Small business owners selling their business or business assets and using the proceeds to contribute to superannuation free of capital gains tax (CGT) need to be aware of the recent changes to concessional and non‑concessional caps, says Peter Hogan, SMSF Association Head of Technical.
Hogan says because there has not been any change to the rules surrounding the small business CGT cap, its potential impact on concessional and non-concessional caps has largely gone under the radar.
The small business CGT cap allows for the capital gain realised on the sale of any small business asset up to $500,000 per eligible taxpayer to be contributed to superannuation free of capital gains tax (when certain conditions are met). If the asset has been held for more than 15 years, that threshold rises to $1.415 million for the 2016/17 financial year.
It applies to small businesses with a turnover of less than $2 million or eligible taxpayers seeking to use the exemption having a net asset value of less than $6 million.
Hogan says: “What has to be remembered is that once this tax-free contribution is placed in an SMSF using the CGT cap, these amounts count as part of a member’s total superannuation account and are assessed accordingly in terms of eligibility for catch-up concessional contributions and available non-concessional contribution caps from 1 July 2017 onwards.
“It will also have an impact on the total amount in an SMSF that adds towards the $1.6 million transfer balance cap.
“So, although the small business CGT cap has been left alone by the legislation, small business owners need to carefully assess the impact of making such a contribution on the sale of a business or business asset.
“Ideally, any small business contribution should be made after any other contribution, especially where the small business CGT contribution will push account balances over the various account thresholds.
“In these circumstances, it is imperative that small business owners get advice from an SMSF specialist to maximise their retirement savings and the tax effectiveness of their SMSF.”
Catch up concessional contributions:
Member has $300,000 in their SMSF in 1 July 2019. Only contributed $15,000 concessional contributions in earlier year of 2018/19, so has potential catch up CC of $10,000. If contributes full $25,000 concessional contribution (CC) for 2019/20 financial year first, they are eligible to contribute the $10,000 (or part thereof) as a catch up CC.
If, however, they had sold business or business asset and contributed more than $200,000 under the small business CGT cap into their SMSF in the 2018/19 financial year, they are no longer eligible to make the catch up CC in later 2019/20 year. The member account balance is tested as your account balance just before the start of the financial year. If they had delayed the small business CGT cap contribution until after 1 July 2019 (which is possible under the CGT cap rules in appropriate instances), then a catch up CC could have been made as well.
Member has an accumulated account balance of $ $1,010,000 at 30 June 2016. Sells a business asset their company business owns in February 2017 and realises a capital gain of $500,000 on the sale. Elects to contribute the $500,000 into their SMSF under the small business CGT cap rules as soon as they receive the proceeds. They are not in a position to make any further contributions into their SMSF before 30 June 2017.
They wish in the 2017/18 financial year to make further non-concessional contributions of $200,000 (triggering the catch up rules). As their account balance at the beginning of the year was greater than $1.5 million, they are not able to make that $200,000 non-concessional contribution (NCC). They are limited to an NCC of $100,000 (being the new 1 year NCC cap). Again the member account balance test is just before the beginning of the financial year to determine eligible contributions allowed in the next financial year.
In both cases, the small business CGT cap is added to the member’s account balance and impacts on the contributions they are able to make under the catch-up CC rules and the NCC rules which apply from 1 July 2017 onwards.
About the SMSF Association:
The SMSF Association is the authoritative voice for the self-managed superannuation fund sector. The Association, which represents professionals providing a range of services across various disciplines in the complex area of SMSFs as well as engaging trustees to become better educated and informed. The SMSF Association is an advocate for the highest professional standards and competence to ensure SMSF trustees always receive the best possible advice.
Contact for interviews
SMSF Association Head of Technical
M: 0488 900 690
Contact for media
M: 0409 585 979