Super strategies and small business CGT concessions

If you are a business owner, it’s important that you are familiar with the Government’s small business capital gains tax (CGT) concessions.

The concessions can offer significant financial benefits, depending on your personal situation and how long you’ve owned your business.

While this is primarily an accountant’s area of expertise, we can work with your accountant to make sure you access all the applicable concessions and can help determine the most tax effective strategy.

First Financial Principal James Wrigley highlights what you need to know when you are thinking about selling your business.

Eligibility criteria

First up, you need to understand the eligibility criteria. James says:

“The series of concessions is available if certain eligibility tests are met. These include an income and an assets test, but there are different concessions depending on the person’s age and stage of life… it also depends on how long they’ve held the business for.”

The ATO website outlines all the conditions, but some of the preliminary criteria are:

“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 your asset is used in a closely connected small business (passively-held assets)
  • a partner in a partnership that is a small business entity, and the asset is either
    • an interest in a partnership asset (partnership assets)
    • an asset you own that is not an interest in a partnership asset (partner’s assets) but is used in the business of the partnership
  • you satisfy the maximum net asset value test.

The asset satisfies the active asset test.”

Eligibility is complex, so it is crucial that you discuss this in detail with your business accountant. They will be able to guide you through the steps, to make sure you meet the conditions.

Four small business CGT concessions

Four small business CGT concessions

There are four different small business CGT concessions and this is where we require input from your accountant to determine what is applicable to your situation. James continues:

“From a financial advice perspective, we always want to make sure that people are aware that the concessions are available.

If someone has approached us and they are selling their business, we discuss this with them. We highlight the possibility of accessing the concessions, because they can be advantageous on two fronts.

Firstly, they are beneficial when you want to limit your tax liability on the sale of your business… and secondly, there are some concessions that allow you to put rather large lump sums into your superannuation.”

Again, the ATO’s website has detailed information about the concessions, but here is a summary:

“Small business 15-year exemption
You will not pay CGT when you dispose of an active asset if you meet both of the following additional requirements:

  • you are aged 55 years or older and retiring, or are permanently incapacitated
  • you have continuously owned the asset for at least 15 years.

Small business 50% active asset reduction
You will only pay tax on 50% of the capital gain when you dispose of an active asset.

The small business 50% active asset reduction applies if you meet the basic eligibility conditions.

Small business retirement exemption
Capital gains from the disposal of active assets are exempt from CGT up to a lifetime limit of $500,000. If you are under 55, the exempt amount from the proceeds on disposal of the asset must be paid into a complying superannuation fund or a retirement savings account.

Small business rollover
The small business rollover allows you to defer all or part of a capital gain made from a CGT event happening to an active asset. For example, you can defer your capital gain until a later year if you buy a replacement asset or improve an existing active asset.”

How you can boost your super balance

How you can boost your super balance

Depending on which concessions you can access, you may be able to boost your superannuation balance and further reduce your tax liability.

Both the 15-year exemption and the small business retirement exemption enable you to contribute lump sums into your super fund without affecting your other contribution caps. James says:

“It’s all about being aware of the possibilities. We need to work jointly with your accountant to confirm that you tick the right boxes… if you do – that’s great. But if you don’t, we ask if there is something else we can do.

There are different ways you can apply the concessions… you can move the order of them around to create a better outcome. The rules are flexible enough that you can pick and choose which concessions you want to apply.

As an example, we had a client who was selling a business he had owned for more than 15 years. He was able to put a little over $1.6 million into his super because he was transitioning into retirement. This was outside the standard concessional and non-concessional contribution limits and was completely tax free.

It shows the importance of being aware of these things… and is one area where we lean heavily on accountants for their specialised tax advice.”

Speak to your accountant and financial adviser

Speak to your accountant and financial adviser

If you are a business owner and nearing retirement, we recommend speaking with your accountant and a financial adviser to make sure you understand exactly which concessions you may be able to access.

Here at First Financial, our experienced team has the knowledge to provide you with tailored advice to suit your unique circumstances. If you’d like to talk to one of our Financial Advisers, please contact us today. Read more articles about superannuation.

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