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Self Managed Super Fund (SMSF) Article
Henry's radical ideas require dissection and translation

By Tony Negline.

This article may be out of date.

7th July 2010

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This week I scrutinise two recommendations found in the Henry Tax Review about super.  At the time of writing the Government hadn't formally adopted any of these recommendations.  However given how radical some of these suggestions and it's well worth understanding what's being considered.

The first issue we need to look at is the small business Capital Gains Tax concessions that are available for assets actively used in a business.  These tax benefits have been around for about thirteen years and are very important to many retirement plans.

Anyone who has tried to understand these small business concessions and how they operate will have a great deal of sympathy for the Henry Tax Review's comment that "the concessions are a significant area of complexity within the capital gains tax rules … [and] despite attempts to simplify the concessions, taxpayers are required to navigate a legislative maze of gateway and threshold conditions and then additional conditions that relate to each of the specific concessions … [The] provisions [are] so complex that specialist professional advice is typically required to access them.  Despite this complexity, but perhaps reflecting their value, the concessions are widely used."

There are two criteria when a person wishes to access these concessions.  Firstly they must satisfy a business turnover test or secondly they must have net assets of less than $6 million.  If an asset is a company share or an interest in a trust then the net asset test must be satisfied.

At preset there are four small business CGT concessions.  An exemption from CGT if an asset has been held for more than 15 years and the sale proceeds are for a business owner who is permanently incapacity or aged over 55 and retiring, a 50% discount, an exemption if the proceeds will be used for an owner's retirement regardless of age and finally an exemption if sale proceeds will be used to acquire another business asset.

The maximum capital gain that can be exempted under the retirement exemption is a lifetime limit of $500,000 per taxpayer.  If the taxpayer is under age 55 they can only access this concession if the capital gains are contributed to super.

All the proceeds from the 15-year exemption can be contributed into super under special rules.

Every taxpayer has a $1.1 million limit that can be contributed to super for both the 15-year exemption and the retirement exemption.  Amounts greater than this threshold are deemed to be excess non-concessional contributions and are taxed at 46.5%.  The $1.1 million limit is indexed every 1st July.

Ultimately the Henry Tax Review recommended that the 50% discount and the 15-year exemption should be eliminated.  The review panel argued that removing these concessions would "improve efficiency and equity".

Interestingly the latest Tax Office statistics for the 2006/07 financial year shows that the 50% discount was accessed by more than 27,000 taxpayers with more than $1.5 billion claimed – the most used CGT small business concession – and the 15-year exemption was least used with over 950 taxpayers accessing it with $340 million claimed.  Just over 16,500 taxpayers claimed $1.6 billion in the other two exemptions.

The Henry Review also suggested that the retirement exemption super contribution threshold should be increased so that it's the same as the $1.1 million allowable contribution limit in place now.

At present if a taxpayer wants to access these small business CGT concessions when selling company shares and trust holdings, the net asset test has to be passed.  The review panel suggested that the business turnover test should be made available for these transactions.

As a collection of amendments these are a start to the reform process in this complex area.  The most complex areas in these concessions are working out eligibility to the concessions both for taxpayers and the assets they own.  The Henry Review has not tackled these complex areas.  As the review points out a major reason for this complexity is to "ensure that the concessions do not provide opportunities for tax avoidance."  Perhaps wants to avoid opening this pandora's box.

The next recommendation that the Henry team suggested involves super contributions after a person turns 75.  At present only industrial award or agreement super contributions are permitted once a person turns 75.

Contributions are permitted in a financial year between age 65 and under 75 if a person is gainfully employed for at least 40 hours in less than 31 days during that financial year.

The Henry Review says that this gainful employment rule should apply to people who are aged over 75 as well.  No rationale is given for lifting this restriction.

At some stage we might hear what the government thinks about these suggestions.

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