Once owners of a small business decide it’s time to sell, knowing the rules around capital gains tax (CGT) may mean no tax on the sale and getting more money into super – potentially up to $1.705 million (the CGT Cap) – even if they’ve already reached the $1.9 million total super balance (TSB).
This is vital for many who neglected their super, as they re-invested every cent back into the business, particularly if they’re close to retirement.
Selling your business requires careful planning and negotiation. This means seeking expert legal and financial advice to capitalise on any tax concessions offered by the Australian Taxation Office (ATO). Some exemptions make investing the sale proceeds into super very attractive.
Four main concessions
“There are four small business CGT concessions to consider when selling a business or business assets. All the tests require basic criteria to be met, which ensures the asset relates to a small business. The tests can be very complex and therefore engaging with professional advisors early in a sale process is important, to maximise the availability of the concessions.
The main rules are: a capital gain must arise on disposal of the asset; either the business turnover is less than $2 million, or the net value of your assets and the assets of relevant associated entities is less than $6 million (excluding personal use assets); the asset disposed of must be an “active asset.”
- The 15-year exemption is the most valuable, as it allows a full exemption from CGT on the sale of the business, or “active asset” – if it has been owned for 15 years and if the owner is over 55 and about to retire, or is permanently incapacitated. If this exemption is applied, no other small business enterprise CGT concessions can be applied. The lifetime CGT cap is $1.705 million (indexed annually).
- The retirement exemption – a $500,000 reduction in the assessable capital gain. The $500,000 is a lifetime limit for each individual and if they’re under 55, the amount must be paid into super. If over 55, it is optional to pay the amount into super.
- The 50 per cent reduction allows an extra 50 per cent reduction in the capital gain. This is in addition to the usual 50 per cent CGT discount available for individuals.
- The rollover concession – allows the capital gain to be rolled over into another active business asset. If no asset is acquired after two years, then the capital gain arises at this point. The retirement exemption can be applied to this capital gain, which can mean a two-year deferral to contribute to superannuation or to turn 55.
Getting money it into super
The 15-year exemption and the retirement exemption allow contributions into superannuation that sit outside the non-concessional contribution caps (refer below), as follows:
- The 15-year exemption allows a contribution of the total sale proceeds, up to the CGT cap ($1.705 million – indexed annually). For example, recently, a client sold his Real Estate business for $600,000 and contributed the entire amount ($600,000) tax-free into his existing superannuation account, utilising this rule.
- The retirement exemption allows a contribution of up to a maximum of $500,000 of the disregarded capital gain, which is different to the 15-year exemption as it is based on the exempt capital gain, not the total sale proceeds.
Even outside the small business CGT regime, there are ways to boost superannuation, subject to being eligible to contribute, namely:
- Non-concessional contribution – $110,000 a year or $330,000 over three years using the “bring-forward” rule.
- Concessional contribution – $27,500 per year.
- Unused concessional cap – carry forward concessional contributions, whereby members who have a TSB less than $500,000, can utilise any unused concessional contributions for the previous five years to obtain a larger tax deduction in the contribution year.”
- Downsizer contribution – if you are 55 or older, you may be able to contribute up to $300,000 from the proceeds of the sale (or part sale) of your home into your superannuation fund. Therefore, a couple could contribute $600,000 between them.
The laws around how and when to make super contributions are complex – therefore you need expert advice.
Please feel free to contact me on 08 8378 4000 to discuss your situation further.
