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Self Managed Super Fund (SMSF) Article
$1 million small business super contributions
By Tony Negline.
This article may be out of date.
21st February 2007
A major plank of the Government’s super changes is to restrict how much in undeducted contributions can be made by an investor each year.
The purpose of this restriction is simple – to limit the amount of superannuation tax concessions an investor can accumulate over their lifetime.
During the development phase the government provided some additional concessions. One rule may allow a small business person to contribute up to $2 million dollars in new money to super. That is $2m of undeducted contributions which means the money can be withdrawn tax-free when required after an investor turns 60. $1m can come from ordinary undeducted contributions and $1 million can come from the proceeds of selling a small business.
Before we look at the rule applying to small business capital gains it is important to discuss the basic rules which are: undeducted contributions below $1 million between 10 May 2006 and 30 June 2007 will be tax-free; any contributions above this threshold will be taxed at 46.5% unless a super fund member applies to the ATO to have those contributions returned to them.
Some investors seem willing to do almost anything – borrow using equity in their homes as security, liquidate assets (in many cases ignoring CGT), and so on – to take advantage of this $1 million undeducted contribution limit before it closes. This is a story for another day.
From July 2007 onwards undeducted contributions above $150,000 will also face high penalty tax rates. From this date investors under 65 will be allowed to contribute three years of undeducted contributions – that is, $450,000 – in advance. If they breach this rule the 46.5% penalty tax rate will apply. This penalty tax can be avoided in special circumstances.
Now let’s look at the rules which directly impact on small business.
If a small business owner satisfies certain conditions they will be exempt from Capital Gains Tax upon selling a business asset or actually selling their business. These eligibility conditions are quite complex and it might be wise to get some good advice to make sure that you can use them. At this point it is important to note that the Parliament is currently amending these eligibility rules. On the whole the changes improve the operation of this key tax area. Many of these specific changes apply from July 2006. Others apply from July 2007.
In total there are four different small business exemptions – the 15 year exemption, the 50% active asset reduction, the retirement exemption and the replacement asset concession. The government will allow up to $1 million of new super contributions if the proceeds comes from the 15 year exemption or the retirement exemption.
This $1m limit applying to small business applies to all relevant contributions made from 10 May 2006 onwards. The $1m applies to the proceeds received on the sale of a business not just to the capital gain that has been made.
This small business limit does not have an end-date of 30 June 2007. This $1 million amount applies for the life of a taxpayer and each year the $1 million will be indexed each 1 July. If a business sells an asset that normally does not attract CGT (principally assets purchased before 10 September 1985) then the capital proceeds can contributed into super using this rule. Clearly this is a very generous concession and many small business people will find them useful.
When a small business concession contribution is made to a super fund the contributor must give the fund a form which provides details that enable the fund to correctly identify how to account for the contribution and how to report the contribution to the Australian Tax Office (so the ATO can work out if any additional tax is payable).
The CGT-exempt small business proceeds contribution must be made no later than either the day you have to lodge your tax return for the income year in which the capital gain was earned or 30 days after the capital proceeds were received.
The 15 year exemption can only be used when a shareholder is retiring or has been permanently incapacitated and the amount of money is paid out as cash. If an investor is eligible for the 15 year exemption then it must be used.
The small business CGT concessions allow a business owner to extract up to $500,000 in capital gains as part of the Small Business Retirement Exemption. If you are under 55 then this amount must rolled over to a super fund. If you are over 55 then you can elect to roll this over to super. (If you are over 65 then before rolling this amount over to super then you must first satisfy some super contribution rules before being allowed to roll it over.)
One final point, contrary to popular opinion the new super rules have not been finalised. During the past week the government introduced further legislation into Parliament about these new rules. It will be sometime before all the necessary rules are in place. In other words, some refinements will continue to be made along the way.
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