Retirement and superannuation are always a topic of conversation for our small business clients. Paris Financial are pro-active in our approach with our small business owners and through discussion and planning we can advise our clients on how they can utilise the small business “retirement exemption” to make up to $500,000 in additional superannuation contributions and also save on tax.
Prath Balasubramaniam is an excellent commercial lawyer and has written a valuable article explaining this strategy. Please contact me direct on #03 8393 1020 and I would be more than happy to discuss your scenario to see if you could utilise the small business retirement exemption.
Pat Mannix, Partner, Paris Financial
Small business concessions still a pathway to building superannuation savings
With the government indicating that it will proceed with a new lifetime cap on non-concessional contributions (NCCs), now is a great time for business owners to examine whether they can utilise the small business “retirement exemption” to make up to $500,000 in additional superannuation contributions. The rules for this exemption have not changed.
How does the “retirement exemption” work?
To access the exemption, business owners must trigger a sale (or other CGT event) of an asset used in their business. This allows up to $500,000 of the capital gain to be disregarded, and allows the individual members associated with the business to contribute an amount into superannuation equal to the capital gain disregarded. These contributions do not count towards the NCC cap.
Who qualifies for the exemption?
Despite the name “retirement exemption”, there is no requirement to retire. Instead, the main requirements are:
- A CGT event (eg sale) occurs in relation to the asset, resulting in a capital gain.
- The asset’s owner either meets the net asset value test (broadly, the owner and its related entities have maximum total net assets of $6 million) or is a “small business entity” (broadly, with maximum turnover of $2 million). Alternatively, one of the owner’s related entities is a small business entity that carries on business in relation to the asset.
- The asset has been actively used in the owner’s (or related entity’s) business for at least half the ownership period, or at least 7.5 years if owned for more than 15 years.
- If the individual member is aged under 55 years, they contribute an amount into superannuation equal to the amount of capital gain disregarded. For those aged 55 and over, this contribution is optional.
Additional rules apply where the owner of the asset is a company or trust.
Who can benefit from this strategy?
Typically, small business owners looking to sell their business premises either to a third party (eg as part of their retirement), or to their own SMSF.
The strategy can potentially accommodate a pre-discount capital gain of up to $2 million, because the $500,000 relief amount is available after applying the 50% discount for assets held for at least 12 months (if applicable), and an optional further 50% small business reduction. Taxpayers with smaller gains may choose not to claim the latter small business reduction in order to keep the gain larger and contribute more into superannuation.
Selling to the members’ own SMSF can be a good long-term strategy as this boosts asset protection and can set up a tax-effective retirement investment. If sold to the SMSF, the premises must qualify as “business real property”, be sold at market value and be leased back to the business on arm’s length (ie commercial) terms.
Can I contribute my business premises “in specie” into my SMSF?
There is uncertainty about the ATO’s view on whether the retirement exemption applies to in specie contributions. Although the ATO has issued some favourable private rulings in the past, in 2016 it has issued several unfavourable private rulings that suggest the contribution counts towards the member’s NCC cap, and that CGT relief may not even be available for members under 55 years (due to technical issues in the legislation). Anyone contemplating an in specie transfer should therefore seek expert legal advice beforehand.
Interaction with 15-year exemption
The $500,000 retirement exemption limit is a lifetime, unindexed cap. Contributions made under this exemption also count towards the individual’s lifetime “CGT cap” (indexed, currently $1.415 million), which also includes any contributions made under the separate “15-year exemption”.
That exemption applies where a business asset is held for at least 15 years and the CGT event occurs in connection with the retirement of an individual aged at least 55 years (allowing the entire capital gain to be disregarded and capital proceeds up to the member’s unused CGT cap to be contributed into superannuation). Where this exemption applies, it automatically takes priority over the retirement exemption.
Business owners should seek expert legal advice when exploring whether they can utilise the small business concessions. The rules are highly technical and this article is merely a brief summary of the main requirements. However, if planned carefully this strategy can be an effective way to boost retirement savings.
Source: MacPherson Kelley
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