Transforming Business Capital into Superannuation: Your Path to a TaxFree Retirement
If you're selling your business to retire, you can convert your business capital into superannuation, gaining tax-free retirement benefits. By leveraging the capital gains tax CGT small business concessions, you can minimise tax liabilities and maximise contributions to your superannuation. This powerful strategy allows you to turn your business proceeds into retirement income within the tax-advantaged super system.
How the Strategy Works
To utilise this strategy, you need to sell active business assets and meet specific eligibility criteria. Active assets include land and buildings used in your business and, in some cases, shares in the company. Two key CGT concessions can help:
-
15-Year CGT Exemption Eligibility: Hold the active business asset for at least 15 years and meet retirement or age criteria e.g., over 55 and retiring. Benefit: Disregard capital gains on the sale of the asset. Super Contribution: Contribute up to $1.78 million into super under the CGT cap.
-
CGT Retirement Exemption Eligibility: For assets held less than 15 years or if other criteria apply. Benefit: Disregard up to $500,000 of capital gains. Super Contribution: Invest up to $500,000 of exempt gains into super under the CGT cap.
Key Considerations
- CGT Cap Election Form: To count contributions towards the CGT cap, you must submit a CGT cap election form to your super fund before or at the time of the contribution.
- Age Restrictions: If under 55, amounts claimed under the CGT retirement exemption must be contributed to super to qualify for the concession. Withdrawals will be restricted until a condition of release is met.
- Retirement Phase Pension: If you meet the conditions to access your super, you can start a retirement phase income stream, allowing tax-free payments to fund living expenses.
Strategic Steps to Maximise Benefits
- Assess Eligibility: Consult a registered tax agent to determine your eligibility for small business CGT concessions and the appropriate strategy for claiming them.
- Maximise Super Contributions: Combine the CGT cap with non-concessional contributions to maximise amounts contributed to super.
- Coordinate Contributions and Caps: Plan contributions to avoid exceeding contribution caps and incurring penalties.
- Review Estate Plans: Update estate plans to reflect changes in assets and super balances.
Case Study: Ruths Retirement Strategy
Scenario: Ruth, aged 64, sells her business after 10 years for $560,000, realising a capital gain of $400,000.
Strategy: Her tax agent determines she qualifies for a 50% general CGT discount, reducing her gain to $200,000. She then uses the CGT retirement exemption, eliminating her taxable gain. Her financial adviser recommends contributing $200,000 under the CGT cap and adding $360,000 using the bring-forward rule for non-concessional contributions, totalling $560,000 into super.
Outcome: Ruth transitions her entire sale proceeds into a tax-advantaged super account and commences a retirement phase pension, enabling tax-free income.
