For small business owners structured through discretionary trusts, optimising capital gains tax (CGT) concessions can unlock significant tax savings and retirement benefits. The small business retirement exemption allows eligible business owners to disregard up to $500,000 in capital gains per CGT concession stakeholder, with the potential to exempt up to $4 million from tax through strategic structuring.
Understanding the Small Business Retirement Exemption
The small business retirement exemption is a key CGT concession that allows small business owners to eliminate up to $500,000 in capital gains per CGT concession stakeholder when selling business assets. Importantly, despite the name, retirement is not a requirement for accessing this exemption.
Key Benefits of This Strategy
- Greater Tax Savings: A larger portion of capital gains can be exempt from CGT.
- Increased Super Contributions: Eligible stakeholders can contribute exempt amounts to superannuation.
- Contributions Beyond Standard Caps: Contributions under the CGT cap ($1.65 million in 2022/23) do not count towards concessional or non-concessional caps.
Who Can Benefit from This Strategy?
This strategy is ideal for small business owners who:
- Own a business structured through a discretionary trust.
- Are selling business assets and want to maximise tax exemptions.
- Wish to contribute sale proceeds to superannuation beyond standard caps. Want to optimise distributions to ensure compliance with CGT concession requirements.
Key Eligibility Considerations
To qualify for the small business retirement exemption through a discretionary trust, business owners must meet specific requirements, including:
- Having at least one CGT concession stakeholder (a significant individual with at least 20% small business participation).
- Ensuring correct income and capital distributions to align with CGT concession rules.
- Meeting all basic and specific conditions outlined by the ATO.
Maximising CGT Concession Stakeholders
To maximise the CGT exempt amount, business owners should aim to increase the number of CGT concession stakeholders. Each stakeholder is eligible for a $500,000 CGT exemption, meaning structuring ownership across multiple stakeholders can exempt up to $4 million in capital gains.
Case Study: Jack and Fred’s Business Sale
Scenario
Jack (57) and Fred (47) co-own Stone Manufacturing Pty Ltd, operating for 10 years. Their ownership is structured through discretionary trusts. In 2022/23, the company sells a business asset, generating a $2 million capital gain.
Strategy
Initially, Jack and his family were not eligible for the small business retirement exemption due to their trust’s income distribution structure. By adjusting income and capital distributions, Jack ensured that he and his spouse (Jill) qualified as CGT concession stakeholders.
As a result, Jack, Jill, Fred, and Fred’s spouse (Betty) each became eligible for $500,000 in tax-exempt CGT amounts, allowing Stone Manufacturing to exempt the full $2 million capital gain.
Superannuation Contributions
- Fred and Betty (under 55): Their $500,000 exemption amounts were directly contributed to super.
- Jack and Jill (55 and over): They could receive the amounts tax-free or voluntarily contribute to super under the CGT cap.
Final Thoughts
For business owners using discretionary trusts, ensuring the right distribution structure is essential to maximise CGT exemptions. By planning ahead and meeting CGT stakeholder requirements, business owners can eliminate millions in taxable capital gains and significantly boost their retirement savings.