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Risks abound in small business CGT exemption


Trustees looking to contribute proceeds of the sale of their business into their SMSF should be aware of the risks, given the ATO’s strong track record of winning cases against small business owners who fall foul of the rules, according to SMSF Alliance.

By Sarah Kendell 8 minute read

In a recent email to clients, the SMSF administrator’s principal, David Busoli, said the rules were extremely strict and in some cases difficult to prove for businesses looking to use the 15-year CGT exemption to make an additional lump sum contribution to super over and above their total super balance.

“Apart from the obvious qualification requirements — over 55 and either small business and relevant assets of less than $6 million or turnover of less than $2 million — there is also the need to prove that ownership requirements have been satisfied for at least the last 15 years,” Mr Busoli said.

“If you take the exemption, you have an extremely high probability of incurring an ATO audit, so make sure that you have your files in perfect order.”

Mr Busoli said the temptation to make a contribution of up to $1.515 million may not be worth the risk, given if the rules were not adhered to properly before the contribution was made, the SMSF would have received a significantly excessive non-concessional contribution and have lost the ability to look at other contribution types.

“There have been 12 cases on the $6 million net asset value test alone and the ATO has won 10 of them,” he said.

Mr Busoli said a good alternative was the retirement exemption which allowed SMSF members to contribute lesser amounts from the sale of business assets that were still CGT-exempt.

“If we assume the realised active asset is $2 million in goodwill to be distributed between a husband and wife, the capital gain is $1 million each. The retirement exemption allows a 50 per cent discount on the gain, so each party’s share will be reduced to $500,000, which may be contributed to super,” he said.

“The amount of the sale proceeds that could be contributed to super is far less for the retirement exemption than it is for the 15-year exemption, but the risk of failing an ATO audit is significantly reduced.”

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