If you run a small business and want to increase your retirement savings, consider the small business retirement exemption. On average, self-employed Australians typically have around $164,000 in their superannuation account when they retire, which is significantly less than the $283,000 balance that most employees have.
This can force retired small business owners to face financial challenges with limited income. The small business retirement exemption provides reduced capital gains tax (CGT) on the profits from selling business assets. It recognizes that small business owners depend on these funds to supplement their retirement savings.
In this blog, you will learn what small business retirement exemption is, the basic requirements, and how to benefit from it.
What Is a Small Business Retirement Exemption?
The small business retirement exemption gives a special benefit to small business owners. It lets them put the money they make from selling assets straight into their super fund. The best part is that the exemption gives different discounts on CGT.
Consider the following example:
In December 2006, Harry decided to retire from farming. He gave the farm that he purchased in 1996 to his son for free. The farm was valued at $1 million. With a cost base of $600,000, Harry realized a capital gain of $400,000.
After applying the 50% CGT discount, the gain was reduced to $200,000, which was further reduced by the 50% active asset reduction to $100,000. Although he didn’t receive any capital proceeds, Harry could choose the retirement exemption for the remaining $100,000 capital gain, provided that he meets the other retirement exemption criteria.
How Does it Work?
When you sell certain assets you use for business or investments, you may not have to pay tax on the profit you make, up to a maximum of $500,000 per person. This applies to individuals as well as company or trust owners who qualify for the Capital Gains Tax concession.
You can choose not to include some or all of a capital gain if you qualify:
- Basic eligibility conditions.
- Additional conditions specific to the small business retirement exemption.
You don’t have to end your job, business, or other work commitments.
If you use this exception, you won’t have to pay tax on the specific amount of capital gain you’ve decided to exempt. Any capital gain above this exempt amount won’t be eligible for this exception. Always keep a written record of the exempt amount you’ve chosen. If there are multiple stakeholders eligible for the CGT exemption in a company or trust, each stakeholder’s percentage must be documented.
What are the Requirements?
If you want to qualify for a retirement exemption, you must meet one of these eligibility requirements:
- You run a small business that makes up to $2 million in sales yearly.
- You have a small business with total assets valued at $6 million or less.
If you’re under 55, put money into a self-managed super fund, super fund, or retirement savings account to claim an exemption. The deposit should match the exempt amount. It’s important to keep track of all your exemption claims and keep copies of statements showing any transfers to your super account.
Tax Concessions of Small Business Retirement Exemption
The small business retirement exemption is part of four tax concessions that apply to small businesses when they sell assets. These concessions acknowledge that many small business owners rely on their business assets to save up for retirement.
These concessions are:
The Retirement Exemption
If you decide to use this concession, you don’t have to stop running your business or end any activities. However, if you are under 55 years old at the time you choose to use the concession, put the exempt amount into a superannuation fund or retirement savings account.
This concession can help you avoid paying tax on the profit you make from selling your business assets, up to a limit of $500,000. This can be a helpful way to save money for your retirement.
15-Year Retirement Exemption
If you sell a business asset you’ve owned for at least 15 years, you might not have to pay any Capital Gains Tax (CGT) on the money you make. It means you can put all the money you get from the sale into your superannuation account, as long as it doesn’t exceed the $500,000 limit for your lifetime.
The concession lets you ignore a capital gain when you sell an asset without using any other concessions.
50% Active Asset Reduction
When you sell or dispose of an asset, you may be able to lower your capital gain by half. This can be possible if you’ve owned the asset for at least a year, and you’re considered an Australian resident for tax purposes.
An Active Asset is considered a CGT asset when used in your business operations, held ready for use, or connected with your business in some way.
Rollover Exemption
The rollover exemption allows small business owners to postpone paying taxes on the profit from selling an asset until a future year. You can select how much profit you want to delay using this exemption. Sometimes, it can be used alongside other tax breaks.
Small Business Retirement Exemption Limit
In Australia, individuals are allowed to claim a maximum of $500,000 in Capital Gains Tax (CGT) for the small business retirement exemption during their lifetime. This limit goes down if they’ve already claimed some CGT through the concession.
If there are multiple stakeholders in a business, they can each claim up to $500,000 too. For example, a small business with four stakeholders could have a total limit of $2 million. In some cases, businesses might not split the exemption evenly among stakeholders, so the amount each person can claim may vary
How to Claim Small Business Retirement Exemption?
To qualify for a retirement exemption, you need to fill out a capital gains tax cap election form. This form can be found online along with guidance from the ATO.
Make sure you submit a signed and dated form to your super fund when or before making a contribution. The form will not be considered valid if the super payment has already been made. Afterward, make sure to complete the relevant sections in your SMSF annual return.
Death and the Small Business Retirement Exemption
You can qualify for the small business retirement exemption if you earn a profit from selling an asset within two years of someone’s passing, the asset is or was part of the deceased person’s estate, and you meet the following criteria:
- Beneficiary of the deceased estate.
- Legal personal representative (LPR).
- Trustee or beneficiary of a testamentary trust.
You might qualify if you and the late person owned the property as joint tenants.
You can qualify based on what the deceased person would have been eligible for before they passed away. Unlike the deceased, you don’t have to put the money into a super fund or RSA. It applies even if the deceased was under 55 years old when they died.
Conclusion
The small business retirement exemption is a helpful way to convert your business assets into a super fund and handle your capital gains taxes effectively.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
