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What is it?
Small businesses have a number of capital gains tax exemptions and concessions available to them when it comes to selling assets. There is the 15-year exemption, which enables business owners to transfer the proceeds from the sale of an active asset owned for 15 or more years if they are aged 55 or over and are retiring or permanently incapacitated.
But there is also the small business retirement exemption available to business owners if they meet certain requirements. For this exemption, the business owner (if they are under 55) needs to contribute the capital gain from the sale of an active asset to superannuation. There is a lifetime limit of $500,000 on these contributions. Business owners can choose to disregard all or part of a capital gain under this exemption.
The small business retirement exemption essentially acknowledges that for many business owners their business is their retirement solution and their nest egg.
How does it work?
When selling an active asset and making a capital gain, a decision must be made as to what to do with that gain once any capital losses are also applied. If a business owner decides to use the small business retirement exemption and are under age 55, they need to make the contribution to a complying superannuation fund, including self-managed superannuation funds (SMSFs) or a retirement savings account (RSA). They don’t need to be retired or have stopped work and this contribution is not counted as a non-concessional contribution (and nor does it have the same non-concessional or concessional contribution caps). A business owner can also choose to disregard all or part of a capital gain under this exemption.
They need to make the contribution when they receive the funds from the sale of the asset or when they make the decision to use the retirement exemption, whichever is later. If they are under 55 years old and decide to use the retirement exemption after they have received the funds – and possibly used the funds for other purchases – the Australian Tax Office says they can still use the retirement exemption if they make an equivalent contribution to a superannuation fund or RSA on the day they make the decision. It is generally advised that the choice is made by the time they need to lodge their tax return for the financial year the CGT event happens.
If they are over 55 years old when they make the decision, there is no requirement to make the contribution to a superannuation fund. However, if they do want to make a contribution, they need to do it by the later of: the day their tax return needs to be lodged for the year in which the CGT event occurred; or within 30 days after they receive the proceeds of the CGT event.
What are the eligibility requirements?
There are a number of conditions that need to be meet to be eligible for any small business CGT concessions or exemptions.
First, the small business must either:
- Not have annual aggregated turnover of $2 million or more; or
- The asset sold must have been used in a closely connected business; or
- The business owner’s net assets must be less than $6 million (excluding personal assets such as the home as long as that has not been used to carry out a business).
The asset must also be an active asset, which means it is used in the course of carrying on a business, or held for that purpose, or it is an intangible asset inherently connected with the business. The active asset test is met if the asset was an active asset for at least 7.5 years of the 15 years of ownership or half of the period owned for if owned for 15 years or less. It does not need to be active just before it is sold.
In addition to the general small business CGT conditions, you also need to keep a written record of the capital gains amounts you chose to disregard to be eligible for the retirement exemption.
If payments from the sale of an asset are received in instalments, the conditions apply to each instalment.
An individual could also be eligible for a retirement exemption if they inherit an asset in a person’s estate if that asset is sold within two years of being inherited. They would be eligible to the exemption to the same extent that the deceased would have been before they died.
In the case of companies and trusts, a person needs to be a significant individual (i.e. own 20% or more of the company or trust). They also need to keep a written record of the CGT amount to be disregarded and how that will be divided between CGT concession stakeholders. They must make payments to at least one CGT concession stakeholder seven days after they receive the proceeds of the sale of the asset, or seven days after they make the decision, whichever is latest.
Case studies
Example 1
Jeff is 47 and was a self-employed retailer with an aggregated annual turnover of $1.5 million. He recently sold his business and made a taxable capital gain of $200,000. Jeff is eligible to claim the small business retirement exemption from CGT because his aggregated annual turnover is less than $2 million.
Instead of paying CGT on his capital gain of $200,000, he arranges to transfer $200,000 of his business sale proceeds into his SMSF. He has not previously claimed any amounts under the small business retirement exemption, so he is well under the $500,000 capital gains exemption claim limit. He therefore won’t pay any CGT on the capital gain from his small business sale.
Example 2
Sally is 52 and has run a number of profitable small businesses over her career. She makes a taxable capital gain of $325,000 on her latest business sale and is eligible to claim the small business retirement exemption for it.
However, she has previously claimed $350,000 in capital gains exemptions from her previous small business sales over the years. She did this by transferring the capital gain amounts to her super fund each time she sold one of her businesses. Sally is therefore only entitled to claim $150,000 of the capital gain proceeds from the sale of her latest business before she reaches her $500,000 capital gains exemption claim limit.
She decides to transfer $150,000 into her super fund to reduce her CGT obligation. For the other $175,000 Sally is eligible for the general 50% CGT reduction, as she has owned the asset for over 12 months, and also the small business active asset reduction. She therefore will only pay CGT on $43,750 of the proceeds of the sale.
The 50% CGT reduction and active asset reduction can be applied either before or after the small business retirement exemption is claimed, depending on what the client’s objectives are.
Example 3
Mike is 37. He currently runs his own small business and will continue to do so, but he has made a taxable capital gain of $50,000 on a business asset that he has sold. Mike is eligible to claim the small business retirement exemption and he has not previously claimed any amounts before. He transfers $50,000 to his SMSF and will not pay any tax on the capital gain.
Mike continues on with his small business, happy that he’s avoided some tax and also put some more money away for his retirement.
How do you go about claiming it?
To make an election for the small business retirement exemption you need to fill out the capital gains tax cap election form available online, with instructions from the ATO, here.
That signed and dated form must be given to your superannuation fund with the contribution on or before it is made. It won’t be valid if you have already made the contribution.
