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A range of concessions encourages someone selling a small business to add the proceeds to retirement savings.
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How CGT rules spur small business owners to boost their super
25 January 2024
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So you’re a small business owner and preparing for retirement? Here are a few important things to consider when selling your small business to make one final boost to your nest egg.
When selling a business or business asset, small business owners can contribute the sale proceeds, or a significant part of them, to their superannuation fund without breaching the super caps. It can be a great way of boosting super balances, but there are a few things to keep in mind to make it work.
To ensure the capital realised from the business sale doesn’t unnecessarily attract CGT, there are four small business concessions to consider. All of these require a basic criterion to be met that ensures the asset being sold relates to a small business.
The tests can be complex and are notorious for not being accessible due to technical reasons such as shares in a company having differing rights. However it is worthwhile persevering, and engagement with experienced advisers early in a sale process is important to maximise the availability of these concessions.
The 15-year exemption
This allows for superannuation contributions that sit outside the usual caps. It allows a contribution of the total sale proceeds up to the CGT cap which is $1.705 for the 2024 financial year (and indexed annually). For example, if an asset is sold for $1.5 million, the full $1.5 million can be contributed to superannuation.
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This is the most valuable concession, as it allows a full exemption from CGT on the sale of the business. To qualify for the concession, the relevant entity:
- Must have owned the business asset for more than 15 years consecutively.
- Must be over 55 and make the sale in connection with retirement or be permanently incapacitated.
- The business must have a turnover of less than $2 million or net assets of less than $6 million.
- If this exemption is applied, no other small business CGT concessions can be applied.
The 50% reduction
This allows an extra 50 per cent reduction of the capital gain and is in addition to the usual 50 per cent CGT discount available for individuals.
Retirement exemption
This concession allows for a $500,000 reduction in the assessable capital gain.
Conditions include:
- The $500,000 is a lifetime limit for each individual.
- If under 55, the amount must be paid into superannuation.
- If over 55, it is optional to pay the amount into superannuation.
Much like the 15-year exemption, the retirement exemption also allows for contributions to superannuation of up to $500,000 that sit outside the usual caps. However, this is different to the 15-year exemption as it is based on the exempt capital gain, not the total sale proceeds.
Small business roll-over
The rollover 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 again at this point.
The retirement exemption can be applied to this capital gain, which means a two-year deferral to contribute to superannuation or to turn 55. Alternatively, if a replacement asset is acquired and subsequently sold the retirement exemption may be applied without retesting of the CGT concession criteria. This allows a contribution into superannuation on a sale that may not otherwise be available.
Other considerations
CGT and the CGT exemptions only apply to capital gains. Gains such as the sale of plant and equipment or trading stock are not able to receive the CGT concessions as they are taxed under a different section of the Tax Act. As a result, there may be a substantial tax bill where plant and equipment have previously been fully deducted under the temporary full expensing concessions.
Also, be aware of warranties in the sale agreement. It can be expensive to take money out of superannuation so these funds may not be available to pay a warranty claim if one arises under the sale agreement.
It is important to consider the timing of the sale, i.e., the date the funds must be contributed to superannuation under the relevant concession.
Even outside the small business CGT regime, there are ways to boost superannuation, subject to being eligible to contribute concessional or non-concessional amounts, including:
- Bring forward non-concessional contributions: each member can bring forward their non-concessional contributions for three years to contribute $330,000 each.
- Carry back concessional contributions: members with a balance of less than $500,000 can carry back unused concessional contributions for the previous five years to obtain a larger tax deduction in the contribution year.
Peter Bardos is director tax consulting at HLB Mann Judd Sydney.
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