How to save CGT when you sell your business

“Owning a small business is a journey,” says Altus Financial director Stuart Waugh. “There is a start, a finish and an in-between. The finish of a successful business can be as important as the other phases to maximise the bankable cash proceeds upon sale.”

Selling your business requires planning, due diligence and careful negotiation. Getting it right often means seeking expert legal and financial advice to capitalise on any tax concessions offered by the Australian Taxation Office(ATO).

Some of the exemptions make investing the sale proceeds into super very attractive. Accountants also point out in some circumstances family businesses can access these concessions as part of a restructure, meaning they don’t need to actually sell the business to a third party.

The laws around CGT concessions are complex.

Four main concessions

There are four small business CGT concessions to consider when selling a business or business assets.

All the tests require basic criteria to be met which ensures the asset relates to a small business. The tests can be complex and are notorious for not being available due to technical reasons, such as shares in a company having differing rights.

Therefore engaging with professional advisors early in a sale process is important to maximise the availability of the concessions.

The parameters include: a capital gain must arise on disposal of the asset; either the business turnover is less than $2 million, or the net value of your assets and the assets of relevant associated entities is less than $6 million (this excludes personal use assets); and the asset disposed must be an “active asset”.

• The 15-year exemption is the most valuable, says Bardos, as it allows a full exemption from CGT on the sale of the business, or “active asset”, if it has been owned for 15 years, and if the owner is over 55 and about to retire or is permanently incapacitated. ’If this exemption is applied, no other small business enterprise CGT concessions can be applied”. The lifetime CGT cap is $1.705 million, and it’s indexed annually.
• The 50 per cent reduction allows an extra 50 per cent reduction in the capital gain. This is in addition to the usual 50 per cent CGT discount available for individuals. The ATO gives the example of Lana who sells land used in her business that results in a net capital gain of $14,000. Because she has owned the land for more than 12 months and meets the basic eligibility conditions, she can use the 50 per cent CGT discount to reduce the capital gain to $7000. After using the small business 50 per cent active asset reduction, it’s further cut to $3,500.
• If you don’t qualify for the 15-year exemption, another concession is the retirement exemption – a $500,000 reduction in the assessable capital gain. The $500,000 is a lifetime limit for each individual, and if under 55, the amount must be paid into superannuation. If over 55, it is optional to pay the amount into superannuation.
• The final concession is the rollover concession, which allows the capital gain to be rolled over into another active business asset. If no asset is acquired after two years, then the capital gain arises again at this point. The retirement exemption can be applied to this capital gain which can mean a two-year deferral to contribute to superannuation or to turn 55.

Getting it into super

The good news is that the vendor of an SME can make a superannuation contribution with the proceeds that are exempt from the non-concessional contributions cap – $110,000 a year or $330,000 over three years using the “bring-forward” rule.

The 15-year exemption and the retirement exemption allow contributions to superannuation that sit outside those two caps.

The 15-year exemption allows a contribution of the total sale proceeds, up to the CGT cap. For example, if an asset is sold for $1.5 million, the full $1.5 million can be contributed to superannuation.

The retirement exemption allows a contribution of up to $500,000 of the disregarded capital gain, which is different to the 15-year exemption as it is based on the exempt capital gain, not the total sale proceeds.

The CGT cap

The CGT cap is the amount that can be contributed to superannuation outside the usual contribution caps, which is $1.705 million for the financial year ending June 2024.

A contribution of sale proceeds under the 15-year exemption can be up to the total lifetime cap, whereas the $500,000 retirement exemption is often called a sub-cap as it is included in the broader $1.705 million; however, it is also limited to $500,000.

It is also important to understand the timing – that is, what is the date that funds must be contributed to superannuation under the relevant concession.

Even outside the small business enterprise CGT regime, there are ways to boost superannuation, subject to being eligible to contribute concessional or non-concessional amounts.

Utilising forward non-concessional contributions means each member can bring forward their non-concessional contributions for three years to contribute $330,000 each.

There are also carry back concessional contributions, where members who have balances less than $500,000 can carry back unused concessional contributions for the previous five years to obtain a larger tax deduction in the contribution year.