SMSFs, Business real property and the small business CGT cap

Clarke McEwan Accountants

Small business clients often want to transfer their business premises into their SMSF as an in-specie contribution to take advantage of the tax effective superannuation environment.

To facilitate the transfer, some clients have sought to utilise the CGT small business concessions and make an in-specie contribution to super using the lifetime CGT cap - simultaneously.

However, the ATO has indicated via a number of private binding rulings that in-specie contributions of active assets, such as business real property, may not qualify for the lifetime CGT cap where the in-specie super contribution is also the CGT event that qualifies for the small business CGT concessions.

As a result, a client's ability to access these valuable concessions may be impacted and careful planning is required to ensure they structure their contributions to meet these complex rules.

Lifetime CGT cap

When a small business owner disposes of an active asset, they may be eligible to disregard some or all of the capital gain resulting from the disposal under the CGT small business concessions. In addition, they may be able to contribute some or all of the sale proceeds to superannuation and elect for the contributions to count towards the lifetime CGT cap.

The lifetime CGT cap for 2018-19 is $1.48 million (indexed annually). Contributions that count against the lifetime CGT cap are neither concessional nor non-concessional contributions.

Broadly, to access the lifetime CGT cap it is necessary for an individual, company or trust to qualify for the 15-year exemption or the $500,000 retirement exemption.

The following table outlines the types of contributions that can be contributed under the lifetime CGT cap:

Contribution type	Amount that counts against lifetime CGT cap
Individual able to disregard capital gain under retirement exemption	Amount of capital gains disregarded under the retirement exemption (up to maximum of $500,000)
Individual able to disregard capital gain under the 15 year exemption	Amount of capital proceeds
Company or trust able to disregard capital gain under retirement exemption	Amount of payment to CGT concession stakeholder of their share of the exempt amount (up to maximum of $500,000)
Company or trust able to disregard capital gain under the 15 year exemption	Amount of payment received by CGT concession stakeholder of their share of capital proceeds

When making small business CGT contributions, depending on the circumstances, the contribution must be made within strict timeframes.

Case study - contribution under the lifetime CGT cap:

Matthew and Lily (both age 70) are farmers who have been running a primary production business for over 15 years. They run their business on a farm they own jointly which qualifies as a business real property.
They decide to retire and sell the farm for its market value of $1.4 million to a third party purchaser.
As Matthew and Lily meet all the basic conditions for small business CGT exemptions as well as the 15 year exemption, they can disregard any capital gains as a result of the sale.
Subject to satisfying the work test, they can then each contribute their share of the capital proceeds ($700,000) from the sale into superannuation under the lifetime CGT cap.

Note – this applies regardless of whether the value of Matthew and Lily's total superannuation balance at the end of the previous financial year exceeds $1.6m, as the contributions are not non-concessional contributions.

In-specie contributions and the lifetime CGT cap

In the Matthew and Lily example, the active asset of the farm was sold and a cash contribution made into superannuation under the lifetime CGT cap. However, the situation is more complex when the transaction involves an in-specie contribution.

For example, if Matthew and Lily transferred their farm into their SMSF as an in-specie contribution, they may not be able to qualify for the lifetime CGT cap as the super contribution is also the event that qualifies for the small business CGT concessions. That is, the ATO has indicated in a number of private rulings ^[1] , that the contributor is not able to utilise the lifetime CGT cap in the event of an in-specie transfer of an active asset into a SMSF, where the small business CGT exemption is applied for the same CGT event.

The Commissioner has stated that the legislation does not contemplate the CGT event, choice (if paid from a company or trust) and contribution of the CGT exempt amount all happening simultaneously. Therefore, the CGT event must occur before a contribution is made and not at the same time.

This view has important implications as in-specie contributions that do not count against the lifetime CGT cap will instead be treated as personal non-concessional contributions and count against the non-concessional cap (assuming the member does not claim a tax deduction for some or all of the contribution), which may result in excess non-concessional contributions.

Due to these issues, advisers should encourage clients to seek a private binding ruling if they are looking to utilise the lifetime CGT cap for an in-specie transfer where the small business CGT exemption is applied for the same CGT event.

Potential solutions

Below we outline three possible alternative strategies that achieve the goal of moving the asset into the SMSF, without the in-specie contribution issue outlined above applying.

SMSF purchasing active asset from client

The SMSF could purchase the active asset from the client (or their trust/company) where they have the required funds available. This achieves the goal of moving the asset into the SMSF, as well as providing cash proceeds to the client (or their company or trust) which can then be contributed to super under the lifetime CGT cap.

Coming back to the example of Matthew and Lily, if their SMSF had cash reserves of $1.4 million, the SMSF could purchase the farm from them. Matthew and Lily could then use the cash proceeds to make contributions under the lifetime CGT cap.

When implementing this strategy, there are a few important things to be mindful of:

A SMSF is only allowed to acquire certain assets from a related party ^[2] , e.g. business real property that's used wholly and exclusively in any business. Generally active assets other than business real property e.g. goodwill of a business, shares in a private company or units in a related trust, cannot be acquired ^[3] .
The purchase must be on arm's length terms and at market value. The SMSF may need to obtain an independent professional valuation to determine the sale price, refer to ATO's Valuation guideline for SMSFs

SMSF uses limited recourse borrowing arrangement (LRBA) to purchase active asset from client

In situations where the SMSF does not have the required funds available to purchase the active asset from the client, an alternative is for the SMSF to borrow the money via an LRBA to complete the purchase.

The cash sale proceeds could then be re-contributed to the fund under the lifetime CGT cap and used to extinguish the outstanding LRBA loan amount. However, it is important to note that this arrangement will incur additional costs as the fund will be required to establish a complying LRBA including the required bare trust arrangements.

Where a fund borrows from a related party, additional care needs to be exercised to ensure the loan complies with the safe harbour guidelines as specified in ATO PCG 2016/5. Otherwise the trustee will need to demonstrate that the loan is on arm's length terms – otherwise any income earned from the asset may be taxed as non-arm's length income.

In-specie contribution of an asset for a different small business CGT event

If a client is disposing of multiple active assets, they could consider triggering a CGT event in relation to one of those assets and then making an in-specie contribution under the CGT cap of a different asset in lieu of the capital proceeds they received.

For example, in ATO ID 2010/217, the ATO confirmed that where a taxpayer sold an asset that qualified for the $500,000 retirement exemption, the taxpayer could contribute a separate asset under the lifetime CGT cap in lieu of the cash proceeds actually received. This is important as it may allow a client to contribute an allowable asset via an in-specie transfer direct to their SMSF under the lifetime CGT cap.

Case study: Winston

Winston (aged 60) ran a successful real estate agent business for more than two decades and has now decided to sell his business and retire. The real estate business operated through a company structure. Winston owned 100% of the shares and the commercial premises. Details are as follows:

Asset	Owner	Ownership period	Cost base	Market value
Shares in SuperAgent Pty Ltd	Winston	20 years	$0	$600,000
Commercial office	Winston	10 years	$200,000	$800,000

Winston wants to sell his shares in the company, but retain ownership of the commercial office within his SMSF which will then be leased to the new business owner.

Sale of shares in the company (CGT event no.1)

Winston sold the shares in SuperAgent Pty Ltd to an unrelated purchaser for $600,000. As he meets the basic conditions for small business CGT exemptions and qualifies for the 15 year exemption, he can fully disregard any capital gains associated with the sale of these shares. He is also eligible to contribute the capital proceeds up to $600,000 into super under the lifetime CGT cap ^[4] .

Small business CGT contribution strategy

While Winston could use the cash proceeds from the sale of shares to make a contribution under the lifetime CGT cap he instead chooses to contribute his commercial office into his SMSF under the lifetime CGT cap instead – as per the scenario in ATO ID 2010/217.

In-specie transfer of commercial office (CGT event no.2)

When Winston in-specie transfers his business real property into his SMSF it will trigger an assessable capital gain of $600,000. However, as the commercial office qualifies for the 50% individual exemption the assessable gain is reduced to $300,000. Winston can then apply the $500,000 retirement concession to fully offset the remaining $300,000 assessable gain - assuming he skips the 50% active asset exemption.

In this case, Winston is then eligible to contribute an additional $300,000 under the lifetime CGT cap – being the amount of the gain offset by applying the retirement concession to the transfer of the commercial office to the SMSF. In this case, Winston could then use $300,000 of his original cash proceeds from the sale of the shares to contribute to super under the lifetime CGT cap.

Mixed contributions

In the above scenario, it is important to note the market value of the BRP ($800,000) contributed in lieu of the share sale proceeds exceeded their value ($600,000) by $200,000. Therefore, only $600,000 of the property can be contributed under lifetime CGT cap. However, as Winston is under 65 years of age (and hasn't previously triggered the bring forward provision) the additional $200,000 could be treated as a non-concessional contribution. He can then make additional non-concessional contributions of up to $100,000 under the bring forward rule.

Summary of contributions:

In-specie transfer of BRP valued at $800,000:
Cash contribution of $300,000:

The end result is that Winston could make total contributions of $900,000 under the lifetime CGT cap (relating to two separate CGT events) and a non-concessional contribution of $200,000. He also has the option of making a further non-concessional of $100,000 to maximise his NCC cap.

The following diagram illustrates the strategy:

Important note

The above example is for illustrative purposes and does not consider the application of the anti- avoidance measures in Part IVA of Tax Act. As this is a complex area of tax law, clients should seek advice from a registered tax agent or obtain a private binding ruling from the ATO before making any decisions relating to the sale of their active business asset, and in-specie transfer of business real property into their SMSF.

[1] Private ruling PBRs: 1013008906784; 1013054081138; 1013021531190; 1012862148885

[2] Section 66 of the SIS Act prohibits a SMSF from acquiring assets from a related party unless an exception applies. A related party is defined as: a member of the fund; a standard employer-sponsor of the fund; and a Part 8 associate of either of these two entities.

[3] Note – SMSFs can acquire units or shares in related companies and trusts under the 5% in-house exemption.

[4] CGT cap election form must be submitted at or before the time of contribution

Disclaimer: This article is not legal or personal financial advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every reasonable care has been taken in distributing this article, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information contained within it. Any views expressed are those of the author(s) and do not represent the views of Australian Unity Personal Financial Services Ltd. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Taxation Information in this document should not be relied upon without seeking specialist advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in October 2018. © Copyright 2018

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The one big, beautiful bill that may not be so beautiful for Aussies

By Clarke McEwan • July 2, 2025

Where are things at? Australian superannuation funds currently have about $400 billion invested in the US and tax concessions are currently available under existing tax treaties. This could change. A new bill, backed by the Trump administration and recently passed through the House of Representatives proposes higher taxes on countries seen to be discriminating against US businesses, including Australia. If the bill becomes law, Australian super funds could face higher taxes on US investments, directly affecting the long-term returns of super funds. The implications Even if you don’t have direct investments in the US, this matters. If your business is tied to superannuation funds or if you rely on consistent super returns for your retirement planning, changes like these can add pressure. It also adds a layer of uncertainty for Aussie businesses operating globally. As trade tensions rise and tax rules shift, doing business internationally becomes more complex and potentially more costly. Tax experts say these changes could override existing treaties between the US and Australia. And they’re not just aimed at big corporates, any individual or entity with US exposure could potentially be affected in some way. What’s being done? Industry groups including the Financial Services Council are calling on the Australian Government to step in and protect Australian investors through diplomatic and trade channels. Major super funds have already met with US lawmakers, reminding them that Australia is a significant source of capital for US markets and that strong partnerships go both ways. That said, this legislation is still working its way through Congress and faces pushback even from some Republicans. But as one US political expert said, ‘Bills that looked doomed have passed before.’ We live in hope but it’s not over yet. What can you do? Using John Howard’s barometer, for now we’re at the be alert but not alarmed stage. If you’re managing a business, planning your retirement, or investing overseas, this is a reminder of how global politics can impact your bottom line. Here’s what we recommend: • Stay informed. Tax rules can change quickly • Ensure your retirement planning is flexible enough to adjust if needed or talk to us to help you • Talk to us if you’ve got exposure to US investments, but you might need some input from a US tax specialist. There’s undoubtedly a bit to consider in the world of tax / finance at the moment, the environment’s changing at pace. You’re not alone in this though, as always please reach out if you have any questions and concerns. We’re here to help.

Trust funds: are they still worth the effort?

By Clarke McEwan • July 2, 2025

Is there a shift away from trusts? In recent years, we have noticed a slight trend of businesses transitioning from trust structures to corporate entities. This shift is largely due to increasing scrutiny on how trusts are used and the growing complexities involved in managing trusts, particularly when it comes to documentation and compliance requirements. Trustees and directors of trustee companies are realising that they need to devote more time and resources to ensure compliance with evolving and complex regulations. One of the primary challenges in utilising trusts for business purposes is the need for timely and accurate decision making. Trustees are normally required to make decisions about distributions by the end of the financial year to prevent the profits of the trust from being taxed at penalty rates. This timing can be problematic as it might not align with the availability of complete financial information, especially for businesses that are actively trading. This can lead to difficulties in making informed decisions regarding the distribution of trust income and to achieve optimal tax outcomes. The ATO has also intensified its focus on trust arrangements, especially when it comes to the use of integrity rules which have formed part of the tax system for many years, but haven’t tended to be applied all that often. The risk of making mistakes and being detected is probably higher than ever before. All’s not lost (we’re here to help) While the landscape around trusts is evolving and the scrutiny is high, this doesn’t mean that trust structures don’t still have their place. With the right support (support that we can provide in conjunction with other experts) trusts can still offer advantages that other structures can’t. They can still be a useful platform for passive investment activities, estate planning and as part of a business structure. This isn’t the time to give up on trusts. But it is important to seek advice before setting up a trust to make sure it is the most appropriate option and to fully understand the advantages, disadvantages and practical issues that will need to be managed when using a trust structure.

Finfluencers: bad tax advice could cost you

By Clarke McEwan • July 2, 2025

Finfluencers: bad tax advice could cost you Relying on this advice could not only leave you out of pocket but also expose you to ATO penalties, fines or in the worst case scenario - prosecution. What’s the problem? Many finfluencers make money by promoting financial products on behalf of companies, which means that they don’t necessarily have your best interests in mind when sharing information or insights. Finfluencers aren’t always qualified to provide advice on tax or financial products. You just can’t expect to receive solid, reliable or tailored guidance. Unfortunately, we’re seeing some influences share tax hacks that are either completely false or apply only in extremely limited situations. The ATO and some of the accounting professional bodies have sounded the alarm on some recent false claims, including: • Claiming your pet as a work related guard dog • Writing off luxury handbags as laptop bags • Deducting fuel costs without any documentation • Trying to claim swimwear as a work uniform These kinds of suggestions might sound plausible but following them could get you into serious trouble. The ATO uses sophisticated data matching tools to detect suspicious or inflated claims. If your deductions don’t meet the legal criteria, this could trigger an audit and if mistakes are found, the consequences can include: • An increased tax liability • Interest charges • Fines • A criminal record and in the most serious cases, imprisonment. Here’s how to stay safe and tax smart: • If it sounds too good to be true, it probably is. Dodgy deduction tips on social media are best ignored, at least until they can be verified. • Stick to trusted sources. For official tax guidance, visit ato.gov.au. • Don’t risk your business or personal reputation for a quick deduction. If you aren’t sure, please reach out to us and we can help you stay compliant, no filters or hashtags!

Important tax update: deductions for ATO interest charges scrapped

By Clarke McEwan • July 2, 2025

What are the interest charges? There are two main types of interest that are charged by the ATO. These are: • General Interest Charge (GIC) : This applies when you pay your tax liability late. The ATO applies GIC to encourage tax liabilities to be paid on time and ensure taxpayers who pay late don’t have an unfair advantage over taxpayers who pay on time. GIC is calculated on a daily compounding basis on the overdue amount. The GIC annual rate for the July – September 2025 quarter is 10.78%. • Shortfall Interest Charge (SIC) : This is applied when there is a shortfall in tax paid because of an amendment or correction to your tax assessment. SIC is also calculated on a daily compounding basis. The SIC annual rate for the July – September 2025 quarter is 6.78%. The ATO applies SIC to the tax shortfall amount for the period between when it would have been due and when the assessment is corrected. What’s changing? Historically, both GIC and SIC amounts could be claimed as a deduction. This has meant that the net after-tax cost of the interest charges has been reduced for taxpayers who have a positive income tax liability for the relevant income year. However, the Government has passed legislation to ensure that GIC and SIC amounts incurred on or after 1 July 2025 are no longer deductible, even if the interest relates to a tax debt that arose before this date. As these interest charges are no longer deductible, this means that the after-tax impact of the charges is higher for many taxpayers. The impact becomes greater as your tax rate increases. For example, let’s take a look at two individuals who have the same level of tax debt owed to the ATO and the same level of tax debt owed to the ATO and the same GIC liability of $1,000 for a particular income year: • Sally is a high income earner and subject to a 45% marginal tax rate (ignoring the Medicare levy). Under the old rules the net cost of the interest charge was only $550 because she could claim a deduction for the GIC amount and this reduced her income tax liability by $450. Under the new rules no deduction is available and the full cost to Sally will be $1,000. • Adam is subject to a 30% marginal tax rate (again, ignoring the Medicare levy). Under the old rules the net cost of the interest charge was $700 because he could reduce his income tax liability by $300 by claiming a deduction for the GIC amount. As with Sally, under the new rules no deduction is available for the GIC and the full cost to Adam is $1,000. What can I do to minimise the impact of this change? The simple answer is to pay down ATO debt as quickly as possible. As you can see, the GIC rate is relatively high and continues to accrue on a daily basis until the debt is paid off. The faster you can pay off that debt, the lower the interest charges that will accrue. If you can’t afford to pay off your ATO debt in the short term then you might want to explore other options, including whether you would be better off borrowing money from another source at a lower interest rate to pay off the ATO debt. In some cases it is possible to claim a deduction for interest accruing on a loan that is used to pay tax debts, although this is normally only possible if the debt arose from business activities. It isn’t normally possible to claim a deduction for interest accruing on a loan that is used to pay a tax debt that arose from investment or employment activities. While the ATO will sometimes allow taxpayers to enter into a payment plan so that tax debts can be paid through instalments, tax debts that are subject to a payment plan still accrue GIC. On a more proactive basis, a better option is to plan ahead to ensure that upcoming tax payments can be made on time. This will sometimes mean setting aside funds regularly for tax instalments, GST, PAYG withholding and other amounts that need to be paid to the ATO. Keeping these amounts separate will help to ensure you’re ready when the ATO bill arrives. If you're currently carrying tax debt or need help staying ahead of your obligations, we're here to help. Let’s work together on a strategy that keeps you compliant and protects your bottom line.

Div 296 super tax and practical things to consider

By Clarke McEwan • July 2, 2025

How does it work? While we are waiting to see whether the measure will become law, let’s assume for the moment that the Government passes legislation which is consistent with the Government’s announcements to date. If so: • If your TSB is over $3 million at 30 June, a portion of your annual superannuation earnings above that threshold will be taxed at an additional 15%. • The tax is assessed to you personally and can be paid from your super or your own funds. • Superannuation earnings for this purpose reflect the increase in your net super balance for the year, adjusted for certain contributions (eg, inheritance via death benefit pension) and withdrawals. • Some exclusions apply: children on super pensions, structured settlements (personal injury), and the deceased. It is important to remember that your TSB is the aggregate of all Australian superannuation interests (including balances with APRA funds, SMSFs and defined benefit schemes) held at the end of the income year. If the start date is 1 July 2025, then the first test date will be 30 June 2026. An individual’s TSB at this date, and each following 30 June, will determine whether they will have a Division 296 tax liability for that income year. Only where the individual has a TSB on 30 June in excess of $3 million will they have a Division 296 tax liability for that income year. Examples Sam’s account • 30 June super balance: $4 million. • Annual growth: $120,000. • Portion above $3m: ($4m–$3m)/$4m = 25% • Taxable earnings: $120,000 x 25% = $30,000 • Extra tax: $30,000 x 15% = $4,500 Lisa’s inheritance • Lisa’s balance rises from $2m to $4.5m after receiving a death benefit pension. • Only new investment growth (not the transferred amount) is taxed as earnings, but a total balance over $3m means she may still have a liability. What can you do? • Review your super fund liquidity and cashflow planning for future tax payments • Ensure your asset valuations are up to date • Estimate your combined super balances and plan for any large transactions • Document asset values, especially for SMSF members • Seek tailored professional advice before making any changes While we are waiting to see whether the legislation passes through Parliament and whether any significant amendments or adjustments are made to the proposed measures, if you have any questions or concerns around this in the meantime, reach out – we’re here to help.

Leveraging Xero for Medical Practices: The Importance of Monthly Bank Reconciliation

By Clarke McEwan • June 12, 2025

Leveraging Xero for Medical Practices: The Importance of Monthly Bank Reconciliation In the evolving world of financial management, the use of cloud-based accounting software like Xero has transformed how businesses, including medical practices, handle their finances. For healthcare providers in Australia, maintaining accurate financial records is crucial, not only for compliance but also for ensuring business efficiency and growth. One of the fundamental accounting processes that support this is regular bank reconciliation. Why Choose Xero for Your Medical Practice? Xero is a user-friendly, cloud-based accounting software designed to simplify day-to-day financial operations. Here are some key reasons why medical practices are increasingly adopting Xero: Streamlined Billing and Invoicing : Xero allows for easy creation and management of invoices, ensuring that patients are billed correctly and efficiently. Real-Time Financial Overview : With Xero, you can access your financial data anytime, anywhere, providing you with a real-time snapshot of your practice's financial health. Integration with Other Systems : Xero integrates seamlessly with a plethora of healthcare management systems, reducing manual data entry and enabling smooth workflow. Efficient Payroll Handling : Automate payroll processing within your practice, helping you manage employee payments and relevant compliance efficiently. The Significance of Regular Bank Reconciliation Bank reconciliation is the process of aligning the records in your practice's accounting system with the corresponding information on your bank statement to ensure both sets of records are accurate. Here’s why doing this every month is vital: 1. Error Detection and Correction Bank reconciliation allows you to spot any discrepancies between your records and the bank's data. This includes identifying double payments, missed transactions, or bank errors that could cost your practice a significant amount if left unchecked. 2. Fraud Prevention By regularly reconciling your accounts, you create an opportunity to detect early signs of fraudulent activity or unauthorized transactions, safeguarding your practice’s funds. 3. Cash Flow Management Accurate reconciliation ensures that your cash flow statement reflects the true financial state of your practice, helping you plan for any financial commitments and investments with confidence. 4. Compliance and Reporting Regular reconciliation ensures your financial statements are accurate, facilitating smoother tax filing and adherence to Australian financial regulations. 5. Financial Decision-Making When reconciled correctly, your financial data becomes a reliable foundation for making strategic business decisions, such as expanding your practice or acquiring new equipment. Incorporating Xero into Your Routine To maximize the benefits of Xero for your medical practice: Schedule Monthly Reconciliation : Set aside dedicated time each month to complete your bank reconciliations without fail. Leverage Automation : Use Xero’s bank feeds to automate transaction imports, which makes the matching and reconciliation process quicker and more efficient. Stay Informed : Regularly review reports generated by Xero to keep abreast of your practice’s financial performance and trends. Consult with Professionals : Collaborate with your accountant or financial advisor to ensure that your reconciliation processes are optimized and aligned with best practices. In conclusion, adopting Xero and maintaining regular bank reconciliations in your medical practice are not merely about staying compliant; they are essential components of robust financial management. They ensure your practice operates smoothly and is prepared for growth, making them indispensable tools in today’s healthcare landscape. Discover how our accounting services can further enhance your financial management processes. Get in touch with us today for tailored solutions to meet the unique needs of your medical practice. To arrange a no obligation meeting please use the link here