Retirement for small business owners is not simply a case of handing in your resignation letter and having a big party at which the company presents you with a gold watch.

It often involves the not inconsiderable task of selling your business—particularly if there is no ‘heir apparent’ to take over the reins. And then there is the whole question of Capital Gains Tax (CGT) once you have actually managed to sell.

Fortunately, there is relief at hand—if you and your business meet certain criteria.

Normally you would pay CGT on the difference between the base cost (the amount that you put in to establish the business, plus additional contributions made by you over the years), and the proceeds (the price at which you sold the business).

If you have no other capital gains during the year, only R40,000 of the capital gain will be exempt from CGT.  However, if you are selling the business in contemplation of retirement, Paragraph 57 of the Eighth Schedule to the Income Tax Act (which deals with CGT) provides that this exemption is increased to R1.8 million in respect of capital gains made from the sale of the business.

Note that this R1.8 million is a lifetime exemption—it is therefore cumulative, and not in respect of each business or business asset disposed of.

To qualify for the increased exemption, the following criteria need to be met:

• You must be over the age of 55 or must be selling as a result of ill-health or other infirmity.
• If you have died and your executor sells the business as part of winding up your estate, the exemption also applies.
• The value of business assets may not exceed R10 million at the time of sale.
• If the business is housed in a private company or close corporation, you must hold at least 10% of the shares or members’ interest (whichever the case may be).
• You must dispose of your entire share of the business assets (in the case of a sole proprietor or partnership), or your entire shareholding or members’ interest (in the case of a private company or close corporation).
• If you own or have interest in more than one business, the total assets of all businesses owned by you may not exceed R10 million.
• You must have been substantially involved with the day-to-day operations of the business.
• You must have held this interest for a continuous period of five years or more prior to the disposal.
• If the business is not sold for cash, and deferred repayment terms are granted, all payments must have been received within 24 months of the sale of the business.

Other retirement benefits

In addition to the value of your business, you may have invested in other vehicles over the years to provide for your retirement.

For example, you may have taken out a retirement annuity—a popular retirement funding vehicle for small business owners—or your business may have established a pension or provident fund for the benefit of employees, in which you as owner had also participated.

The good news is that these benefits are specifically excluded from CGT in terms of Paragraph 54 of the Eighth Schedule, provided that you have retired from these funds in accordance with the rules thereof. In addition to this exemption, Paragraph 55 provides that benefits from long-term life insurance policies are also exempt from CGT, provided that the person who receives the benefit is the owner thereof, their spouse, dependent or nominee, or the former spouse who acquired the policy as a consequence of divorce.

So-called ‘keyperson’ policies, or policies taken out with the specific purpose of buying out a fellow partner, shareholder, or member upon your death, disability, or severe illness, also qualify for exemption from CGT, provided that none of the premiums were paid by the deceased person.

These benefits are exempt from CGT irrespective of the size of business involved, i.e. your business does not have to qualify under the ‘small business’ rules for these benefits to be exempt.

Written by Steven Jones

Steven Jones is a registered SARS tax practitioner.

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