Unlocking opportunities with the CGT cap
The CGT cap can be an effective way of maximising superannuation account balances for SMSF members, particularly in light of the restrictions placed on contributions
Recent limitations in the contribution caps have placed significant restrictions on the ability to contribute private wealth to superannuation funds. Notwithstanding these restrictions, the ability for members to make contributions under the CGT cap remains unaffected. This is particularly significant for small business owners who seek to contribute wealth to superannuation as part of their transition to retirement.
This article provides a broad overview of some of the issues and planning opportunities presented by the CGT cap in maximising superannuation account balances for SMSF members.
A contribution made under the CGT cap refers to a superannuation contribution resulting from a taxpayer’s use of certain small business CGT concessions available under the income tax legislation, namely, the Subdivision 152-B 15-year exemption or the Subdivision 152-D retirement exemption. Importantly, the CGT cap is separate and distinct from the concessional and non-concessional contributions caps. It is available both in cases where the taxpayer with the disregarded capital gain is the member themselves or an entity such as a company or trust in which the member is a CGT concession stakeholder. A CGT concession stakeholder is broadly a person with the requisite interest of at least 20 per cent in the entity or a spouse of such a person who has any interest in the entity.
Unlike the annual concessional and non-concessional contributions caps, the CGT cap is a lifetime cap. The cap is indexed annually and currently stands at $1,480,000 for the year ending 30 June 2019. There is no total superannuation balance test for accessing the CGT cap.
Criteria – important observations
A number of important observations emerge from a careful examination of the CGT cap provisions.
First, eligibility for the CGT cap should not be confused with eligibility for the small business CGT concessions themselves and vice versa. In order to access the CGT cap it is necessary for an individual, company or trust to qualify for the 15-year exemption or the retirement exemption. This does not mean that the requirements of the CGT cap are satisfied. Conversely satisfaction of the CGT cap does not mean the taxpayer has satisfied the requirements of either small business CGT concession.
Second, where a capital gain is disregarded because of the use of the 15-year exemption, a person is able to contribute all of the capital proceeds from the transaction to their SMSF under the CGT cap. By comparison, where the retirement exemption is applied, only the capital gain disregarded by the retirement exemption can be contributed under the CGT cap.
Third, the CGT cap does not of itself provide a mechanism for accessing tax sheltered capital gains or capital proceeds from an entity that has qualified for the 15-year exemption or the retirement exemption. While both concessions provide mechanisms for accessing capital gains or proceeds from a company or trust tax-free, the criteria for making the tax-exempt payments set out in each of those concessions must be carefully assessed. Simply meeting the requirements of the CGT cap will not be sufficient.
There are a number of planning choices and opportunities that are worth noting in the context of a member seeking to maximise the use of the CGT cap. Some of these include the following:
- When applying the 15-year exemption in respect of a company or trust, there is a potential for the CGT cap to be accessed by multiple persons even though only one individual has attained age 55 and is retiring in connection with the CGT event in accordance with the requirements of the 15-year exemption. This may provide an opportunity to contribute a significant amount to superannuation by application of multiple CGT caps.
- If the 15-year exemption and the retirement exemption are both available, often it will be preferable to choose the 15-year exemption. This is because the 15-year exemption allows an amount equal to the capital proceeds to be contributed to superannuation under the CGT cap, rather than just the exempt capital gain.
- In some cases, it may be beneficial to choose not to apply other available concessions to reduce the capital gain of the taxpayer when applying the retirement exemption. For example, where the taxpayer has a sufficient amount of their $500,000 lifetime retirement exemption limit to disregard the whole of the capital gain, the taxpayer may choose not to apply the Subdivision 152-C small business 50 per cent reduction in order to maximise the retirement exemption CGT exempt amount and therefore the amount that can be contributed to superannuation under the CGT cap. Further, where the taxpayer has a choice between applying the Division 115 50 per cent discount and frozen indexation to the cost base of the asset, it may be beneficial for the same reason to choose to apply frozen indexation rather than the discount — noting that it is not possible to choose not to apply the 50 per cent discount unless indexation is chosen.
- The CGT cap is available on the disposal of pre-CGT assets that would otherwise qualify for the 15-year exemption, notwithstanding that a capital gain will not arise on the disposal of such assets. This is because the legislation provides for a pre-CGT asset to be treated as though it was a post-CGT asset for the purposes of the CGT cap. Critically, this concession only applies in accessing the CGT cap for the purposes of the 15-year exemption and not the retirement exemption.
- The CGT cap may provide an opportunity to undertake in specie contributions of business real property to SMSFs, including in combination with concessional and non-concessional contributions if eligible. However, this requires care as the ATO has raised some concerns about accessing the CGT cap where the CGT event giving rise to the exempt capital gain occurs simultaneously with the contribution.
- Amounts contributed pursuant to the CGT cap form part of the tax-free component of a member’s superannuation account balance. By immediately commencing an income stream from the balance comprising the CGT cap contribution, this provides an eligible member with an opportunity to isolate and lock in the favourable tax-free/taxable benefit ratio in the fund. This is likely to give rise to more favourable tax outcomes on the death of the member if benefits will ultimately be paid to non-death benefits dependants and therefore subject to tax on the taxable component.
The CGT cap – not to be overlooked
The CGT cap is complex in its operation but presents significant opportunities for small business owners to migrate wealth to SMSFs as part of their retirement plan. Since 1 July 2017, the ability to contribute significant value to SMSFs using the CGT cap has become particularly valuable given the prevailing concessional and non-concessional cap limits. Advisers should take care not to overlook the opportunities afforded by the CGT cap.
Peter Slegers, partner and Daniel Marateo, lawyer, Superannuation Group, Cowell Clarke