When a small business is sold, it is possible to contribute up to $500,000 to a super fund, without exceeding the super caps. It can be a great way of both reducing CGT and boosting super balances.

The CGT rules are complex, more so when trusts and shares are involved. If the basic conditions are met, the taxpayer has four Small Business Concessions (SBC) that can be applied to reduce or even eliminate the capital gain on sale. The taxpayer can elect to use the Concession(s) which result in the best tax outcome.

15 Year Exemption

This is the most valuable concession, as it allows a full exemption from CGT on the sale of a business. It requires that:

- The business has been owned for more than 15 consecutive years,

- The owner must be over 55 and the sale is made in connection with retirement or permanent incapacity,

- The annual business turnover must be less than $2m, or the vendor has net assets of less than $6m,

- No other SBC will be applied.

If the conditions are met, it allows a contribution of the total sale proceeds up to the CGT Cap of $1.705m for 2024 (annually indexed).

50% Reduction (Active Asset Condition)

The General Exemption is 50% of the capital gain, available as long as the asset has been held for 12 months. In addition to this, a further 50% reduction of the capital gain can be claimed (that is, 25% of the total capital gain) where the sale was an Active Asset (eg., a business, not a Passive Asset like a rental property).

If the 15 year Exemption is not available, the 50% Reduction could be the first applied.

Retirement Exemption

This SBC allows for a $500,000 reduction in the assessable capital gain. The conditions to claim it are:

- The $500,000 is a lifetime limit for each taxpayer under this Concession (if fully used, it cannot be claimed again where a second business was sold).

- If under 55, the amount must be paid into a superannuation fund.

- If over 55, it is optional to pay the amount into a fund.

Like the 15 year Exemption, the contribution can be made outside the usual caps, but here the contribution is based on the exempt capital gain and not the total sale proceeds.

Small Business Rollover

This SBC allows part or all of the capital gain to be rolled over within the next two years into another active business asset (eg., purchase another business, or equipment to start a new business). If no asset is acquired within the two years, then the capital gain arises again at this point.

This concession allows a taxpayer two years to find a new business or acquire business assets. If not, the taxpayer can then use the Retirement Exemption and contribute the amount to superannuation or elect to use the Retirement Exemption (if then over 55).

Alternatively, if a replacement asset was acquired and subsequently sold, the Retirement Exemption may be applied without retesting of the CGT Concession criteria. This allows a super contribution from the new sale where concessions may not be available.

Why Bother?

Income in a Super Fund is taxed at 15%, Nil if in Pension mode, and the Pension is also tax free.

So, there is a large saving of Capital Gains Tax, and then a saving of income tax through the Super Fund.

Other Considerations

CGT applies only to capital gains. If a business is sold and the sale includes depreciated plant, equipment and vehicles or trading stock, these are taxed under ordinary income tax (as the recovery of a cost), not as capital gains. As a result, there could be income tax to pay where the plant, etc., have been fully deducted under the temporary full expensing concessions, which were in place to 30 June 2023.

Monies must be contributed to superannuation within the times required by the Concession.

These Concessions need to be considered when selling a business and for increasing retirement savings. The contributions to super do not breach the super caps, and are a great way to increase super. The rules are complicated and it is worthwhile to speak to an advisor early in the process, to determine the availability and benefit of these concessions.