By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
February 2023

Are you selling your business and looking to top-up your super?

Many small business owners haven’t had the luxury to put money aside for retirement needing instead to retain earnings in the business to grow or just remain afloat.

For them their business is their superannuation.

Thankfully, small business owners selling their business or a business asset, may be able to disregard some, or all, of any capital gain by utilising the generous small business CGT concessions.

In addition, they may be able to make up lost ground and turbo charge their super by contributing the proceeds which count against the CGT cap, not the non-concessional contributions (NCCs) cap.

Being exempt from the NCCs cap means they may contribute even if their total superannuation balance (TSB) is $1.9 million or more – allowing them to get more into super.

Importantly, certain requirements must be met to get this right.

Eligible for tax concessions?

Where the sale of a business, or business asset, gives rise to a capital gain, that gain may be reduced, even eliminated, if you can apply the small business CGT concessions.

There are four concessions.

The first and most generous is the 15-year exemption where the entire capital gain on disposal of a business asset owned for at least 15 years is disregarded – no further concessions apply.

You must be permanently incapacitated or aged 55 or more and retiring.

If you don’t qualify for this concession, there’s the 50 per cent active asset reduction – additional to the general 50 per cent CGT discount available to individuals and trusts.

Then there’s the retirement exemption – a reduction up to a lifetime limit of $500,000 (unindexed) in the assessable capital gain.

If you’re under age 55, the amount must be contributed to super.

Finally, there’s the rollover relief where the capital gain is deferred where a replacement asset is acquired within the required timeframe.

But first, before any of this, you must satisfy the basic conditions.

Basic conditions

Generally, to qualify either your aggregated turnover is less than $2 million – you’re a small business entity – or the net asset value of your business and related entities does not exceed $6 million – excludes personal use assets.

The asset must be an active asset – one used or held ready for use in your business or a related business (including goodwill) – and has been for at least half its ownership or 7.5 years if owned for more than 15 years.

Further conditions apply where the asset being sold is a share in a company or an interest in a trust.

The rules are complex, and you should seek advice on your eligibility to apply the small business CGT concessions.

Eligible to make a CGT cap contribution?

The CGT cap (currently $1.705 million), which operates separately from the NCCs cap, is a lifetime cap – so, be mindful of any previous contributions made under this cap via the small business concessions.

These two caps together with the concessional contributions (CCs) cap may enable you to contribute up to $2,062,500 from sale proceeds, excluding any catch-up CCs from unused cap amounts and CCs made under a contribution reserving strategy.

If you can claim the 15-year exemption, you may be able to utilise the entire $1.705 million CGT cap as it comprises all proceeds from the sale of business assets.

But if you’re claiming the retirement exemption then up to $500,000 only can be contributed under the CGT cap as it relates to the exempt capital gain claimed under this concession. If you wish to contribute more of the sale proceeds, it must be done as CCs and NCCs, if eligible.

Take Ron aged 69 who sells his business for $1 million making a capital gain of $750,000. His accountant advises that he can apply the small business retirement exemption.

After applying the 50% CGT discount, Ron contributes the $375,000 exempt gain under the retirement exemption.

Wishing to contribute more, Ron utilises both the CCs cap – having met the work test (before selling his business) to make a personal deductible contribution – and NCCs bring-forward rule to contribute $357,500. Thus, contributing a total of $732,500 from the sale into super.

If Ron was eligible to apply the 15-year exemption, the entire sale proceeds of $1 million could have been contributed under the CGT cap.

Eligible to contribute?

You must still meet the contribution rules to get the money into super.

You have up until 28 days after the end of the month in which you turn 75 to contribute – only mandated employer contributions and downsizer contributions can be accepted from then.

It’s all in the timing

For a contribution to be assessed against the CGT cap, a deadline applies which varies depending on whether the asset was owned individually, or by a company or trust.

For assets owned personally, the contribution must be made before the later of the day your tax return needs to be lodged, or 30 days after receiving the proceeds.

Where the asset was owned by a company or trust and the 15-year exemption is claimed, the payment must be made to you within two years after the CGT event (or later for earn-out rights), and you must make the contribution within 30 days after receiving this payment.

But if the retirement exemption is claimed, the company or trust is required to pay you or your fund within the later of seven days of making the election or seven days after receiving the proceeds.

If you’re under age 55, the CGT exempt amount must be paid directly into super, whereas if you’re 55 or older, it’s paid to you, and you have 30 days to contribute the money to your fund if you want it assessed against the CGT cap.

Paperwork is crucial

Where you claim a small business CGT concession and contribute to super, you must provide your fund with an ATO approved CGT cap election form for it to count against the CGT cap.

The form must be provided no later than when the contribution is made. If the form is late, or the amount claimed does not qualify for the concession, the contribution will be an NCC assessed against your NCCs cap – which may result in an excess.

Given the $1.9 million TSB test applying to NCCs, it’s important to use all available means to get money into super and the CGT cap is one way of doing this.