breakdown or was compulsorily acquired, lost or destroyed. In the relationship breakdown case the ATO allows you to include your former spouse's ownership period.

For a company or trust the equivalent test is that there was a significant individual for at least fifteen years of the whole ownership period, and the ATO notes it does not have to be the same individual throughout.

When the money has to go into super

If you are putting a 15-year exemption amount into super, the ATO states the contribution must be made on or before the later of the day you lodge your income tax return for the year the CGT event happened, or 30 days after you received the capital proceeds. Where the amount comes to you from a company or trust, it is within 30 days after the entity made the payment.

The amount is generally treated as a non-concessional contribution. To have it count towards the CGT cap instead, the ATO states you must notify the fund on the CGT cap election form, and that form must be completed no later than the time you make the contribution.

Note that this timing differs from the retirement exemption, where an individual contributes immediately upon making the choice. Two concessions, two different deadlines, which is a good reason not to work from a general article about CGT.

What is the lifetime limit for the CGT retirement exemption?

$500,000 per individual across a lifetime. That limit belongs to the retirement exemption, not to this one.

The 15-year exemption has no equivalent cap. Where it applies, the entire capital gain is disregarded, which is why the ATO places it first and why nothing else needs to be applied afterwards. our guide to the retirement exemption covers the $500,000 limit in detail.

Frequently asked questions