Maximise your super with small business capital gains tax concessions

Over the years, there have been attempts to simplify the rules with varying degrees of success

Start planning early and consider all your options.

Many small business owners have significant wealth in their commercial activities. The rough plan for many is to use the proceeds for retirement.

An added bonus of running a small business is that there is a range of valuable capital gains concessions available when your business is sold.

The bad news is that these concessions are unbelievably complex. Over the years, there have been attempts to simplify the rules with varying degrees of success. In most cases, specialist professional advice is essential.

Before working out the types of CGT exemptions available, you need to know the rules used to determine if you can actually use these concessions.

Start planning early and consider your options

Make no mistake – these concessions are valuable and many people make use of them.  In 2010/11, around 22,000 taxpayers claimed more than $2.5 billion worth of these concessions.

To maximise your ability to use these tax breaks, you need to slowly move through your current business structure and work out what changes, if any, are needed. In addition, some of the concessions have time constraints on their use. 

All restrictions need to be carefully understood and factored into the sale process of your business.

Business entity test

You can qualify for the CGT Small Business Concessions (CGTSBCs) by satisfying the “small business entity test”, which says you have turnover of less than $2 million in a financial year, or the “maximum net asset value test” – which includes most of your assets other than those you use for personal reasons. Your net assets must be less than $6 million.

Active assets

The CGTSBCs are only available for your “active assets”.  

That is, if an asset:

  • has been owned for up to 15 years and it has been an active asset for at least half the time between when it was acquired and when it was sold (or, if the business terminated in the last 12 months, when the business ceased).
  • has been owned for more than 15 years, the asset was an active asset for at least 7.5 years between the time when it was acquired and when it was sold (or, if the business terminated in the last 12 months, when the business ceased).

Typically, when you’re selling your business, you will sell the assets of the business, not the entity that owns those assets.

However, if you end up selling the company or trust that runs your business, then there are special rules that determine if that asset is eligible for the CGTSBCs.

Effectively, these special rules require that you and your relatives control, and have controlled for an extended time period, that company or trust.

Assets that you depreciate on your tax return are not eligible for the CGTSBCs.

Let’s look at the basic rules that govern each of the four concessions available.

1.      15-year exemption

You can disregard a capital gain arising from the sale of a CGT asset that is owned for at least 15 years. This is extremely valuable because there is no ceiling on the amount of the exemption.

To qualify for the 15-year exemption:

  • the basic conditions (see above) must be met
  • the asset must be owned for at least 15 years just before its disposal

  • if an individual is disposing of a company share or trust interest, then special rules exist (mostly about the need for one individual to control that trust or company). Additional rules exist for discretionary trusts and the distributions these trusts make.

  • the asset is being sold because the person in question has become permanently incapacitated or is over 55 and is retiring.

2.      Fifty per cent reduction

This potentially applies to all assets eligible for the CGTSBCs and the discount is available even if the normal 50 per cent CGT discount – which you can access as an individual – has also been applied.

There are special rules on accessing this concession for discretionary and fixed trusts.

3.      Retirement exemption (only $500,000 may be claimed under this exemption)

This concession applies after the 15-year exemption, after capital losses have been used and potentially (but not compulsorily) after the 50 per cent reduction has also been activated.

It can also be applied where the replacement asset rule (see below) had been used but a replacement asset hadn’t been acquired in the required time (or the amount chosen for the replacement asset was less than the amount chosen for the rollover).

If the recipient of the retirement exemption is under 55, the amount must be immediately contributed into a complying superannuation fund as a small business retirement exemption contribution.

If this person is at least age 55, then the proceeds can be contributed into super but do not have to be.

If the person is at least 65 but under 75, then you must satisfy a work test. These contributions can’t be made if you’re aged at least 75.

4.      Replacement asset concession

This concession allows you to defer tax on the disposal of an active asset as long as the deferred gain is used to acquire replacement active assets within a set timeframe. The deferral will only last as long as those assets remain active assets. The replacement assets don’t have to be similar to, or fulfil the same function as, the original asset.

Requirements for this specific concession include:

  • the replacement asset must be acquired during the period starting one year before and ending two years after the last CGT event. The ATO can extend this period of time.
  • the replacement asset must be an active asset when it is acquired or by the end of the two years after the last CGT event

  • special rules apply if the replacement asset is a company share or an interest in a trust interest.

Making super contributions with the proceeds

In total, all your CGTSBCs cannot exceed $1.395 million in the 2015/16 financial year ($1.355 million in 2014/15). 

This includes the Retirement Exemption (which is limited to $500,000).  All of these amounts are lifetime limits.

There are four potential ways contributions can be made:

1.        You personally use the 15-year small business CGT concessions

This contribution can include all of the proceeds from the sale of an asset . The contribution must not be made later than the day your tax return, claiming the CGTSBCs, is lodged or 30 days after the proceeds have been received.

2.        The 15-year CGTSBC is used by a company or trust

Similar rules to the above apply, although there are slightly different time periods when the proceeds have to be contributed to super.

3.        You personally use the retirement exemption

This only applies to the gain that is made on the sale of an asset. The super contribution must not be made later than the day your tax return claiming the CGTSBCs is lodged or 30 days after the proceeds have been received.

4.        A company or trust is using the retirement exemption

These contributions are quite tricky. The most basic rule you need to know is that the contribution must be made within 30 days after the company or trust has received the proceeds for the asset.

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