Small Business CGT concessions
Small business owners who sell business assets may be eligible for tax concessions on capital gains and may be able to contribute an amount into superannuation to help fund their retirement.
- The rate of return inside superannuation may be higher after-tax than investing outside superannuation. This is because earnings inside superannuation are taxed at a maximum rate of just 15%, whereas earnings from non-superannuation investments are generally taxed at your marginal tax rate (plus Medicare levy) which could be up to 47%. This could help your savings to grow faster.
- Your tax-free component will increase. This amount can be withdrawn tax-free at any age and is also tax-free if paid as a death benefit lump sum to dependants (including a person who is a non-tax dependant such as an adult child) after your death.
How it works
Rather than saving for retirement during their working lives, many small business owners instead use surplus funds to grow their business. The CGT cap exists to allow small business owners to make large contributions into superannuation once business assets have been sold. To be eligible to use the CGT cap, you must first be eligible for a small business CGT tax concession.
Qualifying for the small business CGT tax concessions
To be eligible for the small business CGT tax concessions, certain basic conditions must be met such as:
- The net value of assets owned by your business and related entities is less than $6 million, or the (aggregated) turnover of the business is less than $2 million each year.
- The asset being sold is being used in running a business or it is held ready to be used in running a business (i.e. is an active asset).
- Additional rules apply if the asset being sold is a share in a company or an interest in a trust, including there must be a ‘significant individual’ and the entity claiming the concession must be a ‘CGT concessional stakeholder’ of the company or trust.
The following table outlines other CGT tax concessions which are available, but which have further eligibility conditions attached.
|15-year exemption||If the business asset being sold had been owned for at least 15 years, the entire capital gain may be exempt from tax under the 15-year exemption. The entire sale proceeds maybe contributed into superannuation using the CGT cap (up to the lifetime limit).|
|Small business 50% active asset reduction||This provides a small business/individual with a 50% reduction to their capital gain. You may also be eligible to apply the small business retirement exemption and/or small business rollover relief to the reduced capital gain amount (provided you meet the relevant criteria).|
|Retirement exemption||Up to $500,000 (lifetime limit) of assessable capital gain can be exempted from tax using the retirement exemption. If you are under age 55, you must contribute this amount to superannuation. If you are over age 55, you can take it in cash or choose to contribute it to superannuation. The superannuation amount is contributed under the CGT retirement cap. Amounts contributed under the CGT retirement cap reduce you’re remaining CGT lifetime cap|
|Small business rollover relief||This allows a person/entity to defer a capital gain arising from the sale of one or more small business asset(s) where a replacement asset is acquired within a certain time period. To be eligible you generally need to meet all the ‘basic conditions’ for small business CGT concessions, and acquire a replacement asset by the end of the ‘replacement asset period’. You still may be able to claim the concession if you do not acquire a replacement asset within this time but some/all of the capital gain may be assessable.|
Contributing the proceeds into super
The amount you can contribute into superannuation is limited by contribution caps. The CGT cap may enable small business owners who are eligible for CGT tax concessions to contribute larger amounts into superannuation closer to retirement.
The CGT cap provides a lifetime limit of $1.565 million for 2020/21 (the cap is indexed). The $1.565 million limit applies to total contributions made from the following amounts:
- up to $500,000 (unindexed) of capital gains which have been exempted using the retirement exemption
- the sale proceeds from an asset that is eligible for the 15-year exemption
- an asset that would otherwise qualify for the 15-year exemption concession but is a pre-CGT asset (purchased before 20 September 1985) or was sold for a capital loss.
Depending on your individual circumstances, there are certain timing requirements that must be adhered to when applying Small Business CGT concessions and making super contributions under the CGT cap. At the time of making the contribution you need to complete a ‘Capital Gains Tax election form’ and give it to the superannuation fund on or before the contribution is made.
Risk and consequences
- As the CGT cap is a lifetime limit, in some cases it may be beneficial to use the non-concessional contribution cap first and retain the CGT cap for future use. However, you should consider your eligibility to make non-concessional contributions in the future under the contribution rules.
- The eligibility criteria for the small business CGT concessions are complex and you must seek tax advice to determine your eligibility.
- Time limits apply to be eligible to use the small business CGT concessions and the CGT cap.
- If you exceed your CGT cap, the excess contributions will count towards your nonconcessional contribution cap. Tax penalties may apply if you exceed your non-concessional contribution cap.
- You need to be eligible to contribute to superannuation including to make contribution assessed against the CGT cap. If you are age 67 – 74, you need to satisfy the work test in the year the contribution is made to superannuation or be eligible to utilise the work test exemption. The work test means you have been gainfully employed for at least 40 hours over 30 consecutive days in the financial year the contribution is made.
- All contributions to superannuation are preserved until you meet a condition of release.
- Fees may be charged for your superannuation contributions. You should check the details in the fee section of your Statement of Advice and the Product Disclosure Statement (PDS) for your superannuation fund.
This publication has been prepared by an Authorised Representative of Apogee Financial Planning Limited ABN 28 056 426 932 AFSL 230689, 105-153 Miller Street North Sydney NSW 2060. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.
Information in this publication is accurate as at the date of writing (September 2020). In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way.
Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy, not accept any responsibility for errors or omissions in this document.
Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.