With the significantly reduced contribution caps that apply from 1 July 2017, it is more important than ever to ensure we are using all possible contribution caps.
One cap that is commonly overlooked is the CGT cap. The CGT cap allows the contribution into superannuation of some of the proceeds of sale of active business assets, in addition to concessional and non-concessional contribution caps.
The CGT cap is available for the amount that is:
- exempt under the small business retirement exemption; or
- the proceeds of sale where the small business 15-year exemption is claimed.
The CGT cap can also be used on the sale of pre-CGT assets where those concessions would apply if the asset had been a post-CGT asset.
There is a lifetime cap for each member for the amount that can be contributed using this cap. For the 2017/18 year the cap is $1.455 million.
As a starting point, it is important to ensure the conditions for the relevant small business CGT concession are satisfied. These are very technical and not easy to apply, and it is easy to not qualify. If the relevant small business CGT concession is not available and a contribution is made using the CGT cap, then the contribution will count towards the concessional or non-concessional cap, which could result in an excess.
To access the CGT cap for a contribution, one condition that is easy to overlook is that the member must give a notice to the trustee of the fund before the contribution is made in the prescribed form. There are also time limits within which the contribution must be made. If the right notice is not given to the right fund at the right time and in the right form, the CGT cap is not available for the contribution.
The limit on accepting contributions where a member’s total superannuation balance exceeds $1.6 million does not apply to CGT cap contributions. This means that a member can make a CGT cap contribution regardless of their existing superannuation balance. This also means that, where a CGT cap contribution results in a member balance exceeding $1.6 million, any non-concessional contributions must be made before the end of the financial year. From the next 1 July, the member will have a zero non-concessional contributions cap and cannot make further non-concessional contributions (unless their member balance drops below $1.6 million).
The age-based contribution limits still apply to a CGT cap contribution though – the member must be under 65, or 65 to 75 and satisfy the work test.
If, for example, James sells assets and can apply the small business retirement exemption for $500,000 of the capital gain, he can contribute that to his superannuation fund under the CGT cap. If he satisfies all the conditions, it does not count towards his non-concessional contribution cap and his total superannuation balance before the contribution does not disqualify him from making the contribution. James must be under 65, or satisfy the work test if he is between 65 and 75.
The CGT cap provides an opportunity to put a significant additional amount into superannuation, and it is important to be aware when it will be available given the new limits on contribution caps.
If you would like any more information on this, please contact a member of our superannuation or tax team.