SMSF Technical Education & Strategies

 

Contributions from the disposal of small business assets

If you use the proceeds of the disposal of certain small business assets to make non-concessional contributions (NCC) to your SMSF, then you may be able to have these contributions (subject to a limit) not count towards your NCC cap.

Background to the CGT Small business concessions

The capital gains tax small business concessions (CGT SBC) are a range of tax concessions on the sale of assets for small business owners, which recognises that many small business owners treat their business as their "retirement nest egg", and due to being self employed, may not have had the opportunity to put much money away into their super fund.

 

Its beyond the scope of this article to go into the CGT SBC's in full, however we will briefly look at what the concessions are, how they can interact with your SMSF, and the opportunity that exists for small business owners.

 

In short, there are four specific concessions available:

 

1. The 15 year exemption

If you are aged 55 years or over and are retiring, or if you are permanently incapacitated, there is no assessable capital gain if your business has owned an asset for 15 years and makes a gain when you sell the asset.

 

2. The 50% active asset reduction

The capital gain on a business (active) asset can be reduced by 50%.

 

3. The retirement exemption

A lifetime limit of $500,000 of capital gains from the sale of a business asset can be exempt. If you are under 55 years of age, then the exempt amount must be paid into your SMSF to get the exemption.

 

4. The rollover exemption

This allows you to defer your capital gain until a later year if you sell a small business asset.

 

Firstly you must satisfy the basic conditions that apply to all the CGT concessions, and then satisfy any additional conditions that specifically apply to the individual concessions. Whilst there are some rules about how you apply the CGT SBC's, you can apply those you are entitled to until the capital gain is reduced to nil. We'll provide some examples below.

 

Are you eligible ?

To be eligible for a CGT SBC, you need to have a CGT event occur (and a capital gain would have occurred but for the concessions), and satisfy the following:

 

At least one of the following applies:

- You are a small business with turnover less than $2 million for the year

- You have active net assets of less than $6 million.

- you do not carry on business (other than as a partner) but your asset is used in a business carried on by a small business entity that is your affiliate or an entity connected with you (passively-held assets)
- you are a partner in a partnership that is a small business entity and the asset is either an interest in an asset of the partnership (partnership assets); or an asset you own (that is not an interest in a partnership asset) that is used in the business of the partnership (partner’s assets).

 

Further to this, the asset must be an 'active asset'.

 

*Note that this is a light summary of the CGT SBC's and you should seek professional advice if you think you will be in this situation.

 

How does it work with your SMSF contributions ?

If you make contributions to your SMSF from the proceeds of the following events, then they will be excluded from the non-concessional contributions cap:

- up to $500,000 of capital gains that have been disregarded under the small business retirement exemption

- the capital proceeds (i.e. not just the gain) from the disposal of assets that qualify for the small business 15-year exemption

- the capital proceeds from the disposal of assets that would qualify for the small business 15-year exemption, but do not because: (1) the asset was a pre-CGT asset there was no capital gain, or (2) the 15-year holding period was not met because of the permanent incapacity of the person (or a controlling individual of a company or trust).

 

What is the limit ?

The limit on the amounts of these contributions that can be excluded from the NCC cap is known as your Super CGT Cap amount. It is a lifetime amount, although it is indexed annually.

 

For the 2013/14 year this lifetime limit stands at $1,315,000.

 

Each time you elect to exclude an eligible contribution from the non-concessional contributions cap, your super CGT cap amount is reduced by that amount.

What if the assets are held in a company or trust ?

If the assets being disposed of are held by a company or trust, then the exclusion from the non-concessional contributions cap can still apply. In this instance, the company or trust can make a payment to, or on behalf of, you if you are a "CGT concession stakeholder" of the company or trust.

As a CGT concession stakeholder, you can choose to have a contribution counted towards the super CGT cap, regardless of whether it is made by you or by the company or trust. You must however notify your SMSF using the approved form before or at the same time that the contribution is made. The exclusion will not apply if you submit the form to your SMSF after the contribution has been made.

 

Examples:

Example 1:

Dave has just sold his business that he has owned for 18 years, and is eligible for the CGT SBC 15 year exemption. He sells it for $900,000, which is a capital gain of $800,000. Dave can contribute the full $900,000 proceeds to his SMSF and elect for it to be counted under the CGT cap. This contribution is fine even if he has maxed out his other concessional and non concessional contribution caps. Note also that if Dave's business was started pre-CGT, he can still contribute the full $900,000 under the CGT cap.

 

Example 2:

Jane has just sold her business that she has owned for 5 years for $1.5 million, which is a $1.2 million capital gain. Firstly, Jane can apply the 50% general CGT discount for assets held over 12 months, which leaves $600,000. She can then apply the CGT SBC 50% discount, which leaves $300,000 of capital gains assessable. Jane then claims the full $300,000 as exempt using the CGT SBC retirement exemption, which leaves no capital gains tax to pay. Note that because Jane is under age 55, she must roll this amount into her SMSF. The $300,000 will count against her lifetime limit of $500,00 for the CGT SBC retirement exemption cap (leaving just $200,000 that can be used at a later date), and it will also count against her $1.315 million CGT SBC overall lifetime cap.