Enabling superannuation contributions using the small business CGT concessions
The small business CGT concessions (the concessions) in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997) can provide generous concessional treatment of capital gains made on the sale/disposal of a business or business asset. These complex provisions also enable contributions to be made to superannuation that do not count towards an individual’s non-concessional contributions cap. This can provide a boost to superannuation but there are a few considerations to make it work without adverse tax consequences.
Contributing to superannuation is heavily regulated and the rules around caps on contributions must be well understood to achieve the intended outcomes. An individual who inadvertently exceeds their caps can face an unexpected excess contributions tax liability.
Eligibility for the small business CGT concessions
Although a detailed analysis of the concessions is beyond the scope of this article, it is important to briefly recap the basic conditions to be eligible for the concessions before overlaying the superannuation rules. An explanation of the related concepts and defined terms is also beyond the scope of this article due to brevity, but hyperlinks to ATO guidance are provided to assist.
Broadly, a taxpayer can disregard or reduce a capital gain made from the disposal of an active asset. An asset is an active asset if it is:
- used in carrying on a business by the taxpayer, an affiliate of the taxpayer or an entity that is connected with the taxpayer, such as business real property; or
- an intangible asset inherently connected with the business, such as goodwill.
Complex rules apply where the active asset is shares in a company or interests in a trust. The taxpayer must also either satisfy the $6 million maximum net asset value test or be a small business entity by satisfying the $2 million aggregated turnover test.
Of the four concessions — the 15-year exemption, the 50% reduction, the retirement exemption and the small business roll-over — this article focuses on only two: the 15-year exemption and the retirement exemption. The further eligibility conditions that apply to each of these concessions will not be discussed except where relevant to contributing to superannuation.
15-year exemption
Applying the 15-year exemption to a capital gain enables the taxpayer to disregard the capital gain in full. Relevantly, an individual who is either the taxpayer or a significant individual in a company or trust must be:
- aged 55 years or over at the time of (or ‘just before’ in the case of a company or a trust) the CGT event and the CGT event happens in connection with their retirement; or
- permanently incapacitated at that time.
Where a company or trust makes the capital gain to which the 15-year exemption applies, the entity must make a payment of the exempt amount within two years after the relevant CGT event to an individual who was a CGT concession stakeholder of the entity just before the CGT event. No such payment is required if the individual is the taxpayer.
Retirement exemption
The retirement exemption is paradoxically named. In contrast to the 15-year exemption, there is no requirement for the individual to retire to access the retirement exemption. Applying the retirement exemption to a capital gain enables the taxpayer to disregard a capital gain if the capital proceeds from the CGT event are used for retirement. This requires the exempt amount to be contributed to superannuation in respect of an individual. Any contributions made under the retirement exemption are not deductible.
A lifetime limit of $500,000 applies for all choices that can be made in respect of an individual under the retirement exemption. The CGT retirement exemption limit per individual is $500,000. This is reduced by any amounts previously chosen for that individual to be disregarded under the retirement exemption. Accordingly, if the taxpayer is an individual, only one lifetime limit is available. However, if the taxpayer is a company or a trust, the entity can choose to disregard an amount that does not exceed the CGT retirement exemption limit of each CGT concession stakeholder for whom the choice is made by the entity. So, if a company had two CGT concession stakeholders just before the CGT event for whom a choice had not previously been made under the retirement exemption, the company can choose to disregard $1 million. The choice must be made in writing and the company must allocate the CGT exempt amount between the CGT concession stakeholders so that all the percentages allocated add up to 100%.
Where the taxpayer is an individual aged under 55 years just before they choose to apply the retirement exemption (that is, when they lodge their income tax return for the income year in which the CGT event happened), they must contribute an amount equal to the CGT exempt amount to a complying superannuation fund. Where the individual is aged 55 years or older, they can choose to make a contribution to superannuation, but they are not required to.
Where a company or trust makes the capital gain to which the retirement exemption applies, the entity must make a payment of the exempt amount within seven days of when the entity chooses to apply the retirement exemption to at least one of its CGT concession stakeholders. If the CGT concession stakeholder is aged under 55 years just before a payment is made to them under the retirement exemption, the entity must make the payment to the CGT concession stakeholder by contributing it for the individual directly to a complying superannuation fund. Such a contribution is taken to be a personal contribution made by the CGT concession stakeholder, even though the funds are paid directly from the entity to the superannuation fund.
So, where the taxpayer is a company or trust, the contribution is made directly to the superannuation fund only where it is disregarded under the retirement exemption and the CGT concession stakeholder is aged under 55 years just before a payment is made under the retirement exemption.
If the company or trust disregards the capital gain under the retirement exemption but the CGT concession stakeholder is aged 55 years or over, or under the 15-year exemption, the payment must be made directly to the CGT concession stakeholder. The stakeholder can then choose to make a contribution to superannuation, but they are not required to.
The retirement exemption can be applied to a capital gain that has been deferred for two years using the small business rollover (giving rise to CGT event J5). This can delay the requirement to make the payment to the CGT concession stakeholder.
The contribution cap rules
Ordinarily, personal superannuation contributions made by an individual are non-concessional contributions (NCC) and count towards the individual’s NCC cap. The NCC cap is $120,000 for 2024–25, or up to $360,000 under the bring-forward rule, subject to the individual’s total superannuation balance. Funds generally cannot accept personal contributions after the individual turns 75.
An exception to the NCC cap allows certain individuals to boost their superannuation without the contribution counting towards their NCC cap. This recognises that small business owners often do not make regular contributions to superannuation for themselves throughout their working lives and instead rely on the sale of their businesses to fund their retirement.
In particular, where an individual, or a company or trust, chooses to disregard a capital gain under the 15-year exemption or the retirement exemption, certain eligible small business proceeds can be contributed to superannuation by that individual, or on behalf of the entity’s CGT concession stakeholder, without the amounts counting towards the individual’s NCC cap. The amount that can be contributed under this exception is limited by a separate lifetime cap called the ‘CGT cap amount’. The CGT cap amount for 2024–25 is $1.78 million. Amounts contributed to superannuation under the $500,000 CGT retirement exemption limit count towards an individual’s lifetime CGT cap amount.
The work test or work test exemption is not relevant as no deduction is available for a personal superannuation contribution made under the concessions.
Making a valid choice to use the CGT cap
The individual must choose to exclude the contribution from their NCC cap by notifying the trustee of the fund using the Capital gains tax cap election form (NAT 71161). This enables the trustee to report contributions to which the election applies separately from other personal contributions when they report to the ATO all the contributions made by or for the individual during a financial year.
If the election is not validly made, the contribution will instead count toward the individual’s NCC cap, which could lead to a substantial excess contributions tax liability. An election to count the contribution towards the individual’s CGT cap is valid only if it is made by the time the contribution is made. Accordingly, the election form should be sent to the trustee of the fund either before or when the contribution is made. The election cannot be validly made after the contribution is made.
Making the contribution
Section 292-100 of the ITAA 1997 provides an exception to an individual’s NCC cap for contributions made to superannuation using capital proceeds from capital gains that were disregarded using the 15-year exemption or the retirement exemption. These contributions instead count towards the individual’s lifetime CGT cap amount.
The amount that can be contributed to superannuation using the CGT cap is:
- for the 15-year exemption — equal to the capital proceeds from the disregarded capital gain;
- for the retirement exemption — equal to the capital gain that was disregarded.
Importantly, only the amount of a capital gain to which the retirement exemption applies can be contributed to superannuation and is excluded from being a NCC, up to the individual’s lifetime CGT cap amount for the relevant year. In contrast, the capital proceeds from a capital gain to which the 15-year exemption applies can be contributed to superannuation and are excluded from being a NCC up to the individual’s lifetime CGT cap amount for the relevant year.
The contribution must be made:
- where the individual is the taxpayer — generally on or before the due date for lodgment of their income tax return for the year in which the CGT event occurred;
- where the individual is a CGT concession stakeholder — within 30 days after the entity makes a payment of the exempt amount to the stakeholder.
Closing comments
These rules are complex and professional tax advice should be sought by those wanting to use the concessions and contribute amounts to superannuation. Key areas where errors can inadvertently be made include:
- not satisfying the basic conditions to be eligible for the concessions;
- not satisfying the further conditions to be eligible for the concessions;
- incorrectly calculating the exempt amount;
- failing to make written choices in the approved form within the required timeframes;
- incorrectly calculating payments made to CGT concession stakeholders;
- failing to make payments to CGT concession stakeholders within the required timeframes;
- failing to make contributions to superannuation within the required timeframes.
