The small business Capital Gains Tax (CGT) concessions, found in Division 152 of the Income Tax Assessment Act 1997, provide favourable tax treatment for capital gains arising from the sale of a business or business assets.

These provisions not only reduce the tax liability on the sale but can also be used to make contributions to superannuation without counting towards an individual’s non-concessional contributions (NCC) cap. However, there are important rules and considerations to avoid unexpected tax consequences.

Eligibility for the Small Business CGT Concessions

A taxpayer may qualify for the CGT concessions if they dispose of an active asset used in their business. Active assets include tangible business property or intangible assets such as goodwill.

Specific rules apply to shares in a company or interests in a trust. Additionally, the taxpayer must meet certain tests, either the $6 million maximum net asset value test or the $2 million aggregated turnover test, to be eligible.

This article focuses on two key concessions: the 15-year exemption and the retirement exemption.

15-Year Exemption

Under the 15-year exemption, a taxpayer can disregard the capital gain entirely if certain conditions are met with the main one being that the asset/business must have been owned for a minimum of 15 years. The individual must be at least 55 years old at the time of the CGT event and the event must be connected to their retirement, or the individual must be permanently incapacitated.

If a company or trust sells the asset, it must distribute the exempted amount to the individual within two years of the CGT event. No payment is required if the individual is the taxpayer.

Retirement Exemption

The retirement exemption allows an individual to disregard a capital gain if the proceeds are used for retirement. Unlike the 15-year exemption, there is no requirement for the individual to retire. However, the exempted capital gain must be contributed to superannuation if the individual is under 55 years old. Those aged 55 or over can choose whether or not to make the superannuation contribution.

There is a lifetime limit of $500,000 per individual under the retirement exemption. If the taxpayer is a company or trust, the limit applies to each CGT concession stakeholder. For instance, if a company has two CGT concession stakeholders, it can disregard up to $1 million (assuming no previous claims).

Superannuation Contributions Under CGT Concessions

Ordinarily, contributions to superannuation count towards an individual’s non-concessional contributions (NCC) cap. For the 2024–25 financial year, the NCC cap is $120,000, with a bring-forward rule allowing contributions of up to $360,000 (subject to total superannuation balance limits). However, contributions made under the 15-year and retirement exemptions do not count towards the NCC cap, providing a unique opportunity to boost superannuation without breaching contribution limits.

These contributions are subject to a separate cap, the CGT cap amount, which for 2024–25 is $1.78 million. Contributions made under the retirement exemption are included within this CGT cap. If the taxpayer uses the retirement exemption, they can contribute the disregarded capital gain to superannuation without it counting towards the NCC cap, up to the CGT cap amount.

Making the CGT Cap Election

For an individual to contribute using the CGT cap, they must elect to exclude the contribution from their NCC cap. This is done by completing the Capital Gains Tax Cap Election Form (NAT 71161) and submitting it to the superannuation fund trustee. The election must be made when the contribution is made, not after. If the election is not validly made, the contribution will count towards the NCC cap, potentially triggering an excess contributions tax liability.

Contribution Rules for the 15-Year and Retirement Exemptions

1. 15-Year Exemption: Contributions to superannuation under the 15-year exemption can be made using the capital proceeds from the disregarded capital gain. This contribution will count towards the individual’s CGT cap, not the NCC cap.
2. Retirement Exemption: For contributions under the retirement exemption, the capital gain that was disregarded can be contributed to superannuation. If the individual is under 55, this contribution must be made directly to a complying superannuation fund. If they are 55 or older, they can choose to contribute but are not required to do so.

Timing of Contributions

The timing of when contributions must be made depends on whether the taxpayer is the individual or a CGT concession stakeholder:

• Individual Taxpayer: Contributions must generally be made by the due date for lodging the income tax return for the year in which the CGT event occurred.
• CGT Concession Stakeholder: If the taxpayer is a stakeholder in a company or trust, the contribution must be made within 30 days of the entity paying the exempt amount to the stakeholder.

While the small business CGT concessions provide significant tax benefits, they are complex, and careful planning is required to make the most of them.

Properly utilising the CGT concessions can help small business owners significantly boost their superannuation savings for retirement, providing a more tax-efficient means of funding retirement through the sale of their business.