17 August 2021
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
Planning on selling your business?
Many small business owners do not have much in the way of super when the time comes to retire. For whatever reason—lack of cashflow, the need to retain earnings in the business to grow it, or even keep it afloat—they generally have not had the luxury to make superannuation contributions of any significance during their working lives.
Consequently, the retirement savings of many business owners is locked up in their business—their business is their super.
Fortunately, when the time comes to sell, there are generous taxation and superannuation concessions available to eligible small business owners which allows them hang onto what they’ve built-up over the years and provides a mechanism for transferring the wealth in their business into superannuation—the most tax effective structure to hold retirement savings.
So, if you are one of these people—a small business owner—selling your business or disposing of an ‘active’ business asset, you might be able to disregard some, if not all, of any capital gain by utilising the small business capital gains tax (CGT) concessions. Furthermore, if you can apply either the small business 15-year exemption or retirement exemption then you may be entitled to make a super contribution with the sale proceeds that is exempt from the after-tax non-concessional contributions (NCCs) cap. Instead, the contribution counts towards the CGT cap, allowing you to get more into super. But there are important requirements that must be met to get it right.
Applying the tax concessions and CGT cap
Your accountant will advise you on your eligibility to apply the small business CGT concessions and which concession(s) to use.
Your adviser will then assist you in making specific contributions to superannuation. The CGT cap (currently $1.615 million) is an individual lifetime cap and operates separately from the NCCs cap. These two caps together with the pre-tax concessional contributions (CCs) cap may enable you to contribute up to $1,972,500 following the sale of your business. You may even be able to contribute more if you have unused CC cap amounts from previous years and/or use a contribution reserving strategy.
If you can claim the 15-year exemption, you may be able to utilise the entire CGT cap of $1.615 million, as this amount can comprise all the proceeds from the sale.
But if you’re claiming the retirement exemption, then up to $500,000 can be contributed under the CGT cap as it relates only to the exempt capital gain claimed under the concession. If you wish to contribute more of the sale proceeds, it must be done as CCs and NCCs if eligible.
Take Bob aged 66 who sells his business for $1,200,000 making a capital gain of $800,000. His accountant advises that he can apply the small business retirement exemption.
After applying the 50% CGT discount, Bob contributes the $400,000 exempt gain under the retirement exemption.
Wishing to contribute more, Bob utilises both the CCs cap and NCCs bring-forward rule to contribute $357,500. Thus, contributing a total of $757,500 from the sale into super.
If Bob was eligible to apply the 15-year exemption, then the entire sale proceeds of $1,200,000 could have been contributed under the CGT cap.
As the CGT cap is a lifetime limit, be mindful of any previous contributions you’ve made under this cap via the small business concessions.
Eligibility to contribute
Even though you may be able to apply the tax concessions, you still need to satisfy the contribution rules to be eligible to get the money into super.
A trustee can only accept contributions if you are under age 67 or, if aged 67 to 74, you have met the work test—40 hours of gainful employment in 30 consecutive days. A work test exemption allows you to contribute where you met the work test last financial year and your total superannuation balance was less than $300,000 at 30 June 2021.
From 1 July next year, it is proposed that you will no longer need to meet the work test to contribute up to age 75. In addition, the NCC bring-forward arrangement will be available provided you meet the eligibility criteria.
Your ability to make contributions under the CGT cap ceases at age 75 as mandated employer contributions only can be accepted from that age.
It’s all in the timing
Rules dictate when a contribution must be made if it’s to be applied against the CGT cap. These rules vary depending on whether the asset is owned individually, or by a company or trust.
If you personally own the asset, the contribution must be made before your tax return needs to be lodged, or 30 days after receiving the capital proceeds, whichever is later.
Where the asset is 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 of receiving that payment. However, if the retirement exemption is claimed, the company or trust must make payment to you or your fund within seven days of making the election or seven days of receiving the proceeds from the CGT event, whichever is later. If you are under age 55, the CGT exempt amount must be paid directly to your super fund, whereas if you’re 55 or older, the CGT exempt amount is paid to you and you have 30 days to contribute the money into super if you want it assessed against the CGT cap.
Paperwork is crucial
Where the 15-year exemption or retirement exemption is claimed and you wish to make a super contribution under the CGT cap, you must provide your super fund with an ATO approved CGT election form no later than when the contribution is made.
If this form is not provided to the fund on or before the day the contribution is made, or the amount claimed does not qualify for the relevant CGT concession, the amount will be treated as an NCC and assessed against your NCCs cap—which may result in an excess NCC.
Given low contribution caps and the total superannuation balance test applying to NCCs, it’s more important than ever to use all available means to get money into super and the CGT cap is one way of doing this.