Maximising Retirement Wealth: Small Business CGT 15-Year Exemption & SMSF Property Acquisition

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Introduction

For small business owners, planning for retirement while optimising tax efficiency is a key financial objective. One strategic approach involves selling business real property to a self-managed super fund (SMSF) while leveraging the small business capital gains tax (CGT) 15-year exemption. This allows business owners to eliminate capital gains tax on the sale and contribute proceeds into superannuation, creating a tax-efficient investment structure for long-term retirement benefits.

How the Strategy Works

While SMSFs are generally restricted from acquiring assets from related parties, an important exception applies to business real property. If the disposer qualifies for the small business 15-year CGT exemption, the capital gain on the sale to the SMSF can be fully eliminated.

For SMSFs with limited liquidity, a limited recourse borrowing arrangement (LRBA) can be used to finance the acquisition. However, any contributions made to assist with loan repayments must remain within allowable contribution caps. The 15-year exemption enables individuals to make non-concessional super contributions under the small business lifetime CGT cap, which can significantly enhance their retirement savings.

Key Benefits

  • Tax Efficiency: Holding business real property within an SMSF is generally more tax-effective than personal ownership or holding the property via a company or trust.
  • CGT Exemption: The 15-year small business CGT exemption eliminates capital gains tax on the property sale.
  • Increased Super Contributions: The sale proceeds can be contributed under the small business lifetime CGT cap, in addition to the standard non-concessional cap ($110,000 per year or $330,000 using the bring-forward rule).
  • Long-Term Wealth Building: Investing in business real property within an SMSF provides a stable and potentially high-growth asset for retirement.

Who Should Consider This Strategy?

This approach is particularly suited for:

  • Small business owners who own business real property and are considering selling it to their SMSF.
  • Individuals who qualify for the 15-year exemption on the capital gain from the property sale.
  • Business owners looking to make substantial non-concessional super contributions beyond the usual limits.

Eligibility Requirements

To implement this strategy, the following criteria must be met:

  1. The property must qualify as business real property under SMSF rules.
  2. The disposer must meet the basic conditions for small business CGT concessions and the specific conditions for the 15-year exemption.
  3. The SMSF trust deed must permit the use of an LRBA if borrowing is required.

Key Considerations

While this strategy offers significant tax advantages, there are important considerations to keep in mind:

  • Financial advisers are not licensed to provide tax advice—consulting a registered tax agent is essential.
  • The property must be wholly and exclusively used in a business to qualify as business real property.
  • The sale triggers a CGT event, but the 15-year exemption may eliminate the tax liability.
  • The small business lifetime CGT cap for contributions is $1.705 million per qualifying individual.
  • Contributions under this cap must be accompanied by an approved ATO Capital Gains Tax Cap Election Form (NAT 71161), which must be submitted before or at the time of contribution.

Case Study: Business Owners Utilising the 15-Year Exemption

Jenny (56) and Paul (58) own a restaurant, along with the property where it operates, through their company, J & P Creations Pty Ltd. To support their retirement strategy, they decide to sell the property to their SMSF.

  • Property value: $4 million
  • Cost base: $900,000
  • SMSF cash & liquid assets: $1.5 million
  • Required borrowing: $2.5 million (via LRBA)

Upon selling the property to their SMSF, the company realises a $3.1 million capital gain. Since they qualify for the 15-year exemption, the entire gain is tax-free. The company can distribute the CGT-exempt amount to Jenny and Paul within two years. Each receives $1.55 million, which they contribute to their SMSF under the lifetime CGT cap.

This strategic move allows the SMSF to fully repay the loan, leaving it debt-free while holding a high-value property asset for retirement.

Final Thoughts

Using an SMSF to acquire business real property from a related party, combined with the small business CGT 15-year exemption, presents a compelling tax and retirement planning opportunity. However, due diligence is crucial to ensure compliance with regulatory requirements and tax laws.

For business owners considering this strategy, seeking professional advice from a financial adviser and a registered tax agent is essential to aligning it with their financial goals and retirement plans.

Disclaimer: This information is intended for professional financial planners and advisers and is not for client distribution. It is general in nature and does not consider individual circumstances. Always consult a qualified professional before implementing any financial strategy.

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