Episode 4 - Small Business CGT Concessions and Your SMSF

SMSF and Your Business

Episode 4 - Small business CGT concessions and your SMSF

Gemma Dale:Welcome to SMSF and Your Business. In this series, we’re talking about self-managed superannuation funds (‘SMSF’), their advantages and disadvantages and strategies to specifically allow business owners to supercharge their retirement savings. In this short video, we’re going to look at one of the more complex but valuable opportunities available to small business owners who are selling assets, particularly as they near retirement. These are called the small business capital gains tax concessions.

I’m Gemma Dale and I’m the Head of SMSF Solutions at NAB. One of the most common statements I hear from business owners when it comes to their retirement planning is: “I don’t need super, my business is my super.” Generally speaking, when you’re setting up a business, or even if you’ve been running on for a while, any spare cash flows is invested straight back in the business, rather than being set aside for long term goals like having a comfortable retirement.

While the government would love everyone to put aside money for retirement from an early age, they recognise that it may not be practical when you’re trying to get a business off the ground, or during some of the tricky stages of growth and development, or even if times are just tough. So there are incentives to invest in superannuation for all workers up to retirement age, in terms of tax deductions and rebates.

But there is also a very specific set of tax breaks for business owners who sell their businesses or assets used in those businesses, recognising that perhaps you have not had the opportunity to take advantage of ongoing tax breaks because you’ve been investing in your business, and therefore getting hit with a big chunk of CGT when you finally sell isn’t necessarily fair. As I’ve mentioned, these tax concessions are quite complex so I’ve invited Peter Hogan, one of Australia’s leading financial and SMSF experts to explain this for us.

Hi Peter, great to talk to you again. Now firstly, who exactly can access these small business CGT concessions?

Peter Hogan:Well, Gemma, they’re designed to be used by people who own and run small businesses. There are some qualifying criteria that the ATO uses to define a small business. And that is generally a business with less than $2million in turnover. The concessionsare also available to certain individuals whose business and investment assets are less than $6million. Secondly in circumstances where the businessis run using a company or trust, you’ve got to be what they call a ‘significant individual’; which requires that you have at least a 20% shareholding in the company or are entitled to 20% of the assets or income of a trust. You can also qualify for an access to the concessions if you’re a spouse of a ‘significant individual’, provided you have an interest greater than zero in the company or trust. And thirdly the asset you’re selling needs to be an active asset, so it’s got to be used in a business for at least half of its period of ownership. Shares or units in a unit trust used to carry on a business can also qualify as active assets for this purpose.

Gemma Dale:Ok, so can you give me an example of someone who will qualify for the concessions?

Peter Hogan:Sure, so a husband and wife who jointly own a newsagency with a turnover of $1million. They would qualify. If the business was owned by a company but the husband and wife each own 50% of the shares, they would also qualify. Equally, if the wife owned 99% of the shares in the business, and the husband owned 1%, both would be able to access the full concessions.

Gemma Dale:And someone who wouldn’t qualify?

Peter Hogan:Let’s say the same couple gave 5% of the shares in the company to each of their two children, those children would not qualify, because they’re not ‘significant individuals’ or the spouse of a ‘significant individual’ in the business. Or if the couple owned the newsagency premises, but they were just passive landlords, they also wouldn’t qualify because the asset was not active in a business they own. Any asset used to derive rent only such as residential or commercial property is generally not considered to be an active asset for these purposes.

Gemma Dale:Ok, great examples. So let’s talk about the concessions themselves. These are designed to minimise capital gains when you sell a business or a business asset.

Peter Hogan:Yes, Gemma, that’s right. And exactly for the reason you explained earlier. The business owners generally haven’t been receiving tax breaks in super, and therefore shouldn’t be hit with a big bill after investing in their businesses.

Gemma Dale:And there are basically four concessions, yes? Can you explain for us how they work?

Peter Hogan: So the first concession is a big one. If you’ve owned the qualifying asset, such as property or goodwill or the business being sold, for more than 15 years, and you’re over 55 and retiring, the entire proceeds are tax free to you. For those who have invested in an asset or business that has been substantially increased in value, this is incredibly important. You’re also able to contribute up to $1.395 million (in the 2015/16 financial year) of these proceeds to superannuation which is substantially more than the caps for other individuals and can set you up for a fantastic tax free retirement.

Gemma Dale: So for a couple, that’s over $2.7 million that you can contribute to super and convert to a tax free income stream. Can you use the ordinary non-concessional caps as well?

Peter Hogan:Yes, you can. You’ve got to get the paperwork right and the timing is very important, but it is entirely possible. So a couple who meet these criteria could contribute over $3.5 million to their SMSF and start a great retirement straightaway.

Gemma Dale: That’s amazing, so tell us about the other concessions.

Peter Hogan:The other concessions apply consecutively if you don’t qualify for the 15 year exemption. Remember too, that if you’re selling assets that you own as an individual, such as shares in the company carrying on your business, then you’ll qualify for the general 50% capital gains tax reduction at this point in the calculation of your CGT liability.

The next concession to apply is the 50% active asset reduction; which means you can reduce your remaining assessable capital gain by a further 50%.

And lastly the retirement exemption then applies to allow you to contribute up to $0.5 million of any remaining capital gain to superannuation without paying any CGT.

Gemma Dale:Right, so that’s quite complicated and there’s a lot to work through. This is clearly an area where people need to get advice.

Peter Hogan:Yes, absolutely. Tax experts estimate that up to 80% of small business owners don’t take advantage of these concessions because they either don’t seek advice from a tax expert, or they get that advice too late. Always ensure that you get advice before you sign any agreement to sell, to ensure you are set up for success.

Gemma Dale: That makes a lot of sense. So tell us again, it’s great to get these concessions but how are they relevant to self managed super funds?

Peter Hogan:Ultimately these concessions are provided to avoid penalising small business owners who have not been taking advantage of the tax benefits of super through their working lives, and allow the eligible proceeds from the sale of small businesses or assets used by these businesses to find their way tax effectively into super. After all, super does provide the most tax effective vehicle for retirement and using these concessions can allow you to set yourself up for a great nest egg in a tax preferred environment.

Gemma Dale:Thanks so much for your time today Peter.

Peter Hogan:Thank you

Gemma Dale: As you’ve heard, the small business CGT concessions can be very complicated, but they’re definitely worth looking into if you have a business or business assets that you’d like to sell. If you’d like to learn more about this strategy or SMSFs in general, go to nab.com.au/SMSFwhere you can find out more.