Keeping the taxman happy - CGT contribution caps explained

John Ciacciarelli demystifies small business CGT contribution caps. 

The small business capital gains tax (CGT) concessions, which are available following the sale of active assets by an eligible taxpayer, are extremely useful in reducing the resulting CGT liability that would otherwise be payable.

From a financial planning perspective, what makes these concessions even more attractive is that where the capital gain on the sale is eligible for the 15-year CGT exemption or the retirement exemption, some or all of the sale proceeds may potentially be contributed to superannuation
by individuals under an additional indexed
lifetime CGT cap.

This CGT cap, currently at $1.155 million per individual, is in addition to the concessional and non-concessional contribution caps ordinarily available for superannuation contributions.

However, what is often overlooked is that the amount of a particular contribution that can be counted towards the available CGT cap will depend on which small business CGT concession is being applied to the asset disposal. Unfortunately, it is often incorrectly assumed that the $1.155 million cap is available in all cases, which may lead to a breach of a person’s contribution caps and the associated additional tax payable. It is therefore important to understand how these contribution caps work.

In essence, to determine the amount that may be contributed towards this additional CGT cap, there are two critical aspects to be aware of:

• When the asset is disposed of, and the 15-year small business CGT exemption is applied, the sale proceeds (up to the individual’s indexed lifetime limit of $1.155 million) can generally be contributed to superannuation using the CGT cap.
• Where the retirement exemption is applied, it is only the capital gain amount exempted under this concession, up to the $500,000 maximum, which can generally be contributed to superannuation using the CGT cap.

These differences are highlighted in the case study.

Case study

Consider Frank, a 60-year-old sole trader who has recently sold an active asset for $1 million.

The asset was originally bought for $200,000. By applying the small business CGT concessions to this sale, he will not be required to pay any CGT. He is now considering how much he can contribute to superannuation.

If we assume that Frank is able to apply the 15-year exemption to this sale, and that he has not previously contributed amounts counted towards the CGT cap, he will be able to contribute (within certain time limits) the entire sale proceeds of $1 million to superannuation using the CGT cap. As a result, his ordinarily available non-concessional and concessional contribution caps remain intact.

Where a business asset is purchased prior to 20 September 1985, it is generally a pre-CGT asset. As such, when a pre-CGT asset is sold, no CGT is payable. However, where a business owner would otherwise qualify for the 15-year exemption, except that the asset was a pre-CGT asset, the proceeds from the sale may still potentially be contributed to super using the CGT cap.

If instead Frank is unable to apply the 15-year exemption, he will only be able to contribute the capital gain amount exempted under the retirement exemption.

If we follow a typical application of the small business CGT concessions, Frank will not pay any CGT on the sale proceeds. However, only a relatively small capital gain amount will be exempted under the retirement exemption.

Looking at the numbers (which assumes that Frank has applied both the general 50 per cent CGT discount and the 50 per cent active asset concession) Frank will only be able to contribute $200,000 into superannuation (within certain time limits) using the CGT cap.

Any additional superannuation contributions that he chooses to make will be counted against his contribution caps in the usual way.

Where a small business owner, or an entity they own, meets the basic conditions for the small business CGT concessions but does not qualify for the 15-year exemption, the amount contributed to super may be maximised by choosing not to use the 50 per cent active asset reduction. This will leave a larger amount to be exempt under the $500,000 small business retirement exemption, which may be contributed to super using the CGT cap. In Frank’s case, this would have allowed for an amount of $400,000 to be contributed into superannuation using the CGT cap.

Clearly, individual case analysis is required. In this case, depending on which CGT concession is applied, the amount that Frank is able to contribute to superannuation will vary significantly. In some circumstances, this may even provide an incentive to defer the sale of the asset so as to give rise to the 15-year exemption.

Doing the paperwork

In addition to being aware of these key differences in determining the right amount, it is equally important that the correct procedures are adhered to when making the contribution.

Of particular importance, when seeking to have contributions assessed towards the CGT cap, is the CGT Cap Election form that must be lodged with the superannuation fund at or before the time of making the contribution.

While this is something that on the surface may seem simple enough, the Australian Taxation Office has confirmed that if this form is not lodged – or is lodged after the contribution is made – then by law the fund will not be allowed to apply the CGT cap to that contribution, which may lead to disastrous consequences for the client.

Finally, in order for these voluntary superannuation contributions to be eligible for the additional CGT cap, the contribution must be made within certain time limits. For example, where the taxpayer is an individual (as was Frank in our example), the contribution must be made:

• By the time the individual is required to lodge their tax return for the year of disposal; or
• 30 days from the date the individual receives the sales proceeds (whichever is later).

With some minor differences, similar rules and timeframes also exist where the taxpayer is an entity, such as a company or trust.

So, while the small business CGT concessions can be extremely valuable to eligible small business owners, with some careful planning they can also be used to maximise the additional contribution opportunities that they unlock.

John Ciacciarelli is technical services manager at AMP.