When a company meets the basic conditions for the small business CGT concessions on the disposal of an active asset, it can use the small business 50% reduction, effectively halving the assessable capital gain. However, this often results in the creation of unfranked dividends to shareholders, which can reduce the overall tax benefit.
By strategically choosing the small business retirement exemption instead, business owners can optimise tax outcomes and make additional super contributions using the lifetime CGT cap.
Benefits of the Small Business Retirement Exemption
- Avoids the creation of unfranked dividends for shareholders.
- Each CGT concession stakeholder can make super contributions using the lifetime CGT cap (up to $500,000 per individual).
- The strategy can provide greater tax efficiency than using the small business 50% reduction alone.
Who Can Benefit?
This strategy is suitable for business owners who:
- Own at least 20% of a small business (or are the spouse of someone who does).
- Are selling a business asset that qualifies for the small business retirement exemption.
- Want to direct sale proceeds into superannuation while minimising tax liabilities.
Key Eligibility Considerations
- The company must qualify for small business CGT concessions.
- CGT concession stakeholders under age 55 must contribute their retirement exemption amount into super.
- The CGT cap election form must be lodged before or with the super contribution.
Case Study: Maximising Tax Efficiency
Mary (53) and Michael (56) each own 50% of Small Business Pty Ltd. The company sells an active business asset for $900,000, generating a capital gain of $600,000.
- If they use the 50% small business reduction, their assessable capital gain would be $300,000. However, this would result in unfranked dividends when distributed.
- Instead, they elect for the full $600,000 gain to be exempted under the small business retirement exemption.
- Mary (under 55) must contribute $300,000 into super using the lifetime CGT cap.
- Michael (over 55) can choose to contribute his $300,000 into super voluntarily.
Final Thoughts
By carefully selecting CGT small business concessions, business owners can reduce tax burdens and increase retirement savings. Professional financial and tax advice is essential to ensure compliance and maximise benefits.