Presented by Keat Chew

Head of Technical Services

netwealth Educational Series

Small business CGT &

SuperWhat you cannot afford to ignore

about this complex area

Outline

• Selling a small business

• Small business CGT exemption conditions

• Types of exemptions and conditions

• Interaction with super and CGT cap

• Business planning ahead

Your business, your super

• Cashflows tied up in their business

• Requires planning to maximise sale & cashflows

• Tax considerations

• Planning exit (& retirement & estate planning)

• Small business CGT changes have improved

access to exemptions

• Business to super- want to make sure not too late

• Make sure use up NCC, CC - importantly CGT

cap

Business structures

• Individual business easiest to deal with

• Structures can cause repatriation problems:

• Extra level to deal with

• More conditions - whether satisfy requirements

• Accessing cashflows without tax implications

• Selling shares in company (provided meet 80% test)

generally better than company selling business

Selling shares vs. business

• Jim aged 59 owns all shares in ABC Pty Ltd, established

8 years ago

• Business to be sold for $2m (all gain), conditions for

exemption met

• Company sells business

• $1m exempt under small business 50% active asset discount**

• Another $500k CGT retirement exemption to super

• Balance $500k taxable gain to company

** problem with repatriating proceeds effectively

• Jim sells company shares

• $1m exempt under general individual 50% discount

• Another $500k exempt under small business 50% discount

• Last $500k exempt under CGT retirement exemption

Small business CGT concessions

• 15 year exemption**

• 50% active asset reduction

• Retirement exemption**

• Small business roll-over

* 50% discount still available for individuals

** concessions that can extend super contribution

*** to access exemption, must meet basic conditions and specific

concession conditions

Small business CGT concessions - basic

conditions

• CGT event resulted in a gain

• Asset must be active asset

• Small business entity or satisfy maximum net

asset value test

• If CGT asset is a share in a company or interest

in a trust:• and if individual claiming, must be CGT concession stakeholder

or

• if CGT share/interest held by a company/trust, CGT concession

stakeholders in the holding trust together have a small business

participation >= 90% (only interposed entity) in the

shares/interests in the company/trust making the capital gain

Active asset

• Owned by entity and used in the course of carrying on a

business

• By entity, connected entity, spouse, child or affiliate

• Intangibles connected with business e.g. goodwill

• No longer need to be active just before CGT event

• Needs to be active for lesser of 7.5yrs or half period of

ownership

• Shares in company/interest in trust - active asset?

• Look through, mv of active assets represent > 80% all assets

(for at least half of ownership period for shares/interest)

• Cash & financial instruments active if inherently connected with

business

• If passed 80% before, unless significant change,

can still treat as active

Maximum net asset value

• Maximum net asset value (market value) < $6m

• CGT assets of yours, connected (controlled)

entities and business affiliates (spouse and child)

• Net asset value: MV-liabilities/provisions

• Main asset exclusions:

• Home (unless income producing)

• Superannuation assets

• Personal used assets

Small business entity (SBE)

• If >$6m net assets, look at turnover

• Aggregated turnover (connected entities)<$2m

• Will need to work with accountant to confirm SBE

status

• Previous year T/O <$2m, then SBE for current year

• Estimate current year <$2m, only possible if one of two

previous years <$2m

• Actual current year <$2m

CGT concession stakeholder

• Only relevant if disposed asset is a share in company or

interest in trust

• To be a CGT concession stakeholder:

• Must be significant individual (SI) or

• Spouse of SI with small business participation %

• To be SI must have participation percentage of >= 20%

• 20% can be direct and indirect

• Company - % voting/dividend/capital entitlement

• Trust

• Where entitled, % of entitlement

• Where discretionary, % distribution of income and capital during

the year - if no dist, no SI

Example 1 – significant individual

Trading Company

Family Trust

90% owned by trust

Mr JonesDirect: 10%

Indirect:9%

Total: 19%

Not Significant Individual

(but is CGT CS)

Mrs JonesDirect: 0%

Indirect: 72%

Total: 72%

Significant individual

(CGT CS)

10% distribution

10% distribution

80% distribution

(spouse)

10% owned

Mr SmithDirect: 0%

Indirect: 9.0%

Total: 9.0%

Not significant

individual

15 year exemption

• Must satisfy basic conditions

• Individual, continuously own asset for 15 years and retiring

after age 55 or permanently incapacitated at time CGT event

• Individual, own shares/interest in trust for 15 years, there

must be a SI during the period (not necessary same SI) and

retiring as above

• Company, own asset for 15 years, must have SI for that

period of time

• Entities must pay individual within 2 years of CGT event,

payment (participation %) will be tax free

• Gain fully exempt

• Capital losses (current year or prior) not affected

50% active asset reduction

• Must satisfy basic conditions

• Can elect not to have the 50% active asset reduction

• More gain absorbed by retirement exemption

• E.g. individual sells business $1m (all gain)

Scenario 1 - no election, $500k tax free individual 50% discount

• $250k tax free under 50% active asset reduction

• $250k remaining tax free and ‘rollover’ to super: retirement

exemption

Scenario 2 - election for active asset reduction not to apply

• $500k tax free individual 50% discount

• $500k remaining tax free and ‘rollover’ to super: retirement

exemption

Retirement exemption

• Must satisfy basic conditions

• Lifetime limit of $500,000 (2 stakeholders e.g. husband &

wife- $1m!)

• < age 55 need to pay into super, relevant time is when

choice (in writing) is made i.e. tax return time

• If = or > age 55, choice of cash or contribution

• No need to receive actual proceeds, can be gifted (e.g.

farmer) and MV substitution rule applies

• If company or trust:

• No need for actual termination of employment- deemed payment

• Company/trust must make a payment of the amount to at least one

of its concession stakeholder

Small business roll-over

• Must satisfy basic conditions

• Can now choose to roll over all or part of gain

• Reduces cost base of new asset by the gain

• Replacement asset can be newly acquired asset

or improvements to assets owned

• Can choose to roll-over gain before acquiring

new asset

Estate planning & CGT exemption

• LPR or beneficiary can access exemption:

• Deceased able to meet conditions before death

• Disposal of asset within 2 years of death

• ATO can possibly extend

• Retirement exemption, no need to pay to super

• Even if beneficiaries < 55

• 15 year exemption, no need to satisfy

• Retirement after age 55

What can be contributed - CGT cap

• Not all small business CGT exemption proceeds

can be contributed, look out for:

• $500,000 small business CGT retirement

• Capital proceeds from 15 year exemption

• Qualify for 15 year exemption but:

• No gain no loss situation

• Pre CGT asset

• Disposed <15 years because of permanent incapacity

Small business CGT cap

• CGT exempt amount

• Forms tax free component, for lump sums and income

streams

• No contribution tax

• CGT cap

• Your CGT cap (or reduced) is indexed annually

• Lifetime limit of $1,315m (2013/14), $1.355m (2014/15)

• Must notify provider before or when contribution is

made, approved ATO form (CGT caps election form)

• CGT cap is reduced by amount of previously elected

contribution

Contribution conditions

• CGT exempt amounts are considered

contributions not rollovers

• Work test requirements-APRA Circular 1.A.1

• Business owners will have to satisfy work test if

over age 65….so don’t leave it too late

Conclusions

• Baby boomers selling out businesses

• Proceeds need to be reinvested

• Maximise after tax amount on selling through

exemptions

• CGT exemption rules will also help to get

proceeds into Super

• Planning in advance will help the process

• Knowing these complex rules will help minimise

tax and maximise amount to super

• Their business, their super

About netwealth

netwealth Investments Limited (netwealth) is an independent, unlisted public company

that entered the market in 2002 to provide a wide range of financial products to Australian

investors and the financial planning industry.

netwealth is a member of the Heine Brothers Group, a privately owned organisation that

originated in Europe in 1865. The group has a long history in international trade and

finance. In 1945 Australian operations commenced and the Heine Brothers Group

became a major trading house dealing in commodities and bulk raw materials throughout

the world. The group expanded its activities from international trade into finance, property

development and investment.

In 1982 Heine entered the Funds Management industry managing a broad range of

investment products including listed and unlisted property, superannuation and unit

trusts. Heine Management Limited, an ASX listed company, was acquired by ING in

October 1999 for more than $110 million. Funds under management at that time

exceeded $2.75b.

netwealth continues the Heine tradition as a strong, innovative, and profitable financial

services organisation focused on building strong relationships with investors and

investment professionals.

Disclaimer – For Financial Adviser use

only

This adviser communication has been prepared and issued by netwealth Investments

Limited (netwealth), ABN 85 090 569 109, AFS Licence No. 230975 and Financial

Planning Services Australia Pty Ltd (FPSA), ABN 55 010 521 810, AFS Licence No.

225982. This communication is intended for financial adviser use only. It contains factual

information and general financial product advice only and has been prepared without

taking into account your or your client’s individual objectives, financial situation and

needs. The information in this newsletter is not intended to be a substitute for

professional financial product advice and you and your clients should determine its

appropriateness having regard to your or your client’s particular circumstances. The

relevant disclosure document should be obtained before deciding whether to acquire,

dispose of, or to continue to hold, an investment in a netwealth product.

While all care has been taken in the preparation of this document (using sources believed

to be reliable and accurate), no person, including netwealth, FPSA or any other member

of the netwealth group of companies, accepts responsibility for any loss suffered by any

person arising from reliance on this information.