Using small business CGT exemptions to boost your super

Each concession is available in a different situation. You can apply as many of the CGT concessions to the capital gain from selling your assets as you are eligible for, allowing you to continue reducing your capital gain and the resulting CGT.

Of the four CGT concessions, however, only two come with the extra bonus of allowing you to make larger contributions to boost your retirement savings. These are the:

• Small business 15-year exemption
• Small business retirement exemption.

Which CGT concession applies?

In most cases, the concessions are applied in the following order:

1. If you qualify for the 15-year CGT exemption, it is applied first. This exemption will disregard the entire capital gain and you do not need to apply any of the other concessions
2. If you didn’t qualify for the 15-year CGT exemption, the 50% active asset reduction is then applied automatically, unless you choose not to use it
3. You may then apply the retirement exemption or small business roll-over.

Before applying the 50% active assets reduction, retirement exemption or small business roll-over, you must first reduce your capital gain by offsetting any capital losses and applying the 50% CGT discount for assets owned 12 months or more (if you are eligible for it).

It is not compulsory to apply the 50% active asset reduction. You may choose not to use it if you wish to increase the amount available to use towards the retirement exemption or small business roll-over.

Comparison: 15-year exemption vs Retirement exemption

Am I eligible for the small business exemptions?

It’s important to know there are both basic conditions and some specific conditions you need to meet before you qualify for each exemption.

1. Basic conditions for any small business CGT exemption

You must be one of the following:

• A small business entity with an aggregated turnover of less than $2 million
• Not carrying on a business (other than as a partner), but the asset you are selling is used in a closely connected small business
• A partner in a partnership that is a small business entity, and the asset is either:
  • An interest in a partnership asset
  • An asset you own that is not an interest in a partnership asset, but is used in the partnership’s business
• You satisfy the maximum net asset value test.

In addition, the asset you’re selling must meet the ATO’s active asset test, which requires the asset to be used in the course of carrying on a business, or held for that purpose, or to be an intangible asset inherently connected with your business.

You will meet the active asset test if the asset you owned for more than 15 years was active for at least 7.5 years. For an active asset you owned 15 years or less, the asset must have been active for at least half the test period, which begins when you acquired it and ends either at the CGT event, or when the business ceases if this occurs in the 12 months before the CGT event.

These minimum periods don’t need to be continuous, provided the asset is active for the minimum amount of time in total.

If the asset is a share in a company or interest in a trust, it must meet additional conditions.

If your situation involves a CGT event related to a partnership and the CGT event involved ending your right or interest, it must be a membership interest in the partnership immediately before the CGT event happens. For all other cases, your right or interest must be a membership interest in the partnership immediately after the CGT event happens.

Contributing to your super using a small business exemption

If you’re eligible for the 15-year exemption or the retirement exemption, you can take advantage of the many benefits of saving for your retirement through the super system. These include a tax rate of 15% on investment earnings in the accumulation phase and 0% in the retirement phase, which compares to your marginal tax rate (plus the Medicare levy) for assets held outside super. In addition, once you reach age 60, withdrawals from your super account are tax free.

If you use money eligible for a small business exemption when you contribute to your super account, you’re not limited by the normal annual contributions cap applying to non-concessional super contributions. This means you can make contributions that would exceed the usual cap and you can contribute when your total super balance was above the general transfer balance cap on the last 30 June.

To make personal super contributions you must be aged below 75. Your super fund is able to accept your contribution up to 28 days after the end of the month in which you turn age 75. After this point you are ineligible to make further non-concessional super contributions.

How the lifetime CGT cap works

Given the generosity of the rules allowing you to ignore the normal non-concessional contributions cap, there is a limit on the super contributions you can chose to exclude. This limit is called the lifetime CGT cap.

For example, if you exclude $500,000 from your non-concessional cap using the retirement exemption and then a further $500,000 using the 15-year exemption several years later, you will consume a total of $1 million from your cap.

If you exceed your lifetime CGT cap, the excess contributions are counted towards your non-concessional contributions cap and tax penalties may apply.

How do I elect to exclude contributions into my super account?

If you plan to use money eligible for the small business 15-year CGT exemption or retirement exemption as a contribution into your super account, you need to fill out the CGT cap election form. This form allows you to make a personal contribution using proceeds from the sale of your small business asset and to exclude them from your non-concessional contributions cap.

The completed form must be given to your super fund before or at the time you make the relevant contribution. If you elect to exclude your contributions after they are contributed, the election will be deemed invalid and the contributions will be included in your non-concessional contributions cap.

After you make your election, your super fund will check if it’s valid before recording it. Your fund will then report these contributions separately from your other personal super contributions.