Convert business capital into tax-free retirement benefits

If you are a small business owner, you may one day sell your business and retire on the proceeds. As a result, you may not have contributed much to superannuation, preferring instead to plough profits back into your business. This makes good sense, but for one thing - capital gains tax (CGT). The more tax you pay, the less you have for retirement.

However, there is a way you can be exempt from CGT when you retire and also use your capital to take full advantage of the super system. By claiming the CGT Retirement Exemption, a small business owner can elect to receive up to $500,000 tax-free when disposing of active business assets.

Note: active business assets can include assets such as plant and equipment, but not 'passive' assets such as shares.

If you are under age 55, you must roll over the proceeds to a super or rollover fund in order to gain the tax exemption; otherwise you can take the proceeds as cash or use them to purchase a tax-effective income stream, such as an allocated pension.

How does the strategy work?

To use this strategy, your net income-producing assets (excluding super) must be less than $5 million and your business must be operated as a sole trader, partnership, private company or private trust. When you retire, you must elect for the CGT Retirement Exemption to apply on or before the lodgement of your annual tax return for the year in which you dispose of your business assets. The amount claimed is called the 'CGT Exempt component'.

The Benefits

Apart from eliminating an otherwise taxable capital gain on disposal of your active business assets, this strategy enables you to convert business assets into superannuation assets. In a super fund, the CGT Exempt component is:

• Tax-free when rolled into a super fund (no contributions tax or surcharge)

• Tax-free when taken in cash (provided benefits are not 'excessive'), and

• Tax-free when received as part of a retirement income stream.