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Self Managed Super Fund (SMSF) Article
Small Business CGT Exemptions - Part 3
By Tony Negline.
This article may be out of date.
27th September 2006
The Government's budget super changes will cause a re-examination of all retirement strategies.
Take the case of someone who has just sold their business and wants to put the proceeds into superannuation.
In relation to this issue, there are several new rules which, depending on the facts of each case, might have a good or a bad impact.
Before we discuss these recent rule changes, we have to consider some background issues.
When a person sells their business they bump into the Capital Gains Tax (CGT) rules if they are selling at a profit.
If the business and the individuals concerned satisfy quite strict and complicated rules, then the sale proceeds will be exempt from CGT as long as they are prepared to deal with these proceeds in a certain way.
For example, if an asset that is sold has been owned for more than 15 years and the recipient of that money is either permanently disabled or retiring and aged over 55 then the gain will be exempt from tax.
There are a range of other rules that must be satisfied before this concession will be available. We will not look at these specific rules here.
The key points about this rule are that if all necessary requirements are satisfied and the taxpayer wants to avoid CGT then they must use this rule which means an individual will end up with an amount of cash that they need to deal with.
The only way to get this cash into super is to make a contribution. Often investors want to put this money into super as an undeducted contribution. A very important new rule introduced in May to simplify super restricts how much money a person can put into super as undeducted contributions. A range of restrictions apply to this rule but principally only $150,000 can be contributed in one year. For those under 65, $450,000 can be contributed in one year if those contributions relate to the financial year in which they are made and the next two financial years. Earlier this month the Government announced a new rule to help people selling their small businesses get money into super as undeducted contributions.
These people will be allowed to contribute $1 million if the proceeds come from the sale of a small business and the taxpayer has used the 15-year exemption.
This is a welcome concession. But under the small business CGT concession rules, there is another rule which relates to super.
It is called the Retirement Exemption. It involves creating an Eligible Termination Payment (ETP) out of the capital gains made on the sale of a business asset. If the recipient of the Retirement Exemption is under 55, the amount must be rolled over into a complying superannuation fund (this is possible because the tax law has made the capital gain an ETP). If the business is owned by a spousal couple then the Retirement Exemption does not have to be paid out strictly in proportion to ownership. For example, a greater proportion, could be paid in relation to owner to fund that person's retirement. Until recently, this was a handy way to resolve some Reasonable Benefit Limit problems because more was paid to the person with a smaller super assets.
However, as RBLs have been abolished, this flexibility may not be as helpful as it has been.
Any amount not used under the Retirement Exemption can be used by another CGT small business concession that allows CGT to be deferred if one business asset is being replaced by another similar asset. This rule allows considerable flexibility for eligible small business entities to choose the amount that is to be used for retirement and the amount of the gain that is to be reinvested into other business assets. For the Retirement Exemption to be activated properly, the choice must be made in writing and in a way that ensures that the lifetime CGT retirement limit for an individual ($500,000) is not exceeded.
The amount so chosen is the CGT-exempt amount.
This choice must be made by the day the taxpayer lodges their income tax return for the year the capital gain hits that tax return. The Australian Taxation Office can allow a longer period.
If a company or trust uses the Retirement Exemption, the entity must have a controlling individual - that is, someone who owns more than 50 per cent of shares or receives more than 50 per cent of income distributions - just before the asset is sold.
The resulting payment is an ETP which must be paid during the seven days after the entity has decided to use the exemption, or after the capital proceeds have been paid - whichever is the later. This ETP paid is not an allowable tax deduction for the company or trust.
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