Small Business Capital Gains Tax Concessions and Superannuation

NEIL STAFFORD
HEAD OF COMPLEX ADVICE

In addition to income tax concessions, the CGT small business concessions play an important role in allowing additional contributions to be made to superannuation (up to $1.615 million in the current financial year). In order to be eligible to gain access to the small business CGT concessions, certain eligibility criteria with two of the main criteria being that the entity must be a small business entity with an aggregate turnover of less than $10 million and must satisfy the maximum $6 million net asset value test.

 

Where the small business concessions are activated and monies are contributed to superannuation, this contribution may be excluded from the member’s non-concessional contribution (“NCC”) cap.  To be excluded from the NCC cap, the contribution must fall within the individual’s “CGT cap amount” and an election must be made. Importantly note that, unlike non-concessional contributions, there is no requirement for the individual’s total superannuation balance to be less than the general transfer balance cap ($1.6m in 2020/21 and earlier years, $1.7m in 2021/22) immediately before the start of the income year in which the CGT cap contribution is made.

 

This makes the capacity to utilise the Small Business CGT concessions and contribution rules extremely effective with respect to the accumulation of wealth within a concessionally taxed environment.

 

The following contribution amounts are eligible to be assessed against an individual’s “CGT cap amount”:

  • the capital proceeds from the disposal of assets that qualify for the small business 15-year exemption;
  • the capital proceeds from the disposal of assets that would have qualified for the small business 15-year exemption except that:
  • the disposal of the asset results in no capital gain or loss; or
  • the asset is disposed of before the 15-year time frame is met, due to permanent incapacity;
  • the amount of capital gain disregarded under the small business $500,000 retirement exemption

 

Given the attractiveness of the capacity to extract a capital gain from a business asset and contribute the amount within the rules to superannuation in excess of the standard concessional and non-concessional contribution caps, we firmly believe that it’s in your interests to consider this matter in conjunction with your accountant to ensure that, at the appropriate point in time, you at least have the choice as to whether you wish to take advantage of the rules to assist in building wealth within a concessional taxed environment. Whilst the rules are complex, our experience in considering these matters strongly supports the contention that small business owners should be acutely aware of the benefits given that if the eligibility criteria are not able to be met (i.e. either the net assets or turnover exceeds the thresholds) the capacity to contribute these additional amounts is also lost.

 

In the first instance, we believe that it would be valuable to consider the aggregated turnover of the business together with the business valuation to assist us in understanding whether or not the eligibility criteria are able to be met.

 

In many cases, the extraction of the capital gain whilst, from a taxation perspective, may be relatively straightforward in terms of strategy, the capacity to be able to take advantage of the small business CGT concessions in respect of superannuation gives rise to further consideration given that we need to make a cash contribution to superannuation. There are many issues associated with the transfer of any assets that have been subject to the CGT assessment to a related superannuation fund and are generally precluded thus leading to the necessity for a cash contribution that needs to be funded. The funding of the contribution may be problematic subject to your particular circumstances and, given that this is a material aspect of the strategy, needs to be strongly considered and anticipated.