CGT small business concessions: CGT event J2 and J3 - capital proceeds for retirement exemption

If CGT events J2 or J3 in sections 104-185 and 104-190 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to an asset previously chosen as a replacement asset under the small business roll-over, what are the 'capital proceeds' for the purposes of choosing the retirement exemption in Subdivision 152-D of the ITAA 1997 for the capital gain made from CGT events J2 or J3?

If CGT events J2 or J3 in sections 104-185 and 104-190 of the ITAA 1997 happen to an asset previously chosen as a replacement asset under the small business roll-over, the 'capital proceeds' for the purposes of choosing the retirement exemption in Subdivision 152-D are the capital proceeds from the original CGT event.

The taxpayer, a grazier, sold their farm in the 2000 income year and made a capital gain. They received actual capital proceeds from the sale. They taxpayer purchased another farm as a replacement asset and chose the small business roll-over to defer the capital gain.

In the 2004 income year, when the taxpayer was 56 years of age, they sold the new farm, thereby crystallising the deferred capital gain. The taxpayer now wants to choose the retirement exemption.

The small business roll-over in Subdivision 152-E of the ITAA 1997 provides a deferral of a capital gain if a replacement asset is acquired, and certain other conditions are satisfied.

If CGT event J2 in section 104-185 of the ITAA 1997 (disposal or other change of status of a replacement asset) or CGT event J3 in section 104-190 of the ITAA 1997 (change of circumstances where a share or interest is a replacement asset) happens, the deferred capital gain is effectively crystallised. A capital gain is made equal to the amount of the capital gain that was previously disregarded.

Under subsection 152-10(4) of the ITAA 1997 the 15 year exemption (Subdivision 152-B) and the 50% active asset reduction (Subdivision 152-C) do not apply to capital gains made from CGT events J2 or J3. However, such gains may be eligible for the retirement exemption or a further roll-over.

With respect to the requirement that there must be actual 'capital proceeds' received in order to choose the retirement exemption, it is considered the crystallised capital gain made from CGT event J2 or J3 has the characteristics of the deferred capital gain including its actual capital proceeds (if any). That is, for the purposes of the retirement exemption, the capital proceeds from CGT event J2 or J3 are the capital proceeds from the original CGT event. These capital proceeds are received for the purposes of Subdivision 152-D at the time CGT event J2 or J3 happens.

If the original CGT event did not involve actual capital proceeds, such that the retirement exemption would not have been available at that time, there would be no actual capital proceeds relevant to the later CGT event J2 or J3, and accordingly, the retirement exemption would not be available for the crystallised capital gain in this situation. Note: If a replacement asset is disposed of, a separate capital gain may also be made (from CGT event A1, section 104-10 of the ITAA 1997) in addition to the crystallised capital gain. This separate capital gain may be eligible for all the small business concessions if the conditions are satisfied.