This article examines situations where small business owners can contribute either the sales proceeds or the capital gains from the sale of their business premises into their SMSF and disregard some or all of the capital gains, by using two main concessions: the 15-Year Exemption and the Retirement Exemption.

There are situations where a self-managed superannuation fund (SMSF) member, who is a small business owner, can contribute either the sales proceeds or the capital gains from the sale of their business premises into their SMSF and disregard some or all of the capital gains.

The law that allows this is referred to as ‘Small Business Capital Gain Tax Concessions’. The Small Business CGT Concessions law recognises that many small business owners invest in their business, rather than make regular superannuation contributions, and later use the equity in their business to fund their retirement.

The two main concessions that relate to amounts that can be contributed to an SMSF, and have some or all of the capital gain from the sale of business premises disregarded are:

1. The 15-Year Exemption that allows an SMSF member to disregard all of a capital gain and contribute the sale proceeds to their SMSF up to the lifetime CGT cap (currently $1,515,000).
2. The Retirement Exemption, which allows an SMSF member to disregard some or all of a capital gain and contribute the disregarded capital gain to their SMSF up to a sub CGT cap of $500,000.

The sales proceeds, or the disregarded capital gain contributed to an SMSF, must not exceed the relevant CGT cap in order to be treated as a CGT cap contribution. Amounts contributed in excess of the CGT cap may be treated as either a concessional contribution and/or a non-concessional contribution and count towards the member’s relevant contributions caps.

An SMSF member’s total superannuation balance does not impact on their ability to make a CGT cap contribution to their SMSF. However, the CGT cap contribution is counted towards the member’s total superannuation balance at the end of the year the contribution is made; so, it may impact the member’s eligibility to make non-concessional contributions or use any catch-up concessional contributions in the following year.

The member needs to also satisfy the superannuation law requirements (i.e. be under the age of 65 at the time of the contribution, or aged 65 to 74 and meet the part-time work test) to be eligible to make the CGT cap contribution.

There are two basic conditions that must be met in order to qualify for the small business CGT concession.  They are:

1. the member/entity must be conducting a business which has a turnover of less than $2 million or the net asset value of the assets of the entity and related entities must not exceed $6 million; and
2. the business premises/asset must satisfy the active asset test.

An active asset is an asset that is used, or held ready for use in the course of carrying on a business by the entity, their affiliates or connected entities. The business premises does not have to be an ‘active’ asset immediately before the CGT event as long as:

• it has been owned for 15 years or less and the premises was an active asset for at least half of the ownership period; or
• it has been owned for more than 15 years and the premises was an active asset for at least seven and a half years.

15-Year Exemption

The 15-Year Exemption allows a business owner to disregard the entire capital gain made on the disposal of their business premises. To qualify for the 15-Year Exemption, an SMSF member must satisfy the basic conditions and must have owned the premises for a 15-year period leading up to the CGT event. The CGT event must have happened as a result of the member being aged 55 or over and retired from their business; or the member is of any age and is permanently incapacitated at the time of the CGT event.

If the sale of the business premises qualifies for the 15-Year Exemption, then the member can contribute some or all of the total proceeds from the sale to their SMSF. They can then elect for the contribution to be treated as a CGT cap contribution and have it count towards the lifetime CGT cap, which is currently $1,515,000 (for 2019/2020).

The CGT cap contribution must be made into the SMSF on or before the later of the following days:

• the day the member’s income tax return is required to be lodged for the income year in which the CGT event happened, or
• 30 days after the day the member receives the capital proceeds.

To elect for the contribution to be counted as a CGT cap contribution, the member must complete a CGT cap election form (NAT 71161) and give it to their SMSF at or before the time the contribution is made.

Example 1

John (aged 67) is a farmer who has been running a primary production business for over 15 years. He decides to retire and sell his farm to a third party purchaser for $1,400,000. John makes a $600,000 capital gain from the sale of his farm.

If John meets the basic conditions for small business CGT concessions, as well as the requirements for the 15-Year Exemption, he can disregard all of the capital gain of $600,000. If John has worked 40 hours over 30 consecutive days in the year of the contribution, he can contribute the capital proceeds of $1,400,000 into his SMSF as a CGT cap contribution and have it counted towards the lifetime CGT cap of $1,515,000.

Retirement Exemption

The Retirement Exemption allows an SMSF member to disregard some or all of a capital gain from the sale of business premises. The maximum amount that can be exempt from CGT is $500,000.

If an SMSF member satisfies the basic conditions and is under the age of 55 when they receive the sale proceeds, then they must contribute the disregarded capital gain of up to $500,000 to their SMSF. If the member is aged 55 or over, they do not need to contribute the disregarded capital gain to qualify for this exemption.

The Retirement Exemption does not require the SMSF member to cease their business. Also, it is the disregarded capital gain and not the amount of the sale proceeds that can be contributed into an SMSF.

For members under the age of 55 to claim the exemption, they must contribute the disregarded capital gain to their SMSF by the later of:

• the day their tax return is required to be lodged for the year in which the CGT event happened, or
• the day the capital sale proceeds are received.

For members aged 55 or over who wish to contribute the disregarded capital gain to their SMSF, they must do so by:

• the day their tax return is required to be lodged for the year in which the CGT event happened, or
• 30 days after receiving the capital proceeds.

Example 2

John, our farmer from Example 1, chooses to apply the Retirement Exemption instead of the 15-Year Exemption.

If John meets the basic conditions for small business CGT concessions, as well as the requirements for the Retirement Exemption, he can disregard up to $500,000 of the capital gain and contribute this amount to his SMSF as a CGT cap contribution. The contribution can be counted towards the $500,000 CGT cap. John is only able to make the contribution if he has worked 40 hours over 30 consecutive days in the year of the contribution.

As John is over the age of 55, he is not required to contribute the disregarded capital gain to qualify for the CGT Retirement Exemption. As the maximum CGT cap under the Retirement Exemption is $500,000, John may need to pay CGT on the remainder of the $600,000 capital gain (i.e. $100,000).

In-specie CGT cap contribution to an SMSF

Some members may want to transfer their business premises into their SMSF as an in-specie CGT cap contribution and take advantage of the small business CGT concessions. This strategy is popular with members who have wound up their business but wish to retain an interest in their business premises.

The Australian Taxation Office (ATO) has indicated, via a number of private binding rulings, that in-specie contributions of active assets, such as business real property, may not qualify for the lifetime CGT cap where the in-specie contribution is also the CGT event that qualifies for the small business CGT concessions.

Example 3

John, the farmer from Example 1, decides to transfer his farm into his SMSF as an in-specie CGT cap contribution. Instead of selling his farm to a third party or to his SMSF and contributing the cash proceeds to his SMSF, he decides to contribute his farm to his SMSF as an in-specie CGT contribution of $1,400,000 under the 15-Year Exemption.

The ATO has indicated John will not be able to utilise the small business CGT concession by making an in-specie transfer of his farm into his SMSF, where the 15-Year Exemption is applied for the same CGT event. This is because, the law does not contemplate the CGT event and the contribution of the CGT cap amount all happening simultaneously. The CGT event must occur before a contribution is made and not at the same time.

One option for SMSF members wishing to transfer their business premises as an in-specie contribution and qualify for the small business CGT concessions is to allow their SMSF to purchase the business premises from them. This is provided their SMSF has the available funds to purchase the premises outright or is able to borrow money under a limited recourse borrowing arrangement.

Under this method, not only is the premises owned by their SMSF, the cash sale proceeds received from their SMSF can be contributed back into their SMSF as a CGT cap contribution under the small business CGT concession.

SMSF members need to be aware that where a premises is acquired by an SMSF from them (i.e. a related party owner), only business real property (i.e. premises that is used wholly and exclusively in any business) can be acquired. Also, the premises would need to be unencumbered before it is transferred to their SMSF. The purchase of the premises must be on arm’s length terms and at market value.

In situations where their SMSF does not have sufficient funds available to acquire the asset, and the funds are borrowed from them (i.e. a related party), the SMSF trustee needs to ensure that the loan complies with the safe harbour guidelines as specified by the ATO in Practice Compliance Guideline 2016/5.

In situations where a member disposes of several active assets, they could consider triggering a CGT event in relation to one of the assets and then make an in-specie contribution under the small business CGT concession of a different asset in lieu of the capital proceeds they receive.  This is confirmed as allowable in the ATO publication Tax Determination 2010/217.

In this publication, the ATO confirms that where a taxpayer sold an asset that qualified for the $500,000 Retirement Exemption, the person could contribute a different asset under the CGT cap in lieu of the cash proceeds actually received.

This means, in situations where the CGT event and the in-specie contribution are separate events, the in-specie contribution may qualify for the small business CGT concessions.

Conclusion

In order for an SMSF member to qualify under the small business CGT concessions, to disregard some or all of the capital gain from the sale of their business premises, and make a CGT cap contribution into their SMSF, timing issues need to be considered. The member will need to sell the business premises first; then contribute the sale proceeds or the exempt capital gain as a CGT cap contribution, either via a cash contribution or an in-specie contribution.

A member cannot transfer their business premises as an in-specie contribution to qualify for the small business CGT concessions where the CGT event and the in-specie contribution occurs from the same event.

Therefore, the choice to disregard all or part of the capital gain, and contribute the CGT cap amount, cannot take place at the same time. The CGT event and the contribution to the SMSF must happen at separate times.

Small business CGT concessions are complex and depend on a member’s specific situation. SMSF members should ensure they are entitled to claim the relevant concession with their professional advisers prior to making any contribution.

Monica Rule is the founder of MonicaRule – Your Self Managed Super Expert.

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QUESTIONS

To answer the following questions, click here.

1. For an SMSF member to be considered for the Small Business CGT Concessions, the member:

1. 1. must be at least aged 55 and operating a business.
   2. must be conducting a business which has a turnover of more than $2 million.
   3. must be conducting a business which has a net assets value of more than $6 million.
   4. must be conducting a business which has a turnover of less than $2 million or the net assets value do not exceed $6 million.

2. Sally owns her own agricultural business. She decides to transfer the business into her SMSF as an in-specie CGT cap contribution. Instead of selling her business to a third party or to her SMSF and contributing the cash proceeds to her SMSF, she decides to contribute her business to her SMSF as an in-specie CGT contribution of $1,400,000 under the 15-Year Exemption. However, for her to qualify for the 15-Year Exemption, which of the following must Sally comply with?

1. Sally must be at least aged 65.
2. Sally must be aged 55 or over and retired from her business.
3. Sally must be aged 55 or over and still operating her business.
4. Sally must be aged 65 or over and still operating her business.

3. The 2019/2020 Lifetime CGT cap for the 15-Year Exemption is:

1. $500,000.
2. $100,000.
3. $1,515,000.
4. $1,600,000.

4. For the Retirement Exemption, a business owner aged 55 or over:

1. must contribute the capital gains into their SMSF.
2. must contribute the sale proceeds into their SMSF.
3. must contribute the sale proceeds and the capital gains into their SMSF.
4. can elect to contribute the capital gains of up to $500,000 into their SMSF.

5. Two options to transfer business premises as an in-specie contribution and qualify for the small business CGT concessions are:

1. Transfer the business premises into an SMSF as an in-specie contribution.
2. Sell the business premises to an SMSF and use different business premises as an in-specie CGT cap contribution to the SMSF.
3. Sell the business premises to an SMSF and contribute the sale proceeds or the capital gains from the sale of the business premises to the SMSF as a CGT cap contribution.
4. Sell the business premises to an SMSF and treat the business premises as an in-specie contribution.