When the new super rules commence on 1 July 2017 the capital gains tax (CGT) small business concessions will continue to allow small business owners to increase their retirement savings significantly. Fortunately, they are not impacted by the reductions in the concessional and non-concessional contribution caps. However, the CGT small business concessions can be complex to understand. In this article we will cover the two concessions that link to retirement and superannuation: the 15-year asset exemption and the small business retirement exemption.
There will be no changes in qualifying for the small business CGT concessions once the new rules commence. However, fund members should be mindful that amounts transferred to superannuation will increase a member’s fund balance. In turn this could impact on the ability to make after tax non-concessional contributions from 1 July 2017. Whether contributions can be made to super will be determined by a member’s total superannuation balance at the end of the previous financial year. Also, to be able to transfer the amount to a superannuation fund, the person must be able to contribute to the fund.
If capital gains from a small business are used for retirement or superannuation purposes, a lifetime cap of $1.415 million applies. The amount available under the CGT concession cap depends on how the CGT concessions are used. In effect, there are two caps, the lifetime cap and the small business retirement cap, which comes within the lifetime cap, which limits the amount available under the CGT small business retirement exemption. The overall cap is indexed while the retirement exemption cap is set at $500,000. This is outlined in the following table:
Amounts claimed under the $500,000 retirement exemption cap reduce the amount available under the Lifetime CGT cap.
What amounts qualify under the Lifetime CGT cap?
There are two small business concessions that can count against the lifetime CGT cap for retirement purposes – the 15-year CGT exemption and the retirement exemption. It is important to understand how these amounts qualify.
Qualifying for the 15-year exemption
The 15-year exemption counts against the Lifetime CGT cap before other small business CGT concessions are applied. The exemption allows the capital gain received from the sale or disposal of a CGT small business asset to be disregarded if it has been owned by the small business for at least 15 years. In addition, the person claiming the concession must be older than 55 at the time of sale or disposal and the amount received must be in connection with their retirement.
If the 15-year exemption does not apply, trustees can consider the other available CGT small business concessions.
Retirement exemption
The retirement exemption allows the taxable net capital gain from the sale of a small business asset to be exempt from tax. This is subject to a lifetime limit of $500,000 which applies to the qualifying net capital gains. Amounts received from the sale of the asset, which do not qualify under the retirement exemption and are made to the superannuation fund are treated as either concessional or non-concessional contributions. Those contributions are measured against the relevant contributions caps.
If an individual is less than 55 years old, the amount for which the retirement exemption is being claimed must be contributed to super. However, if they are 55 or over there is no requirement to pay the amount to super. Also, other good news is that for the retirement exemption to apply there is no requirement for the individual to retire.
Qualifying for the small business CGT relief?
The small business CGT concessions are available to individuals, trusts, companies and partnerships that carry on a small business where a capital gain is made on the sale or disposal of an “active asset” of that business.
What is considered a Small Business?
To qualify as a small business, individuals, trusts, companies or partnerships (referred to as ‘entities’) can meet one of two tests – the net turnover test or the net asset value test.
To satisfy the net turnover test, the entity must be carrying on a business for tax purposes and the net total turnover of the business and connected entities cannot exceed $2 million. If this test is not met, the $6 million net asset value test may be satisfied. This test requires that the sum of the net value of CGT assets owned by the taxpayer and connected entities must not exceed $6 million. In calculating the $6 million net assets, personal assets, life insurance and superannuation are excluded from the calculation.
What is an Active Asset?
An ‘active asset’ for purposes of the CGT small business concessions is an asset that is used or held ready for use by an entity and is used in connection with the business activity.
Active assets can include goodwill, trademarks, franchises, licences or certain shares or units held in Australian companies or trusts.
CGT Small Business Strategies
The CGT small business concessions for retirement purposes can be used in conjunction with the other two concessions that are available. These are the CGT 50% active asset reduction and the CGT small business asset rollover concession. When used in combination with each other, it is possible to vary the amount used under the retirement exemption, which can result in less tax being paid on the capital gain.
Using the 50% active asset reduction effectively
The 50% active asset reduction and general 50% CGT discount are often applied together with the retirement exemption to minimise the amount of CGT payable. However, as the person has a choice as to which small business concession can be used, it might be better not to apply the discount so that a higher amount can be made to super under the retirement exemption. This is illustrated as follows:
Sam has sold a commercial property previously used in his business. The property was sold for $2,000,000 and the initial cost was $1,000,000. The property was owned for more than one year, which allows Sam to use the 50% general discount, which reduces the taxable capital gain to $500,000. In addition, Sam could apply the 50% active asset reduction, which would leave a taxable capital gain of $250,000. Sam could choose to contribute $250,000 under the retirement exemption which would mean that none of the capital gain would be taxed.
As an alternative, if Sam wished to maximise the amount he could make to superannuation, he may be better off by using the 50% active asset reduction and leave the remaining net capital gain of $500,000 to fully utilise the $500,000 retirement exemption cap.
If a person wishes to transfer amounts to superannuation under the CGT small business concessions a work test needs to be satisfied if they are 65 or older. Once a person is over age 75, they are no longer able to transfer amounts to superannuation under the CGT small business concessions. For a person who is at least 65 difficulties may arise in situations where the amount received from the sale of a business is received over multiple years as they may not meet the work test in one of those years.
Using the small business CGT concessions for retirement purposes cannot only save paying tax but it can significantly boost amounts held in superannuation. This can help top up the retirement savings for small business owners who may have made irregular contributions during their working life. As the CGT concessions are complex it is always useful to obtain advice from a qualified professional to make sure they are used most effectively.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
