If you are a small business owner, the capital gains tax (CGT) small business concessions can allow you to increase your retirement savings significantly while at the same time allowing you to choose to disregard all or part of a capital gain from the sale of an active asset if you satisfy certain conditions.

What is considered to be a small business?

To be eligible to use the CGT contribution caps, you must first be eligible for a small business CGT tax concession. 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 then 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.

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.

What Small Business CGT concessions are most relevant to Superannuation?

The two concessions relevant to small business owners that relate to Superannuation are the 15-year asset exemption and the small business retirement exemption. If you use the capital gains from small business concessions for retirement or superannuation purposes, a lifetime cap of $1.65 million, which is indexed, applies. In effect, there are two parts, the lifetime cap and the small business retirement exemption cap. The lifetime 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.

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.

Qualifying for the Retirement Exemption

The retirement exemption allows up to $500,000 (lifetime limit) of the assessable capital gain to 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 choose to take it in cash or contribute to superannuation.

Risks and considerations

Although the small business CGT concessions when used for retirement purposes can significantly boost your superannuation while also reduce potential tax obligations, there are various considerations, for example, the timing of contributions to superannuation, interaction with other contribution limits such as non-concessional contributions, the impact on a members Total Superannuation Balance and that all contributions to superannuation are preserved until you meet a condition of release.

This is a complex area and it is important to not only seek independent financial advice but you must also consult your tax professional or Accountant to ensure the sale of your business is structured to provide you with maximum benefit.