The Small Business Retirement Exemption Explained

Small business owners have so many tasks to manage. From suppliers and payroll to marketing and training, it’s hard to stay on top of everything.

This is especially true for your personal retirement. The day-to-day operations of your business may prevent you from taking the time you need to plan out and take steps toward managing and funding your superannuation account.

Fortunately, there are many tools for long-term planning. One sophisticated strategy is the small business retirement exemption. When you sell business assets, part of the proceeds can be directed to your superannuation account. This strategy is especially helpful for small business owners who have neglected to fund their super over time steadily. With this method, you can make up for lost time while lowering your capital gains taxes.

Let’s take a look at the ins and outs of this unique strategy. It may be a practical solution for your unique situation.

 

What is the Small Business Retirement Exemption?

The small business retirement exemption is a concession that can exempt capital gains on your company’s business assets. It’s one of four specific capital gains tax (CGT) small business concessions that govern the sale of assets; these exemptions recognise the fact that many small business owners use their company’s assets to fund their nest eggs. Below is a summary of the four concessions.

 

1. 15-year Exemption

If your business has owned an asset for 15 years, you will not be assessed capital gains taxes when you sell the asset. To qualify for this concession, you must be retiring and be age 55 or older, or you must be permanently disabled.

 

2. Rollover Exemption

You may defer the capital gain from a business asset sale for a later year. This can be a helpful tax planning strategy for lowering your overall liabilities.

 

3. 50% Active Asset Reduction

With this concession, you can reduce the capital gain on an active asset by 50%.

 

4. The Retirement Exemption

If you’re under the age of 55, you can transfer the proceeds from the sale of a small business asset into your superfund. Note that there’s a lifetime limit of $500,000 of capital gains for this concession.

In this post, we’ll be looking specifically at the small business retirement exemption and how it can help you to reduce your taxes while giving your nest egg a boost.

 

Interaction with Other Concessions

Generally speaking, you can’t take advantage of every capital gains concession available, so you have to make careful decisions about which concessions to use.

As you make decisions about which concessions work best for your situation, keep the following interactions in mind:

• You may use the small business retirement exemption after you’ve already used the 50% active asset reduction. In other words, the retirement exemption may be applied to the remaining 50% of the capital gain.
• You could turn down the 50% active asset reduction and apply for the retirement exemption first. This strategy works well if you’re trying to make a more substantial tax-free payment under the retirement exemption.
• You could use the retirement exemption where the status of a capital gains tax asset has changed. This circumstance sometimes occurs in rollovers.
• The retirement exemption could be used when you chose a rollover but didn’t acquire a replacement asset by the end of the rollover period.
• You might also use the retirement exemption when you previously chose a rollover but your replacement asset wasn’t worth as much as the original asset.

 

 

Requirements for the Small Business Retirement Exemption

To take advantage of the small business retirement exemption, you’ll have to satisfy several requirements. First of all, you must qualify as a small business (less than $2 million in aggregate turnover each year) or you must satisfy the maximum net asset value test.

It’s essential that you keep a written record of the amount of capital gains tax that you choose to disregard.

If you are under 55 years of age the funds must be deposited in a qualifying super fund, SMSF or retirement savings account, and the amount must be equal to the exempt amount in your records.

 

Capital Gains Tax (CGT) Retirement Exemption Limit

A small business owner has a lifetime limit of $500,000 for the retirement exemption. This amount is reduced by previous CGT amounts claimed through the concession. Other stakeholders in the business may also request up to $500,000 with the retirement exemption. For example, if a small business has six stakeholders, the organisation’s limit would be $3 million.

The business may determine the percentage of the exempt amount for each stakeholder, and the amounts may vary from person to person.

 

Consequences of Using the Small Business Retirement Exemption

When you choose to use the small business retirement exemption, you narrow the other tax options available to you. This is why it’s important to be careful about which tax planning strategies you use. What works well for you one year might not be the best option in subsequent years.

Payments to CGT Stakeholders

If you’re an individual receiving payment from a small business that is using the retirement exemption, you’ll need to keep in mind that the amount doesn’t qualify as assessable income or exempt income. The company making the payment may not deduct the payment from their assessable income.

Payments Passing Through Trusts

If a retirement exemption payment is passing from a small business to a trust and then from the trust to an individual, the trust must keep these consequences in mind: the amount is not included in the trust’s assessable income and is not deductible from its assessable income. Also, the payment does not qualify as exempt income for the trust.

Superannuation Consequences

The amount you send to your superfund or RSA is usually considered a non-concessional contribution. If you want to exclude the amount from your non-concessional cap, and in so doing have it count toward your CGT cap, you’ll need to notify the manager of your superfund via the capital gains tax cap election form.

 

Conclusion

As you plan for your future and build your retirement nest egg, use every tax strategy possible to improve your situation and care for your loved ones. The small business retirement exemption can be a valuable tool for turning your business assets into super, all while managing your capital gains taxes well.

To learn more about business tax planning and retirement strategies, reach out to one of our expert advisers. With a thorough analysis of your current situation, we can help you to build a plan that will take you exactly where you want to go. We’ll guide you through the ever-changing tax regulations and find the best strategies for your unique situation.