A range of concessions encourage small business owners to add the proceeds from selling their business to their retirement savings. If you are a small business owner preparing for retirement, here are some key considerations to make one final boost to your nest egg.
Leveraging Business Sale Proceeds
When selling a business or business asset, small business owners can contribute the sale proceeds, or a significant part of them, to their superannuation fund without breaching the super caps. This can significantly enhance super balances, but there are essential points to keep in mind.
Small Business CGT Concessions
To ensure the capital realised from the business sale doesn’t unnecessarily attract CGT, there are four small business concessions to consider. All require a basic criterion to be met, ensuring the asset being sold relates to a small business. These tests can be complex and are sometimes inaccessible due to technical reasons, such as shares in a company having differing rights. Engaging with experienced advisers early in the sale process is crucial to maximize these concessions.
The 15-Year Exemption
This exemption allows for superannuation contributions that sit outside the usual caps. It permits a contribution of the total sale proceeds up to the CGT cap, which is $1.705 million for the 2024 financial year (and indexed annually). For example, if an asset is sold for $1.5 million, the full amount can be contributed to superannuation.
This is the most valuable concession as it offers a full exemption from CGT on the sale of the business. To qualify:
- The entity must have owned the business asset for more than 15 consecutive years.
- The seller must be over 55 and making the sale in connection with retirement or be permanently incapacitated.
- The business must have a turnover of less than $2 million or net assets of less than $6 million.
- No other small business CGT concessions can be applied if this exemption is used.
The 50% Reduction
This concession allows for an extra 50% reduction of the capital gain in addition to the usual 50% CGT discount available for individuals.
Retirement Exemption
This concession allows for a $500,000 reduction in the assessable capital gain with the following conditions:
- The $500,000 is a lifetime limit for each individual.
- If under 55, the amount must be paid into superannuation.
- If over 55, it is optional to pay the amount into superannuation.
Like the 15-year exemption, the retirement exemption also allows contributions to superannuation of up to $500,000 outside the usual caps. However, it differs as it is based on the exempt capital gain, not the total sale proceeds.
Small Business Roll-Over
The roll-over allows the capital gain to be rolled over into another active business asset. If no asset is acquired after two years, the capital gain arises again. The retirement exemption can be applied to this capital gain, offering a two-year deferral to contribute to superannuation or turn 55. Alternatively, if a replacement asset is acquired and subsequently sold, the retirement exemption may be applied without retesting the CGT concession criteria.
Other Considerations
- CGT and the CGT exemptions only apply to capital gains. Gains from the sale of plant and equipment or trading stock are taxed differently and do not qualify for CGT concessions.
- Be cautious of warranties in the sale agreement, as funds taken out of superannuation may not be available to pay a warranty claim.
- Timing of the sale is crucial, particularly the date funds must be contributed to superannuation under the relevant concession.
Additional Ways to Boost Superannuation
Even outside the small business CGT regime, there are ways to boost superannuation, subject to eligibility for concessional or non-concessional contributions:
- Bring Forward Non-Concessional Contributions: Each member can bring forward their non-concessional contributions for three years to contribute $330,000 each.
- Carry Back Concessional Contributions: Members with a balance of less than $500,000 can carry back unused concessional contributions for the previous five years to obtain a larger tax deduction in the contribution year.
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