Making the most of small business capital gains tax concessions
As a small business owner, it’s important that you understand the capital gains tax (CGT) concessions available from the government.
Martin van der Saag, North Advisory Founder and Strategic Advisor, discusses the different types of concessions available and how we can help maximise your eligibility.
“Every business owner who thinks they might want to sell their business at some point in the future needs to talk to their accountant about their plan… because the small business capital gains tax concessions are really generous. But they are very complex.
If you take off down one path from the beginning, you may be eligible… but if you go down the wrong path, you might miss out.
Why you need to do the planning is because, essentially, you could pay zero tax on the sale of your business… and it is then possible to put that money into your superannuation. There’s a double benefit there… not only could you pay no tax… you are also not constrained by the superannuation contribution restrictions.”
Eligibility conditions
The first step when determining whether you are eligible for the CGT concessions is to confirm the type of business you are selling… whether a sole trader, a partner selling their equity in a partnership, a business from within a company, shares of a company or units from a trust.
Plus, you must also meet an ‘active assets’ test.
Once you have determined ‘what’ you are selling, there are two more straightforward tests.
You must pass one of these in order to be classified as a small business and therefore meet the eligibility conditions.
- The annual turnover of the business, and any connected entities, is under $2 million.
- The assets value of the business, and any connected entities, is under $6 million. This excludes private assets of the business owner, such as superannuation or a main residence.
Martin says,
“Once we have confirmed that you meet the eligibility conditions as a small business there are four different concessions you can look at to reduce your tax liability.
These are in addition to the standard CGT 50% discount that you automatically receive if you make a gain on an asset you have owned for more than 12 months.”
“Every business owner who thinks they might want to sell their business at some point in the future needs to talk to their accountant about their plan… because the small business CGT concessions are really generous.”
50% active asset reduction
You can reduce your CGT on your active assets by a further 50%. This concession is automatically applied once you meet the conditions. Martin explains how this works:
“If we work with the example of a $2 million capital gain, the standard 50% discount leaves us with a $1 million gain… the 50% active asset reduction decreases the gain to $500,000.
For some people, this is a sufficient concession and they will pay tax on the 25% capital gain, but there are a few more entitlements that you could make use of to help reduce your tax liability.”
Small business rollover
Any capital gain remaining after the first two concessions are applied can be negated by purchasing another asset to the value of the gain, within two years of the CGT event. Martin continues:
“This means, in our example, if you have the $500,000 and you purchase another business to the value of $500,000 within two years, your gain no longer exists… you’ve rolled it over into another business.”
Retirement exemption
The retirement exemption concession is applicable to a lifetime limit of $500,000. Anyone who has an assessable capital gain can access this concession, but for people under 55 years old, the exempt amount must be paid into your superannuation. Martin explains this is more detail:
“If you are under 55, again looking at our example of a $2 million capital gain, the remaining $500,000 can be contributed into superannuation, to not pay tax. However, if you are 55 or over at the time of the CGT event, you don’t need to put it into super and you can still pay no tax.
But if that same person had an investment property and they made a $2 million profit… regardless of their age, they would have to pay up to $500,000 in tax. This highlights the benefits of having a business and receiving concessions… you can still make the $2 million profit and pay no tax.
The government acknowledges that small business owners put everything into their businesses over their working career and often don’t put a lot into super… so by the time they come to retire, they may be light on retirement funds.
These concessions enable them to make up for past years when they put money into their business rather than into super, and standard contribution caps are not impacted by this transaction.
This is a great planning policy that the government has allowed for small business owners.”
“It is possible to pay zero tax on the sale of your business — and then put that money into your superannuation.”
15-year exemption
This concession is the most complex and challenging to achieve, but it is also the most rewarding.
If you have owned your business for 15 years or more, are over the age of 55 years and sell your business in order to retire, your entire capital gain will be exempt. You can also pay the entire gain amount directly into your superannuation with no tax liability. Martin expands on this final concession:
“You do need to retire in order to be eligible… so it is difficult to satisfy the requirements, but it is the most generous concession.
If you sell your business for $1.5 million, immediately there’s no tax… plus you can put the entire amount straight into super. Then, as you receive your retirement income in pension phase from super… there’s no tax in that environment either. This is definitely something you need qualified professional help to manage.”
Speak to your advisor
As small business tax accountants, we understand the intricacies of navigating the small business CGT concessions.
We look at the big picture and determine where there are opportunities to help you achieve optimal results when you sell.
We can analyse your circumstances and engineer a path so that you achieve eligibility for the concessions.
To find out more, contact our team today.
About the author
Cayle Petritsch - Director & Wealth Advisor
Cayle Petritsch, Director and Wealth Advisor, works with our existing clients who have recognised the importance of business owners making strategic financial choices not only for their company, but for their personal finances too.
Cayle saw a great opportunity to expand North Advisory’s services into SMSF/superannuation, personal wealth management, asset protection services and other crucial personal finance facets that business owners need to consider.
His approach to wealth management allows you to receive highly personalised wealth advice. Working closely with Marius, Cayle understands the unique needs of every client, from their lifestyle and business goals to their retirement plans.
Key Takeaways
The Small Business CGT Concessions can substantially reduce or eliminate tax on the sale of a business.
For eligible small businesses, it’s possible to pay little — or no — CGT when exiting.
Eligibility depends on business size (turnover/asset tests) and the nature of assets sold (active business assets).
It’s essential to confirm that the business meets the turnover or asset-value threshold before planning a sale.
Multiple layers of concessions are stackable — maximizing tax benefit requires careful planning.
The general CGT discount, active-asset reduction, rollover, retirement or 15-year exemptions can be combined (subject to conditions) for optimal outcome.
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Frequently Asked Questions
What are “Small Business CGT Concessions”?
They are special Australian tax concessions that allow eligible small business owners to reduce, defer, or even eliminate Capital Gains Tax (CGT) when they sell or dispose of active business assets — for example business premises, goodwill or shares in a business.
How do I know if my business qualifies as a “small business” for these concessions?
Your business qualifies if it meets either the aggregated turnover test (annual turnover under A$2 million, including connected entities) or the net asset value test (total net assets of the business and related entities under A$6 million, excluding private assets like main residence or superannuation).
Do the assets I’m selling need to meet certain conditions to qualify?
Yes — the assets must be “active assets.” That means the assets are used (or held ready for use) in the course of carrying on the business (not passive investments).
What types of CGT concessions are available for small business owners?
There are four main concessions available: the 15-year exemption, the 50% active asset reduction, the retirement exemption, and rollover relief. Each concession applies in different circumstances and can significantly reduce or even eliminate the capital gain, provided all eligibility requirements are met.
Can I combine multiple concessions when disposing of a business asset?
Yes — typically you apply the standard CGT discount (if eligible), then the small-business CGT concessions (in the order prescribed), which may drastically reduce or even eliminate the taxable gain — but eligibility must be carefully assessed.
What are the small business CGT concessions and how can they reduce tax when I sell my business?
If I meet the eligibility conditions (including the active asset test and either turnover under $2M or net assets under $6M), I may be able to access small business CGT concessions to reduce or even eliminate tax when selling my business. These can include the 50% active asset reduction, the small business rollover, the retirement exemption (up to $500,000), and in some cases the 15-year exemption, which can make the entire capital gain tax-free.
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