Small business CGT concessions: an overview for sellers

For many business owners, the tax on a sale is one of the largest costs of the whole transaction. The small business capital gains tax (CGT) concessions can reduce that tax substantially, and in some cases remove it altogether. They are also among the most complex parts of Australian tax law, and the cost of getting them wrong is high. This overview explains the main pieces so you know what to ask about. It is not a substitute for advice on your own situation.

The basic eligibility tests

Before any of the concessions can apply, the seller generally has to pass one of two threshold tests:

• The small business entity test. The business has aggregated turnover of less than $2 million. Aggregated turnover includes the turnover of certain connected entities and affiliates, not just the business being sold.
• The maximum net asset value test. The net value of CGT assets held by the taxpayer and certain related entities is no more than $6 million just before the sale. Some assets, such as personal-use assets and in some circumstances the family home and superannuation, are excluded.

Both tests include assets or turnover of related entities, which is where many owners are caught out. A business that looks small on its own can fail because of a family trust, a property entity or a partner's interests elsewhere.

The active asset test

The asset being sold must be an active asset. Broadly, that is an asset used, or held ready for use, in carrying on a business. Goodwill of a trading business usually qualifies. Assets mainly used to earn passive income, such as rent, generally do not, although there are exceptions.

The asset must have been active for a minimum period:

• if it was owned for 15 years or less, it must have been active for at least half of the ownership period;
• if it was owned for more than 15 years, it must have been active for at least seven and a half years.

Where shares in a company or interests in a trust are being sold, further tests apply. These look at what the company or trust holds and who has a significant interest in it. The rules for a share sale are considerably more involved than for a direct sale of business assets, which is one reason structure matters. See our article on asset sale vs share sale.

The four concessions

Once the basic conditions are met, there are four concessions. Each has further conditions of its own, and they can be combined in a particular order.

1. The 15-year exemption

If the asset has been owned continuously for at least 15 years and the owner is 55 or over and retiring, or is permanently incapacitated, the entire capital gain may be disregarded. This is the most generous concession, and where it applies, the others are not needed for that gain.

2. The 50% active asset reduction

The capital gain can be reduced by 50%. For individuals and trusts this can apply on top of the general 50% CGT discount for assets held at least 12 months, so in an illustrative case a $1 million gain could be reduced to $250,000 before any further concession is applied. Companies are not entitled to the general discount, so the arithmetic is different for them.

3. The retirement exemption

A capital gain can be disregarded up to a lifetime limit of $500,000 per individual. Despite its name, you do not need to retire to use it. If you are under 55 when you choose it, the exempt amount generally has to be contributed to a complying superannuation fund or retirement savings account. Where the seller is a company or trust, there are additional requirements about paying amounts to the individuals concerned.

4. The rollover

A capital gain can be deferred, rather than removed, if the owner acquires a replacement active asset or makes capital improvements to an existing one within a set period. If no replacement is acquired in time, or the replacement later stops being active, the deferred gain can come back into tax.

Why timing and planning matter

The concessions reward planning and punish surprises. Some examples of why:

• the active asset test is measured over years, so how an asset was used long before the sale can matter;
• decisions such as restructuring, moving assets between entities, or taking on another business can change the turnover or net asset calculations;
• the order in which the concessions are applied, and whether to apply some at all, affects the result;
• choices about superannuation contributions interact with contribution caps and your broader retirement plans;
• the way the contract allocates the price between assets affects how much of the gain each concession can reach.

The concessions can be worth a large share of your sale proceeds, but only if eligibility is confirmed before the deal is structured, not after it is signed.

What to gather now

If you think you might sell in the next few years, it helps to have:

1. records of when each business asset was acquired and what it cost;
2. a clear map of every entity you, your family and your business partners control or have interests in;
3. turnover and balance sheet figures for those entities;
4. an understanding of how each asset has been used over the time you have owned it;
5. your superannuation balances and recent contributions.

With this, your adviser can assess eligibility and model the outcomes of different sale structures.

A word on complexity

This article describes the concessions in broad terms. The legislation contains many further conditions, definitions and exceptions, and the Australian Taxation Office publishes detailed guidance on how they apply. Whether you qualify, and which combination gives the best outcome, depends on your specific facts. Always get advice from a registered tax agent or tax adviser before relying on any of them.

For the bigger picture of getting ready, read preparing your business for sale.

How we can help

Kainos helps business owners understand where they stand on the concessions well before a sale, gathers the records needed, and models the after-tax result of different structures so the deal can be shaped with tax in mind. We work alongside your tax adviser and lawyer to get the detail right. To start that conversation, contact us or read about our business structuring service.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.