The small business capital gains tax concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 97) are a tool that all practitioners should be aware of when clients are selling businesses.
One benefit that is often overlooked is the ability to contribute up to $500,000 in superannuation, above the non-concessional contribution caps. Furthermore, the ITAA 97 provides considerable flexibility as to the timing of contributions.
Most practitioners would be aware of the CGT small business concession in Division 152 of the ITAA 97 that enable taxpayers who satisfy the conditions set out in that division to disregard all or some of a capital gain arising from the sale of assets of a small business.
The small business retirement exemption in Subdivision 152-D of the ITAA 97 is one of the available concessions. The small business retirement exemption entitles a taxpayer, who makes a capital gain from the sale of an asset of their small business, to choose to disregard up to $500,000 of the capital gain if the proceeds from the gain are used in connection with the taxpayer’s retirement.
If you have a client who is eligible to choose the small business retirement exemption then the choice as to whether your client will utilise the exemption must be made by the day that they lodge their income tax return for the income year in which the relevant CGT event occurred and must be made in writing.
If your client is an individual and is under 55 just before they make the choice to disregard all or part of a capital gain under the small business retirement exemption, they must make a contribution equal to the amount of the gain that they wish to disregard to a complying superannuation fund.
If the entity that made the gain is a trust or company, the trust or company can also choose to apply the small business retirement exemption provided that the entity satisfies the significant individual test and the entity makes a payment equal to the amount of the gain disregarded to at least one of its CGT concession stakeholders.
If the CGT concession stakeholder is under 55 then the payment must be made to a complying superannuation fund on behalf of the CGT concession stakeholder.
Where an individual chooses to apply the small business retirement exemption, the contribution must generally be made at the later of the time they make the choice to use the small business retirement exemption or when they receive the capital proceeds.
Where a company or trust chooses to apply the small business retirement exemption, the contribution must generally be made by seven days after the entity makes the choice to use the small business retirement exemption or seven days after receipt of the capital proceeds from the relevant CGT event.
The small business retirement exemption is also available to use to disregard all or some of the capital gain arising from CGT events such as J5, which occurs where a taxpayer chooses to roll over a capital gain under the small business rollover provisions in Subdivision 152-E of the ITAA 97 but the taxpayer fails to acquire the necessary replacement asset by the end of the relevant two-year period.
If CGT Event J5 occurs in relation to your client, your client can still choose to apply the small business retirement exemption at that time without needing to again satisfy the basis conditions in Subdivision 152-A of the ITAA 97.
Many practitioners over-look the added benefit that amounts contributed to superannuation under the small business retirement exemption and the small business 15-year exemption are excluded from a persons non-concessional contributions up to the CGT cap
Practitioners will need to advise their client not only as to the availability of the small business concessions but also the importance of the timing of the contributions relating to the small business retirement exemption as the provisions of the ITAA 97 need to be followed strictly to ensure that the CGT exemption and exemption from being counted towards the non-concessional caps apply.
Even with the changes announced to superannuation, the interaction between the small business concessions and superannuation, particularly in light of the exemption from the non-concessional caps, still provide significant planning opportunities for small businesses.