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The small business retirement exemption allows you to disregard all or part of any capital gains made on the sale of a small business or its assets. This exemption can help you to avoid or reduce capital gains tax (CGT), provided that you satisfy specific conditions to be eligible to claim it.
The basic idea behind the exemption is to recognise the fact that many small business owners treat their businesses as their retirement nest egg. They often invest heavily in their businesses and may not contribute as much to their super as a result.
How does it work?
It’s important to understand that you don’t necessarily have to sell your business entirely and cease operating in order to claim the small business retirement CGT exemption. You can do that, but you can also progressively claim the exemption each time you make a capital gain selling any of your small business assets, before you reach your preservation age.
Doing that can help you to minimise your CGT, while providing for your retirement at the same time. You simply contribute the capital gains on any asset sales to any complying Australian super fund (including SMSFs). These contributions are treated as non-concessional (i.e. contributions made after tax) and are therefore not included in the SMSF’s taxable income. They are also excluded from your non-concessional contributions cap, meaning you can still make the maximum allowable non-concessional contributions each year if you want to.
If you’re aged over 55, you can simply claim the small business retirement exemption and your capital gain will be tax-free.
A lifetime capital gains limit of $500,000 can be exempt from CGT under the small business retirement exemption.
What are the eligibility conditions?
To qualify for the exemption, you must satisfy one of the following conditions:
- your business must have an annual aggregated turnover of less than $2 million. Aggregated turnover includes the annual turnover of any affiliate businesses that you may have and/or any that you may be connected with in some way.
- the asset sale for which you’re claiming the CGT exemption must have been an “active” asset. This means that it must have been either used in the course of carrying on your business at the time of the sale or it must have been an intangible asset (like goodwill) that’s connected to the business.
- the net value of your other personal assets can’t exceed $6 million.
Can you give some examples to show how the small business retirement CGT exemption works with super?
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.
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. She will therefore only pay CGT on a capital gain of $150,000, rather than on her total capital gain of $325,000 from this latest business sale.
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 the small business retirement exemption?
- complete a Capital gains tax cap election form specifying the amount of the capital gain that you want to claim under the exemption. This form is available online from the Australian Taxation Office (ATO).
- pay the capital gain amount that you’re claiming into your super fund within thirty days of receiving the proceeds of your small business asset sale. If you don’t, the opportunity to claim the small business retirement exemption for your capital gain is lost.
The small business retirement exemption helps eligible small business owners to reduce or avoid CGT on the sale of all or any of their business assets. Business owners aged under 55 can do this by transferring all or some of their capital gain into their super fund within thirty days, up to a maximum lifetime limit of $500,000.
The information contained in this article is general in nature. It’s worthwhile to seek independent professional advice about your eligibility for the small business retirement exemption and using it via your super fund.