You may have heard of a retirement exemption for small business owners retirees in Australia and are probably wondering how it works and how it could be of use to you.
Here’s a quick guide to help if you decide to make capital proceeds when you retire.
What is the small business retirement exemption?
Small businesses have several capital gains tax exemptions and concessions when selling active assets for a better market value. One of these concessions is the retirement exemption wherein you can transfer proceeds from the sale of your asset into your superfund.
You can choose retirement exemption if you’re not eligible for the 15-year exemption—the returns from the offer of a functioning resource possessed for at least 15 years if an individual is aged 55 or over and is resigning or permanently incapacitated. Even with the lifetime limit of 500 000, entrepreneurs can decide to disregard all or part of a capital gain under this exclusion.
For many owners, retirement exemption essentially acknowledges that their business is their retirement solution.
What are the requirements for retirement exemption?
These conditions should be met to be qualified. One of the basic conditions is that you must qualify to be a small business.
- Business asset must be used in a firmly associated business, or the business owner’s net assets must be less than 2 million.
- Must satisfy the maximum business asset value test
- Must keep a written record of the amount of capital proceeds that you choose to disregard
- If an individual is under 55, the proceeds from the sale must be deposited in a qualifying super fund, retirement savings account, or SMSF.
When do you choose to claim the exemption?
Compulsory contribution to super fund only applies if the significant individual is under 55 years old when making the required written ‘choice’ to apply for the retirement exemption.
The individual should sketch out the amount of the lifetime limit of 500 000 retirement exemption to be claimed. However, the choice election is separate to and distinct from the client’s income tax return.
How do you use the retirement exemption effectively?
There are no “basic conditions” when using retirement exemption, so how do you use it?
Learn about Capital Gains Tax (CGT) Retirement -Exemption Limit
The quantity of the capital gain you choose to ignore must not exceed your ‘CGT retirement exemption limit’ or the limit of each CGT concession stakeholder receiving a payment.
The lifetime CGT retirement exemption limit is $500 000, deducted by any previous CGT exempt amounts the individual has overlooked under the retirement exemption. This includes a sale disregarded under former retirement exemption provisions for a company or trust with eight CGT concession stakeholders, the limit of 500 000 capital gain for each.
A company or trust may determine the percentage of the exempt amount applicable to each stakeholder, respecting each stakeholder’s retirement exemption limit.
Learn about CGT event and the relationship with other CGT concessions
Learning about when a choice is made about which CGT concession works best will always be essential. More information about CGT concessions and small business CGT is always good, so here are some of those connections:
- You could use small business retirement exemption after using the 50% active asset reduction.
- You can turn down 50% active asset reduction and apply for the retirement exemption first.
- You may apply the retirement exemption where the level of a CGT asset has changed.
- The retirement exemption can be used when choosing a rollover but did not make a replacement asset at the end of the rollover phase.
Cons of Using the Small Business Retirement Exemption
Looking only at the pros will not help you use the retirement exemption effectively. For example, ignoring the amount of the capital gain you have selected as the CGT exempt amount will make it not qualify if the quantity of any capital gain surpasses the CGT exempt amount. With the conditions come consequences of using retirement exemption:
- Payments made to CGT concession stakeholder
If you’re a CGT concession stakeholder, a contribution you receive from a company or trust to satisfy the retirement exemption conditions is not measurable income and is not exempt.
- Interposed entities receiving or making payments
If you’re a corporation or trust obtaining payment that another business or trust made to fulfil the retirement exemption requirements, and you’re passing on that payment to a CGT concession stakeholder or another mediated entity when payment is made, it’s not included in your computable income and is not exempted income.
- Complying superannuation fund consequences
For instance, after 1 July 2007, if you pay a retirement exemption amount to a superannuation fund or RSA, the amount must generally be a non-concessional contribution. To dismiss the amount from your non-concessional payments cap and have it count towards your CGT cap amount instead, you inform the superannuation fund using the Capital gains tax cap election. You must finish this form at the Australian Taxation Office before the time you must make the contribution.
As you plan for your future and build your retirement life, at least one year or whether in two years or far into the future, use every tax, return or not, strategy possible to improve your situation. The small business retirement exemption can be a valuable tool for turning your company assets into super, all while managing your capital gains taxes well.
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