Super for small business owners

Superannuation has been designed for employees, not for business owners. But with the right advice and structures, small business owners can use their business assets to boost their superannuation.

Key points

Small business owners need to understand the capital gains tax (CGT) lifetime cap and how the CGT concessions work.
But they should talk to their tax accountant because these arrangements can be complex.

Building a business can take time and money. It's about building the business and investing money and time into it. Did you know that for assets held by a small business, if sold, the proceeds can be contributed into super to increase your retirement savings significantly?

It is hard work being self-employed, and the last thing you'll be thinking about is your own super. You've got overheads to pay, mortgage repayments, salaries and insurance, and you need to keep the business running.

There are four capital gains tax (CGT) concessions for small business in regard to the sale of a CGT asset (see the table on page 63). If sold, the proceeds of the sale of CGT assets used in a small business can be contributed into super. However, there are certain conditions that must be satisfied before these concessions can be applied.

Below is a general summary to assist you in gaining a basic understanding of these CGT business concessions. But it's a complex area that usually requires some consultation with an accountant or tax adviser.

Basic conditions

Certain basic conditions must be met by the small business for it to be eligible for the small business CGT tax concessions, such as:

1. The turnover or net asset value test:

- net value of the assets owned must not exceed $6 million

- turnover of the entity and related entities must be less than $2 million.

2. Active asset test—the asset sold was used or held by the small business for explicit use in a business.

3. Additional conditions apply to an asset being sold as a share in a company or interest in a trust:

- the entity claiming the concession must be a CGT concession stakeholder in the company or trust

- if there is an interposed entity between the CGT concession stakeholder and the company or trust in which the shares or interests are held, the stakeholder must have at least 90% participation.

Entity refers to an individual, partnership, company or trust.

A CGT concession stakeholder is either a significant individual in the company or trust and also a spouse of the individual, who participates in the voting, receipt of dividends, income or capital distributions.

Small business CGT concessions

There are four small business CGT concessions available to a business owner for the sale of a CGT asset.

The amount you can contribute into superannuation comes at a lifetime cap of $1.565 million for the 2020-21 financial year (the cap is indexed), which means the proceeds of the sale of an asset can count towards the lifetime cap and not affect your non-concessional cap.

The CGT lifetime cap contributions arise from the application of the following two concessions:

- small business 15-year exemption; and

- small business retirement exemption.

CGT concessions Summary
15-year exemption Probably the most favourable of all the concessions. The entire capital gain can be disregarded and capital losses are not offset against the gain. The asset must have been owned for 15 years before the sale.
Small business 50% active

A small business may qualify for the 50% active asset reduction to their capital gain. Also, if the asset is owned by an individual or trust, the 50% CGT discount can also be applied.

Small business retirement exemption This exemption allows an entity to disregard a capital gain up to $500,000. This amount can be contributed into super if you are under age 55.
Small business rollover relief This concession basically defers the capital gain on the sale of an asset where the asset is being replaced or expanded to improve an existing asset.

Contributions relating to they 15-year exemption

If a business owner applies the small business 15-year exemption (asset owned for 15 years) towards their assessable capital gain, the proceeds can be contributed to superannuation as a CGT lifetime cap. There are other conditions that must be met, but this gives you a basic understanding of the exemption.

Sharon, age 64, has owned her cattle farm since 2000 and has decided to sell the farm in 2020. By disposing of the farm and assuming that a capital gain was triggered, Sharon could apply the 15-year exemption to disregard the capital gain.

Sharon received $950,000 from the proceeds of the sale of the farm and she's eligible to contribute to superannuation. Sharon can make a CGT lifetime cap contribution of up to $950,000 (the proceeds of the sale).

Contribution relating to the retirement exemption

If you apply the small business retirement exemption, a capital gain can be exempted to an amount of $500,000 (this amount is not indexed), and the exempt amount can be contributed to superannuation as a CGT lifetime cap contribution.

David's company has applied the small business retirement exemption and has made a respective payment of $300,000 to David. David is age 53 and wishes to contribute

these monies to superannuation. David has some options available to him, which include:

make a non-concessional contribution of $300,000 invoking the bring-forward rule

  • Make a non-concessional contribution of $100,000 and a CGT lifetime cap contribution of $200,000
  • Make a CGT lifetime cap contribution of $300,000.

David needs to consider the possibility of further non-concessional contributions in the same year or a future financial year when he makes a decision.

Tip: If you are age 55 years or younger, the retirement exemption amount must be contributed in super; if you are over age 55, there is no requirement to direct the amount into super.

The small business CGT concessions are a strategy that can save you in terms of tax, and can also boost your superannuation savings. As these are complex strategies, we recommend that you seek qualified professional advice from an accountant or tax adviser.

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