When selling a small business asset, owners may still face a capital gains tax (CGT) liability even after applying available CGT discounts and concessions. One effective strategy to further reduce this tax liability is making personal deductible superannuation contributions. By doing so, business owners can lower their taxable income while boosting their retirement savings.
How Deductible Super Contributions Reduce Capital Gains Tax
After applying the general 50% CGT discount and relevant small business CGT concessions, any remaining net capital gain is included in the business owner’s assessable income. By making a personal deductible super contribution, the owner can claim a tax deduction, effectively reducing taxable income and total tax payable.
Who Can Benefit from This Strategy?
This strategy is particularly useful for small business owners who:
- Still have an assessable net capital gain after applying CGT concessions.
- Expect a marginal tax rate higher than 15% in the financial year of the sale.
- Have sufficient cash flow to make a super contribution.
- Are eligible to make personal deductible contributions under superannuation rules.
Eligibility to Make Deductible Super Contributions
To claim a tax deduction for personal super contributions, individuals must meet the following criteria:
- Aged 18 to 67 (or up to 75 if they meet the work test or work test exemption).
- Have taxable income to offset (the deduction cannot exceed taxable income).
- Submit a valid Notice of Intent to Claim a Deduction form to their super fund.
- Stay within the concessional contributions cap, which is $27,500 for 2023-24.
Key Considerations
- Concessional Contributions Cap: Personal deductible contributions count towards the annual $27,500 cap, which also includes employer Superannuation Guarantee (SG) and salary sacrifice contributions.
- Excess Contributions: Contributions exceeding the taxable income limit become non-concessional contributions, which are subject to different caps and rules.
- Preservation of Funds: Once contributed, super funds remain preserved until a condition of release is met.
Case Study: How Angela Reduced Her Capital Gains Tax
Scenario
Angela, 56, sells her active business asset (owned for 12 years) for $3 million, resulting in a capital gain of $2.1 million. After applying the 50% CGT discount, the small business 50% reduction, and the small business retirement exemption, Angela has a remaining taxable capital gain of $25,000.
Angela’s Strategy
- Angela makes a $27,500 personal deductible super contribution to reduce her taxable income.
- Since she is under age 67, she is eligible to contribute to super and claim a deduction.
- Her total taxable income decreases from $140,000 to $112,500, lowering her income tax and Medicare Levy.
Outcome
By implementing this strategy, Angela:
- Saves $10,387 in income tax and Medicare Levy.
- Pays $4,125 in super contributions tax, leaving a net super contribution of $23,375.
- Improves her overall financial position, as her super balance increases while reducing her tax liability.
Final Thoughts
Making deductible super contributions is a smart way for small business owners to reduce capital gains tax, optimise tax efficiency, and grow retirement savings. However, individuals must carefully plan their contributions to ensure they remain within concessional caps and align with their broader financial goals. Seeking professional tax and financial advice is recommended to maximise benefits and avoid compliance risks.