The CGT concession bonus

Many business owners are unaware of the tax concessions they can take advantage of when restructuring a business, but with careful planning it could be a major boost to super balances come retirement, Peter Bembrick writes.

The economic climate is reinforcing the need for business owners to evaluate their current business structure and determine whether it’s appropriate for their circumstances and future exit plans.

There are many factors that will cause a business owner to review their structure, including the current uncertainty around business conditions, which could, depending on the industry, include inflation, supply chain disruption, labour shortages, energy and fuel prices and the higher cost of finance. Other key considerations include the stage of the business life cycle, the age of the business owner and the likely options for exit, such as family succession, employee buyout or external sale.

As there is no single best business structure that suits every situation, it is usually a case of the business structure being appropriate at the time the business is established, but this may cease to be the case as the business itself grows, the needs of the business owner change or the environment it operates in changes. Therefore, it is important to evaluate the business structure every few years or when any significant developments are identified.

When a decision is made to restructure, many business owners are potentially missing out on valuable capital gains tax (CGT) concessions, which can be used to top up superannuation balances.

As there are several key conditions that must be met in order to apply the CGT concessions, it is first necessary to review the existing structure, the restructure transaction and the proposed new structure to ensure all the right boxes have been ticked.

The age of the business owner, or owners, is important. For two concessions, the retirement concession and the 15-year exemption, when an individual is aged under 55, the full tax benefits are gained only by making a contribution to super. For those aged 55 or over, the situation is more flexible. While they still have the ability to contribute to super, they can also choose to take the money and run.

It is reasonably common for older small to medium-sized enterprise (SME) owners who have built up a certain level of super to have also set up an SMSF. By contrast, younger SME owners tend to be no more interested in SMSFs than their peers who are not running a business.

Importantly, payments arising from applying CGT concessions can be made into any complying super fund, such as a retail or industry fund account, and are not restricted purely to SMSFs.

When the retirement concession is applied, an amount equal to the exempt capital gain can be contributed to super, as long as it does not cause the lifetime cap for this concession of $500,000 per individual to be exceeded.

This contribution is on top of the standard non-concessional super contribution cap of $110,000 for a single year or $330,000 for a three-year period, and is not restricted by any of the other normal super balance limits. This allows a greater super balance to be accumulated than would otherwise be the case, which can be extremely tax-effective as the years go on with tax concessions including a 15 per cent rate on earnings derived in the fund.

Even greater benefits arise where the 15year exemption is available. This provision is considered by many to be the holy grail of concessions for small business owners. The concession applies to businesses that have continuously owned an ‘active’ asset for 15 years and the business owner is aged 55 or over and is retiring or permanently incapacitated.

Not only does this concession provide a complete tax exemption, it also allows a business owner to exit and contribute more into superannuation on top of the standard contribution limits, remembering super is a very tax-effective place to have your money.

Across all small business CGT concessions, generally the most critical step in terms of eligibility is meeting the maximum net asset value test. This is the total net asset value of the business owner and connected entities, and is currently capped at $6 million, with two notable carve-outs being the family home and existing super balances.

Ultimately, if business owners, particularly those nearing retirement, are aware of available tax concessions, they can plan accordingly and take advantage of them. In some instances, concessions can be used to ensure a restructure is tax-free, although it is of course important to remember there are a wide range of financial and commercial reasons for undertaking a restructure and the basis of the decision to do so should not be purely tax driven.

Undertaking a restructure while the value of the business is below necessary limits can be quite tax-effective, but it is a case of use it or lose it. Business owners shouldn’t wait until the final sale of a business to seek out available concessions as the value of the business may have already exceeded the threshold.

The decision to restructure a business can be overwhelming and stressful for many. However, the fact that tax concession savings can be redirected into super should be of comfort to business owners as they enter a new phase of life and business.