Published June 12, 2023 (last updated on May 10, 2024) | Adam Wyatt - Content Writer
If you own a small business andwant toadd to yoursuperannuationnest-egg, it’s worth consideringhow you might benefit from the small business retirement exemption.
The average self-employed Australian will have only accumulated$164,000in super by the time they reach retirement. Compared to the average salaried employee’s super balance – a healthier $283,000 – retired small business owners are often forced to make ends meet withan uncomfortably lowincome.
The small business retirement exemption offers reduced capital gains tax (CGT) on the proceeds from selling company assets. The exemptions acknowledge that small business owners rely on these fundsto top uptheir super for later life.
What is the small business retirement exemption?
The small business retirement exemption is a concessionthat allows small business ownersto transfer the proceeds from sellingassets directly into theirsuperfund. Best of all, the exemption offers various levels of reduction on CGT.
This exemptionis made up of four specific CGT concessions:
The Retirement Exemption:If you’re a small business owner under the age of 55, you can transfer the proceeds from the sale of anasset into your superfund. However,there’s a lifetime limit of $500,000.
15-Year Retirement Exemption:If you sell abusiness asset that hasbeen owned for at least 15 years, the entire sum of CGTmay be exempt. In this case, all proceeds can becontributed into your superannuation, up to the lifetime limit of $500,000.
50% Active Asset Reduction:With this concession, small business ownerscan reduce the CGTon the sale of an active asset by 50%. Note that youmust have owned the asset for at least 12 months.
Rollover Exemption:The rollover exemption gives small business owners the choice to defer the capital gainstax on a sold asset toa later year. You may choose to apply the rollover to as much of the capital gain as you decide. In some cases, it can be combined with other exemptions.
What are the eligibility requirements?
If you’re a small business owner planningto claim retirement exemption, one of the following eligibility requirements must apply:
You owna small business with an annual aggregated turnover of $2 million or less
You own a small business withan aggregatedassets value of $6 million or less
If you meet the abovecriteria, also keep in mindthat claimants under 55 years of age must deposit funds into a qualifying super fund,self-managed super fund, or retirement savings account. Additionally, the amount deposited must be equal to the exempt amount.
Additionally, be sure to keep an accurate record of all your exemption claims, as well as copies of statements for your super account documenting any transfers.
Small business retirement exemption limit
Each Australian has a lifetime limit of $500,000 in CGT for the small business retirement exemption. This amount is reduced by any earlierclaims of CGTthrough the concession.
Other stakeholders in abusiness canalso claimup to $500,000 in CGT with the retirement exemption. This means a small business withfour stakeholders would have a limit of$2 million.
Somebusinesses with multiple stakeholders may decide not to split the exemption entitlement evenly, meaning the amount may vary from person to person.
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Small business retirement exemption examples
By this stage, you might be wondering how the small business retirement exemption worksin the real world. Here are twoexamples illustrating ordinary exemption claims:
Example 1: Annie is 47 and ran a cafewith an aggregated annual turnover of $1.7 million. Sherecently sold thecompany and made a taxable capital gain of $300,000. Annie is eligible to claim the small business retirement exemption because her aggregated annual turnover wasless than $2 million.
Instead of paying CGT on her capital gain of $300,000, she transfersthe full amount into her super fund. Annie has neverclaimed any small business retirement exemptions before, so she is well withinthe $500,000 lifetime limit. Anniewon’t pay any CGT on the capital gain from selling hersmall business.
Example 2: James is 52 and has run multipleprofitable small businesses over the years. Hemakes a capital gain of $350,000 on his latest business sale, which he bought 8 months ago and makes an annual turnover of $1.2 million.
However, Jameshas alreadyclaimed $375,000 in CGT exemptions from earlierbusiness sales.This means he is only entitled to claim an exemption of $125,000 before hereaches his $500,000 lifetime limit.
James decides to transfer $125,000 into his super fund to reduce his CGT obligation but must pay CGT on the remaining $225,000. Because he has owned the business for less than a year, James cannot claim the 50% Active Asset Reduction.
How can you claim the small business retirement exemption?
To make a claimfor a retirement exemption, you first need to completethecapital gains tax cap election form, which is available onlinewith instructions from the ATO.
Your signed and dated form must be submitted to yoursuper fund when (or before) the contributionis made. It won’t be valid if you have already made the super payment. You must then fill outthe applicablesections inyour SMSF annual return.
Advice regarding tax and superannuation is outside of Employsure’s areas of expertise. Any information in this article regarding tax and superannuation is general and does not constitute financial advice. Employsure recommends seeking specialist advice from your accountant, tax specialist or the ATO for further information.
For all other employment workplace relations and health & safety matters,Employsurecan help simplify your obligations. If you have any questions or concerns, please call ourFREE 24/7 Advice Lineon1300 651 415.
Frequently Asked Questions
What is capital gains tax?
Capital gains tax (CGT) is the tax you pay on profits from selling assets, such as property.
Individuals documentany capital gains and capital losses in theirincome tax return, paying taxon anynet capital gains. Although it is referred to as ‘capital gains tax,’ CGTis part of our normalincome tax.
Capital gains tax also applies to businesses when certain events occur, such as selling a business, commercial property, or company asset.
What is an active asset?
This is an asset owned by a taxpayer and used in a business either by the taxpayer, an affiliate of the taxpayer, or by another entity connected with the taxpayer’s business.
An active asset can be a physical, such as a commercial building, or intangible, such as intellectual property.
According to the terms of the small business retirement exemption, an active asset must have been in use for at least half the time it was owned. Note that periods of use time do not need to be continuous.
