Selling a business or even just its assets can result in a substantial Capital Gains Tax (CGT) liability. For many small business owners, this tax can significantly reduce the financial benefit of years of hard work.
Fortunately, Australian tax law offers four major CGT concessions specifically designed to help eligible small businesses minimise or completely eliminate this tax. Understanding how these concessions work, along with the criteria you must meet to qualify, is essential for strategic tax planning and maximising the final return from your business sale.
Understanding CGT for Small Business Owners
Capital Gains Tax applies when a business owner disposes of an asset and makes a profit from the sale. This may include selling the business itself, goodwill, equipment, or other assets. The amount of CGT payable depends on how long the asset was held and whether the business meets specific small business eligibility requirements.
Fortunately, small business concessions can dramatically lower this tax -or remove it altogether, if applied correctly.
Eligibility Requirements for Small Business CGT Concessions
Before you can access any of the small business CGT concessions, you must first satisfy the basic eligibility conditions. Importantly, depreciating assets do not meet these conditions.
Depreciating Assets and CGT Concessions
Depreciating assets are excluded because:
- Under the uniform capital allowance system, any profit or loss on a depreciating asset used for business purposes is treated as ordinary income or a deductible balancing adjustment. Since the gain is included directly in your assessable income, small business CGT concessions do not apply.
- If part of the asset’s use was for private (non-taxable) purposes, any capital gain arising from that private-use portion also does not qualify for the concessions, as it does not relate to business activity.
Aside from the small business 50% active asset reduction, all CGT concessions have additional specific requirements.
Step 1: Determine if You Are an Eligible Entity
You must fall into one of the following categories:
- A CGT small business entity with aggregated turnover of less than $2 million.
- An individual not running a business, but holding an asset that is used in the business of an affiliate or connected entity (passively held assets).
- A partner in a partnership that is a small business entity, where the relevant asset is:
- an interest in a partnership asset, or
- an asset you personally own (not a partnership interest) but which is used in the partnership’s business.
- An entity that meets the maximum net asset value test.
Step 2: The Asset Must Be an Active Asset
To qualify, the asset must pass the active asset test, meaning it must be used, or held ready for use in the course of carrying on a business for a required minimum period.
Step 3: Additional Rules for Shares or Trust Interests
If the asset is a share in a company or an interest in a trust, you must also meet additional ownership and control conditions to access the CGT concessions.
Step 4: CGT Events Involving Partnerships
This step applies to CGT events occurring after 7:30 pm AEDT on 8 May 2018 involving the creation, transfer, change or ending of rights to:
- income or capital of a partnership, or
- an amount calculated by reference to a partner’s entitlement to partnership income or capital.
If the CGT event ends your right or interest, you must have held a membership interest in the partnership immediately before the event.
For all other events, you must hold a membership interest immediately after the CGT event.
To access the small business CGT concessions, you must first be an eligible entity, dispose of an active asset, and satisfy any additional requirements relating to shares, trusts, or partnerships. Depreciating assets are excluded, as gains from them are taxed under separate rules. Ensuring you meet all eligibility conditions is essential before applying any of the small business CGT concessions
The Four Key Small Business CGT Concessions
- Small Business 15-Year Exemption
If your business has owned an asset for at least 15 years and you are retiring or permanently incapacitated, you may be able to disregard the entire capital gain. This is one of the most generous concessions available and can enable eligible business owners to sell tax-free.
- Small Business 50% Active Asset Reduction
This concession allows you to reduce the capital gain on an active business asset by 50%. Combined with the general 50% CGT discount available to individuals and trusts (for assets held longer than 12 months), it can result in significant tax savings.
- Small Business Retirement Exemption
Under this concession, business owners may be able to disregard up to $500,000 of capital gains over their lifetime. Owners under 55 must contribute the exempt amount into a complying superannuation fund, offering both tax relief and retirement planning benefits.
- Small Business Rollover
Instead of paying CGT immediately, you may defer all or part of the gain for up to two years -or even longer if you acquire a replacement asset or improve an existing one. This is especially useful for owners who reinvest in a new business or restructure their operations.
Eligibility Requirements: What You Must Meet
To access these concessions, your business must generally satisfy the Small Business CGT conditions, which include:
- Meeting the $2 million turnover test or the $6 million maximum net asset value test
- Ensuring the asset is an active asset used in the business
- Satisfying additional criteria for each specific concession
Because the rules can be complex, business owners should seek advice early -ideally well before selling to ensure their structure and circumstances align with the eligibility guidelines.
Conclusion
The Australian small business CGT concessions can provide powerful tax advantages when selling a business or its assets. By understanding the four major concessions and ensuring your business meets the relevant conditions, you can significantly reduce your tax burden and retain more of the proceeds from your sale.
While these concessions can be very generous, there are numerous rules, checks and balances that you are required to tick off before accessing them.
Small business CGT concessions are also a high attention area of the ATO which means you need to be equipped with solid advice and ensure eligibility before the ATO conducts a review. Timing is crucial here, do not leave it until it is time to lodge a tax return, seek advice as soon as you are thinking of selling.
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