If you are a small business owner considering utilising the capital built up in your business for retirement funding, there are two significant Capital Gains Tax (CGT) exemptions that can potentially enhance your super when selling business assets.
These exemptions generally apply to active assets your business owns and sells at a profit, provided your annual turnover is below $2 million and your net assets must not exceed $6 million.
1. Small Business 15-Year Exemption
This exemption is applicable when selling a business asset owned for at least 15 years, specifically for individuals aged 55 or over who are retiring or permanently incapacitated. The capital gain from this sale can be contributed to your super as a non-concessional contribution. To ensure this contribution counts toward your CGT cap and not your non-concessional contributions cap, proper notification to your super fund is necessary.
2. Small Business Retirement Exemption
For business owners meeting certain requirements, this exemption allows you to be exempt from paying CGT if you contribute the capital gain from the sale of an active asset to your super fund. There is a lifetime limit of $500,000 for these contributions. There is no age limit for utilizing this exemption, but if you are under 55, you must roll the amount into a super fund. Contributions to super are permitted up to age 75.
How the Small Business Retirement Exemption Works
If you are under 55, the contribution must be made to a complying super fund, including self-managed superannuation funds (SMSFs) and retirement savings accounts (RSAs). This contribution is not counted as a non-concessional contribution up to the superannuation CGT cap amount.
The super CGT cap is a lifetime limit ($1,650,000 for 2022–23), covering both the small business retirement exemption and the 15-year CGT exemption.
You must notify your super fund trustee of your CGT retirement election before or at the time of making the contribution.
If under 55 and deciding to use the retirement exemption after receiving funds, you can still utilize it by making an equivalent contribution to a super fund on the day of the decision.
To qualify for small business CGT concessions or exemptions, several conditions must be met, including having an annual aggregated turnover of $2 million or less, usage of the asset in a closely connected small business, and ownership of at least 20% in the case of companies or trusts. Keeping a written record of disregarded capital gains amounts is also crucial for eligibility.
Claiming the Small Business Retirement Exemption
To claim the small business retirement exemption, you need to fill out the capital gains tax cap election form available online, providing it to your super fund before or at the time of making the contribution.
That signed and dated form must be given to your super fund with the contribution on or before it is made. It won’t be valid if you have already made the contribution. You then need to complete the relevant sections in your SMSF annual return.
Case Study 1.
James is 48 and was a self-employed IT Consultant with an aggregated annual turnover of $1.8 million. He recently sold his business and made a taxable capital gain of $300,000.
James is eligible to claim the small business retirement exemption from CGT because his aggregated annual turnover is less than $2 million. Instead of paying CGT on his capital gain of $300,000, he arranges to transfer it into his SMSF.
He has not previously claimed any amounts under the small business retirement exemption, so he is well under the $500,000 lifetime limit. He therefore won’t pay any CGT on the capital gain from his small business sale.
Case Study 2.
Jennifer is 53 and has run several profitable small businesses over her career. She makes a taxable capital gain of $325,000 on her latest business sale, which she has run for less than 15 years, and is eligible to claim the small business retirement exemption for it.
However, she has already claimed $300,000 in capital gains exemptions from her previous small business sales. She did this by transferring the capital gain amounts to her super fund each time she sold one of her businesses.
Jennifer is therefore only entitled to claim $200,000 of the capital gain from the sale of her latest business before she reaches her $500,000 lifetime limit. She decides to transfer 200,000 into her super fund to reduce her CGT obligation.
For the other $125,000, Jennifer is eligible for the general 50% CGT discount, as she has owned the asset for over 12 months, as well as the small business active asset reduction. As a result, she will pay CGT on just $31,250 of the proceeds of the sale.
The 50% CGT reduction and active asset reduction can be applied either before or after the small business retirement exemption is claimed, depending on your objectives. If Jennifer were to apply the 50% CGT discount and active asset reduction on the total amount first, the capital gain she could contribute to super would be reduced to $75,000.
She would not pay any CGT, but the amount she can contribute to super is much lower. The benefit of having in Super is when you are fully retired and over 60 the earnings and drawings from your account based pension is tax free up to the limit of $1.6 million.