Converting small business wealth to SMSF savings CGT small business concessions. Jordan George, Senior Manager- Technical & Policy SMSF Association

Transcription

1 Converting small business wealth to SMSF savings CGT small business concessions Jordan George, Senior Manager- Technical & Policy SMSF Association

2 Agenda A quick overview of the CGT small business concession process The CGT cap Interaction with contribution rules Case studies 15 year exemption Retirement exemption The active asset

3 Eligibility Small Business Entity Test Aggregated Annual Turnover Connected entities Affiliates Max Net Asset Value Test Connected entities Affiliates Assets included Net liabilities Exclude certain assets Active Asset? CGT Concession Stakeholder?

4 Applying the concessions Entitled to access small business concessions Apply prior losses and CGT 50% discount 15 year exemption Extra eligibility conditions No limit Retirement exemption $500k lifetime limit Restrictions based on age 55 Active asset discount 50% of gain exempted for active assets Not compulsory to apply Small business rollover 2 year deferral Retirement exemption can be applied after 2 years Contribute amount to superannuation lifetime CGT cap $1,355,000

5 15-year exemption subdivision 152-B The main conditions are that: the basic conditions for relief in Subdivision 152-A are satisfied; the entity continuously owned the asset for the 15-year period leading up to the CGT event; if the entity is an individual, the individual retires and is 55 or over, or, is permanently incapacitated; if the entity is a company or trust, the entity had a significant individual for a total of at least 15 years during which the entity owned the asset and the individual who was the significant individual just before the CGT event is 55 or over and retires; or is permanently incapacitated

6 Retirement exemption subdivision 152-D Can choose to disregard all or part of capital gain up to $500,000 life time limit. No need to retire, cease working or sell business. Focuses on providing for retirement If CGT concession stake holder is < 55, they or company/trust claiming the concession must make payment equal to exempt amount to super Company/trust must have a significant individual Exempt amount must be paid to a CGT concession stakeholder

7 Active Asset Discount Subdivision 152-C Reduce capital gain (after applying current year and carry-over losses and CGT 50% discount) by 50% Applies automatically if meet basic conditions, unless chosen not to. My choose not to apply to have an increased exempt amount to contribute to super via CGT small business cap. Other small business concessions can apply after application of active asset reduction.

8 Small business roll-over subdivision 152-E Defer all or part of a capital gain made from a CGT event happening to an active asset. Can choose to apply: After active asset reduction and CGT discount Instead of active asset reduction Need to satisfy basic conditions + roll-over conditions

9 The CGT cap CGT cap amount excludes certain amounts relating to small business concession from non-concessional contributions s Lifetime cap of $1.355 million Indexed annually check each year s lists what amounts can be contributed from the different CGT small business concessions

10 The CGT cap What amounts count under the cap? Capital proceeds exempted by 15 year exemption CGT exempt amount from retirement exemption Capital proceeds that would have been exempt under 15-year exemption but no gain/loss occurred, asset was pre-cgt Asset wasn t owned for 15 years because of permanent incapacity

11 The CGT cap Where the individual owned the relevant assets, the contribution must be made by the later of: the day that individual is required to lodge their tax return for the financial year in which the CGT event occurred; or 30 days after the day the individual person received the capital proceeds, whichever is later. Where the asset was owned by a company or trust, the contribution must be made within 30 days after payment from the company/trust is received. Where the capital proceeds are received and then contributed in instalments, each instalment is a separate contribution which must comply with the timeframes. (paragraphs (2)(b) and (7)(b)) Fund member must notify the trustee of the fund that they are contributing via the CGT cap use ATO approved form (s (9))

12 CGT cap case study Elwood is retiring and sells his small business which he has owned for 25 years for total capital proceeds of $1.1m Elwood has previously contributed $500,000 to his super fund via the CGT cap and retirement exemption. How much can Elwood contribute via the CGT cap? (Lets assume he claimed the 15 year exemption)

13 15 year exemption = exclude capital proceeds from CGT Elwood can contribute $855,000 via the CGT cap outside of non-concessional contributions ($1.355m $0.5m) Elwood can then contribute the remaining $235,000 as a non-concessional contribution via the bring forward rule if he meets the NCC rules. No tax paid; 100% contributed to SMSF

14 A word of warning SIS Regulations Contribution Standards Compliance with SIS Regulations Contribution standards is still needed for CGT cap contributions Reg 7.04 SISR Members aged under 65 no restriction on contribution. members aged must satisfy the work test. Gainfully employed for 40 hours in a consecutive 30 day period The fund may continue to accept contributions from members who were gainfully employed on a part time basis up to 28 days after the end of the month in which the member turns 75.

15 Contribution Strategy Point Beneficial to use the NCC cap and the bring forward rule before using the CGT cap Preserves the CGT cap lifetime limit for later in life NCC bring forward resets after 3 years CGT cap can be used after 65 if pass work test whereas the bring forward rule cannot be SIS Reg 7.04(3) and s ITAA 1997 Useful where a small business may sell off physical assets before selling business/good will.

16 Case study: 15 year exemption

17 Case study: 15 year exemption Kate, 61, is an owner of a small business company who is considering selling her share in the business and retiring. Kate owns 40% of the small business company s shares. She has owned the shares for 18 years. Shares were acquired for a cost base of $100k. Can now sell them for $800,000. Let s assume that Kate passes the MNAV Test so that she can claim the small business concessions

18 Case study: 15 year exemption Small business? Yes, passes the MNAV Test under $6m assets. Active asset? Yes, shares in a company, as long as the underlying assets of the company are 80% active assets. Have the assets been owned for 15 years? Yes, Kate has owned the assets for 18 years Is Kate over 55 and is selling the shares connected to her retirement? Yes, age 61 and she wants to sell shares as part of retirement plan. Retirement: Significant change and not necessarily permanent and lasting retirement

19 Case study: 15 year exemption Capital gain of $700k disregarded (from proceeds of $800k). No need to apply CGT 50% discount and previous year capital losses. Kate wants to maximise her contribution to her SMSF. CGT cap allows entire capital proceeds to be contributed outside of NCC cap. Cap is $1.355m can contribute entire capital proceeds via cap to SMSF. or Make a $540k NCC and $260k under CGT cap to preserve CGT cap for future use if required.

20 Case study: 15 year exemption What if the company sold an asset how can the 15 year exemption be claimed? Small business company sells a property for $500,000. What needs to be satisfied? Company must be a small business entity i.e. turnover below $2m Must have a significant individual for 15 years of total ownership period Does not need to be the same individual Individual that was the SI just before CGT event was over 55 and CGT event happened in connection with retirement; or Was permanently incapacitated at that time.

21 Case study: 15 year exemption Let s assume Kate s company meets the SBE test Kate has been a SI for the last 15 years She is a CGT concession stake holder as she has SBPP 40% (minimum required is 20%) The land is sold in connection with Kate retiring (i.e. company downsizing or winding up). Land sold for $500k how much can Kate get through 15 yaear exemption?

22 Case study: 15 year exemption Limited to CGT concession stakeholder's control percentage Control percentage Company or fixed trust: stakeholder s SBPP x exempt amount Discretionary trust = 100 Number of CGT concession stakeholders Kate SBPP = 40% $500k x 40% = $200,000 can be receive as an exempt amount What if company paid Kate $250,000? The extra $50,000 would be treated as an unfraked dividend

23 Case study: Retirement exemption

24 Case study: retirement exemption Kates, business partner David, who also owns 40% in the small business company. David is 53. He decides to sell his stake in the business as well. David bought the shares 10 years ago for $200,000. They are now worth $800,000. Let s assume that David passes the MNAV Test so that he can access the small business concessions

25 Case study: retirement exemption Small business? Yes, passes the MNAV Test under $6m assets. Active asset? Yes, shares in a company, as long as the underlying assets of the company are 80% active assets. Shares only owned for 10 years cannot access 15 year exemption, so will use the retirement exemption. Retirement exemption must be applied after CGT 50% discount and any previous year losses.

26 Application of the retirement exemption: Capital Gain $800k -$200k = $600k Capital losses $600k - $0 = $600k CGT 50% discount $600k x 50% = $300k Active Asset discount - Retirement exemption Disregard $300k gain

27 David is under 55, so he must make a personal contribution to super equal to disregarded amount Contribution to be made at later of: When you choose to use retirement exemption; or When you receive the proceeds Can choose exemption after receiving proceeds i.e. when filing tax return Can use capital proceeds for other purposes until choice is made and contribution is required. $300k exempt amount contributed via CGT cap Other amounts CGT discount portion ($300k) and cost base ($200k) can be contributed via NCC.

28 Case study: retirement exemption Planning point: using the retirement exemption in conjunction with the small business roll-over Small business roll-over can be used to defer the application of the retirement exemption by 2 years. Apply the retirement exemption to CGT event occurring at end of roll-over period No replacement asset/capital improvement in 2 years J5. Cost of replacement asset/capital improvement less than capital gain disregarded J6 Change of use of replacement asset/capital improved asset by end of replacement period J2 Do not need to satisfy basic conditions in Subdivision 152-A for J5 & J6: s (4) Cannot apply the active asset discount or CGT 50% discount to J2, J5 & J6 David could apply small business roll-over and apply retirement exemption when aged 56 no need to make contribution to superannuation fund.

29 Case study: Active Asset Discount

30 Case Study: active asset discount The key point in applying the active asset discount is that it is not compulsory to apply. Let s look at David s case: Capital Gain $800k -$200k = $600k Capital losses $600k - $0 = $600k CGT 50% discount $600k x 50% = $300k Active Asset discount - Capital Gain $800k -$200k = $600k Capital losses $600k - $0 = $600k CGT 50% discount $600k x 50% = $300k Active Asset discount $300k x 50% = $150k Retirement exemption Disregard $300k gain Retirement exemption Disregard $150k gain

31 Case study: active asset discount Without active asset discount greater amount excluded from non-concessional contributions via CGT cap amount Depends on age/contribution history/financial needs David s case with active asset discount $150k contribution via CGT cap $540k contribution via NCC bring forward $110k not contributed to super

32 Summary Don t forgot eligibility rules! CGT cap allows significant savings to be contributed to superannuation Be strategic in the use of the active asset discount Forward planning through transitioning to retirement can help maximise benefit of the CGT concessions

33 Disclaimer Jordan George, SPAA 2014 This presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.