The small business capital gains tax concessions offer a myriad of ways to enjoy the sale of the family business with a small amount, or no tax payable. And while they are a complex mindfield, the end outcome of the concessions is so incredible that every long term tax plan should have it.
The small business CGT concessions also allow a family business to contribute significantly more to their superannuation fund. And the sale of the family business might be to the next generation – with the tax concessions helping the parents structure their superannuation fund wisely.
What are the superannuation caps?
Currently, tax penalties apply if you exceed certain limits on how much you contribute to your superannuation fund. As a general guide you can contribute:
- $25,000 as concessional superannuation contributions: and
- $100,000 as non-concessional contributions.
There are additional tax restrictions on the amount you can contribute. Your age can limit the amount you put into your superannuation fund as does the amount that is already present in your superannuation fund.
What happens if I exceed the superannuation cap?
The key takeaway is that if you contribute more to your superannuation fund than the amounts detailed above: your superannuation fund will attract excess tax liabilities.
The first tax, called the excess concessional contributions tax effectively applies an additional tax of 31.5%. So the ultimate tax on contributions increases from 15% to 47%.
The second tax, called the excess non-concessional contributions tax, you can be taxed 47% on the excess contributions. This is significant as you have already paid tax on the non-concessional contributions.
Given the high tax impost of these contributions, you can sometimes have the options of removing the excess from your superannuation fund. Good tax advice in these situations is critical when dealing with the ATO.
What about the small business CGT concessions?
The small business CGT concessions are an exception to the thresholds discussed above. So where a family sells the family business they are potentially able to contribute the maximum contributions above and also contribute monies to their superannuation fund using the additional tax concessions to avoid the excess non-concessional contributions tax.
How much can you contribute?
If you sell a business, and you qualify for the tax concessions under 152-B of the Tax Act you can make an additional contribution of $1,480,000 to your superannuation fund. This concession is significant in that the threshold of $1,480,000 applies to each person. So a couple could potentially contribute $2,960,000 to their superannuation fund on the sale of the business.
This is even more interesting in that the ability to contribute $2,960,000 is independent of the $3,200,000 cap on making additional superannuation contributions. A good tax strategy will also look at ways to reduce your $1.6m transfer balance cap.
Alternatively, the concession under 152-B might not be available (it is quite restrictive). However, there are other tax concessions including the same under 152-D. In this situation, a person is able to contribute $500,000 to their superannuation fund on the sale of a business asset.
What is the tax on contributing?
If you contribute a tax-free capital gain under either 152-B or 152-D, these amounts do not incur tax within your superannuation fund. Likewise, when you withdraw these amounts you also do not incur tax. And if these amounts are withdrawn from your superannuation fund on death and paid to your estate, the beneficiaries of your estate do not incur tax.
How much should I contribute?
There is no point in making a significant contribution to your superannuation fund if you then invest poorly and lose the lot. Any decision to contribute money to a superannuation fund will inherently involve another decision about where to invest those monies.
So a licensed investment advisor should always be engaged with the decision on investing into a superannuation fund. A family business should also engage a life insurance advisor for a discussion on insurance policies for the family.
Getting the succession right
Where to from here?
The small business capital gain tax concessions are easy to discuss and hard to implement. Careful, documented independent tax advice is critical during the sale process of a family business.
Superannuation funds primarily offer tax concessions intended to encourage people to save for retirement. However, the tax concessions restrict how much a family can contribute. Considered independent tax advice is critical for a family business when they are seeking to maximise the tax concessions offered in their superannuation funds. If the independent tax strategy is coupled with independent investment advice a family business will create the best possible outcome of creating and transferring a legacy for the current and future family members.
At Westcourt our sole focus on advisory for family businesses gives us an insight into the complexity of business families few other firms offer. And as our advice is only independent you can be certain of achieving a superior overall outcome.