By Monica Rule

If you don’t know what you don’t know, then you may not know what you’re missing out on.

There are many ways SMSF trustees can get more money into their Self Managed Superannuation Funds (SMSF) beyond the $35,000 concessional contribution limit and $540,000 non-concessional contribution limit.  In fact small business owners can contribute an additional $500,000 or $1,395,000 into their SMSF without incurring any excess contribution tax or Capital Gains Tax.

If an SMSF member is a small business owner - where the net value of their business assets (including assets of entities connected with them) does not exceed $6 million; or if aggregated annual turnover of their business (including businesses that are connected to them) is less than $2 million, then there are tax concessions available if they sell an active asset.  An active asset is an asset that is used or held ready for use in the course of carrying on a business.  For example, commercial premises that the SMSF member owns and conducts their business from. 

The three main tax concessions that are available when selling a member’s business premises to their SMSF are referred to as:

(1) The 15-year exemption;
(2) The retirement exemption; and
(3) The 50% active asset reduction.

(1) 15-Year Exemption

Under the 15-year exemption, if a member has continuously owned their business premises for at least fifteen (15) years and they are at least fifty-five (55) years of age and selling the property because they are retiring from their employment, or because they have become permanently incapacitated, then they can sell their property to their SMSF and not have to pay Capital Gains Tax on the sale of the property.

If a member decides to contribute the sale proceeds from the sale of the property to their SMSF, the amount is also not counted towards their concessional or non-concessional contribution caps.  However, the member will need to complete a Tax Office form (NAT 71161) and make a Capital Gains Tax election, for the money to be instead counted towards the CGT cap of $1,395,000 (i.e. the limit for 2015/2016) in order for it not to count towards the contribution caps.  The election needs to be made no later than the day that the SMSF member is required to lodge their income tax return or thirty (30) days after the day they received the sale proceeds, whichever is later.

If an SMSF member is aged sixty five (65)  or older, then they will need to make sure that they meet the part time work test (i.e. worked 40 hours in 30 consecutive days) in order to contribute the sale proceeds into their SMSF.  The beauty about this concession is that it does not matter how much capital gains they make from the sale of the property.  The entire capital gain is disregarded.  In addition, if the member decides to contribute more than the $1,395,000 CGT limit, then any amount over this limit is counted towards their $180,000 or $540,000 non-concessional contribution cap.

(2) Retirement Exemption

The Retirement Exemption provides an SMSF member with a capital gain tax exemption of up to $500,000 lifetime limit if they qualify as a small business owner and sell an active asset.  Despite the name of this exemption, the member does not need to retire from their employment, cease business or be permanently incapacitated.  However, if an SMSF member is under the age of fifty five (55), then the law requires them to contribute the capital gains into their SMSF to qualify for the exemption.  Again, the money is counted towards the CGT cap of $500,000 (instead of the non-concessional contribution cap) as long as the SMSF member completes the necessary ATO election form (NAT 71161).

(3) 50% active asset reduction

The 50% active asset reduction provides a fifty (50) per cent reduction to a capital gain if the SMSF member qualifies as a small business owner and sells an active asset.  The capital gain that remains after applying any current year capital losses and any unapplied prior year net capital losses, and the normal CGT discount (if the asset has been held at lease twelve (12) months) is reduced by fifty (50) per cent.  This means, if you applied the normal CGT discount for assets held for at least twelve months and the 50% active asset reduction, the capital gain is effectively reduced by seven-five (75) per cent.  That is, the fifty (50) per cent of the whole capital gain and then a further fifty (50) per cent of the remaining capital gain.

For Gold or Platinum members please read on for examples of how to use the above two CGT exemptions.

Monica Rule is the author of the book “SMSFs and Properties” and “The Self Managed Super Handbook”– www.monicarule.com.au

Related Documents:

• Self Managed Superannuation Fund Deed
• Investment Strategy for Self Managed Super 14/15
• Commercial Lease
• Webinar - Tips and Traps for Property Investment in your SMSF