Small business CGT concessions explained
Selling a business, or business property, can produce a large capital gain. For eligible small business owners, the small business CGT concessions can reduce that gain dramatically, sometimes to nil. They’re among the most valuable concessions in the tax system, but the conditions are detailed, and planning years ahead makes a big difference.
The basic conditions
To use any of the concessions, you must first pass the basic conditions:
- A size test: either
- aggregated turnover under $2 million (including connected entities and affiliates), or
- net assets of $6 million or less (for you, connected entities and affiliates, excluding your home, super and personal-use assets).
- The active asset test: the asset was used in carrying on a business for at least half the time you owned it (or 7.5 years, if you owned it for more than 15 years). Goodwill and business premises used in the business are typical active assets. Rental properties generally aren’t.
- Extra conditions for shares and trust interests, including that you’re a “significant individual” or that the entity’s own assets are mostly active.
The four concessions
1. The 15-year exemption
If the business or entity owned the asset for at least 15 years, and you’re 55 or over and retiring, or permanently incapacitated, the whole gain is exempt. It’s the most generous concession, and it applies before any others. Amounts can also be contributed to super under the lifetime CGT cap without counting towards the non-concessional cap.
2. The 50% active asset reduction
Halves the capital gain. It applies on top of the general 50% CGT discount for individuals and trusts who’ve held the asset for more than 12 months, so the gain can be reduced to a quarter before the other concessions apply.
3. The retirement exemption
Lets you disregard up to $500,000 of capital gains over your lifetime. Despite its name, you don’t have to retire. If you’re under 55, the exempt amount must be paid into a super fund or retirement savings account. It can also be contributed to super under the CGT cap.
4. The small business rollover
Defers the gain if you buy a replacement active asset, or make improvements to one, within the period from one year before to two years after the sale. The deferred gain comes back into account if the replacement isn’t acquired or later stops being active.
How they combine: an example
Jo, aged 52, sells a business she’s owned for 10 years and makes a capital gain of $800,000.
| Capital gain | $800,000 |
| General 50% discount | ($400,000) |
| 50% active asset reduction | ($200,000) |
| Remaining gain | $200,000 |
| Retirement exemption (paid into super as Jo is under 55) | ($200,000) |
| Taxable capital gain | Nil |
Jo still has $300,000 of her lifetime retirement exemption left for the future.
Plan ahead
Many owners lose the concessions through avoidable problems: turnover or net assets creeping over the limits, assets held in the wrong entity, property leased to unconnected tenants, or a sale structured as an asset sale when a share sale would qualify (or the reverse). Restructuring close to a sale can itself trigger tax.
If you’re thinking of selling in the next few years, or passing the business to family, talk to us early. We’ll check your eligibility, model the options, and coordinate with your lawyer on the sale contract. If the gain is going into super, see non-concessional contributions and business property in an SMSF.