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Selling a small business is not just about getting the best sale price. It’s also about reducing Capital Gains Tax and optimising superannuation contributions.
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Death and taxes
If nothing is certain but ‘death and taxes’ it follows that we naturally want to live as long as possible, and minimise the amount of tax we must pay.
To this end, superannuation has been, and remains, the primary wealth management vehicle by virtue of offering concessional tax rates (we’ll leave aside the proposed ‘excess $3m member balance tax’ for the time being).
The Superannuation challenge for Small Business Owners
But superannuation has two problems: a) until you meet a ‘condition of release’ (e.g. turn 65) you can’t access the capital, and b) the limits on contributions mean that moving capital into the structure must happen progressively. This can be detrimental because of the advantage of the compounding effect of investment returns.
Capital Gains Tax concessions for Superannuation boosting
For those who run a business, often you put everything into that venture whilst in its infancy, and the payoff only comes much later. Typically, this means forgoing the ability to make superannuation contributions in earlier years. And then, later on, trying to play catch up.
Additionally, many business owners may not have significant funds to put towards retirement until a later point is reached, potentially where retirement is imminent, with the source of funds often being the sale of the business itself.
How to boost superannuation contributions as a small business owner
This problem is at least acknowledged by Australian tax law. A number of CGT concessions to small business owners are available. Two of these are specifically designed to boost superannuation contributions.
For individuals who qualify for a small business CGT exemption under the 15-year rule[1], they will be able to contribute up to $1.78m under the lifetime CGT cap[2] from the proceeds of the business sale. This cap is outside of the non-concessional contribution cap.
For those not eligible under the 15-year rule, but who would qualify under the retirement exemption[3], they will be able to contribute up to $500,000 to offset the capital gains from the sale. Amounts contributed under this concession count towards the lifetime CGT cap, and are also outside of the non-concessional contribution cap.
For individuals below age 55, in order to access the tax concession, the contribution to superannuation must be made. For those aged 55 and above contributing to superannuation is not compulsory. In any case there can be tight timeframes for making the contribution, potentially as short as 30 days following the receipt of proceeds.
Interestingly there is no actual requirement for the individual to retire to access the concession.
[1] The 15-year rule, in essence, allows an eligible taxpayer to disregard any capital gain from the sale of an active asset where the asset has been owned continuously for at least 15 years.
[2] The lifetime CGT cap is a limit on the amount which can be contributed to superannuation and not counted towards the non-concessional contribution cap. The amount is indexed and for FY-25 is $1.78M
[3] The retirement exemption is a tax concessional available to qualifying individuals to exempt a capital gain on an active asset, up to a lifetime limit of $500,000 (unindexed).
Cascading concessions
At a high level, the concessional are available to eligible businesses that meet the basic eligibility conditions and dispose of an active asset that realises a capital gain.
Further additional conditions then apply depending on the individual concession that is desired to be accessed.
Small business CGT laws – it’s complicated
The small business CGT laws are a highly technical area of Income Tax law. It is important to understand and plan the potential qualifications with your wealth adviser.
The other key person is your accountant. For example, one of the key considerations is the structure of the business and its sale. The major issue is what is being sold? Is it the business assets, the business itself or the entity that owns the business?
Working with an accountant who understands the nuances and can then advise on the structuring of the sale itself can open up access to qualification for the various concessions. This in turn may provide the ability to make the extra contributions to superannuation that are not otherwise ordinarily available.
Conclusion
The opportunities to reduce CGT and, at the same time, contribute more funds into superannuation are too good not to plan for. Don’t wait until the cheque is in the bank before considering these opportunities….
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The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation, or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.