Selling a business you have built over years or decades can trigger a large capital gain. For many owners that gain is the retirement plan, the next venture or the long-awaited reward. The tax outcome can swing dramatically depending on whether you qualify for the small business capital gains tax (CGT) concessions.
These concessions are among the most valuable in the Australian tax system, yet they are also among the most missed. The rules are layered, the eligibility tests are technical and the decisions often get made in the rush of a sale. This article walks through the four concessions, the conditions that gate them and the traps that catch owners out.
The Four Concessions At A Glance
There are four small business CGT concessions, and they can be applied in combination to reduce or eliminate a capital gain on an active business asset.
- The 15-year exemption can disregard the entire capital gain where you have continuously owned the asset for at least 15 years and you are 55 or older and retiring (or permanently incapacitated).
- The 50% active asset reduction reduces the capital gain by half. It applies automatically unless you choose for it not to.
- The retirement exemption can disregard capital gains up to a lifetime limit of $500,000 per individual. If you are under 55, the exempt amount generally must be paid into a complying superannuation fund.
- The rollover lets you defer a capital gain by acquiring a replacement active asset, generally within a set period after the sale.
Used well, these concessions can mean the difference between a modest tax bill and none at all. Used without planning, you may default to less than you were entitled to claim.
The Basic Conditions Gate
Before any concession applies, you must pass the basic conditions. Think of this as the gate every claim has to clear.
First, there must be a CGT event that would otherwise produce a capital gain. Second, you must satisfy one of two size tests. Third, the asset must meet the active asset test.
The first size test is the small business entity test. You generally qualify where your aggregated turnover is less than $2M, which includes the turnover of your affiliates and connected entities, not just the selling entity.
The $6M Net Asset Value Alternative
If you do not pass the turnover test, there is a second path. The maximum net asset value test is met where the total net value of CGT assets owned by you, your affiliates, connected entities and their connected entities does not exceed $6M just before the CGT event.
Net value here means the market value of those assets less related liabilities. It is a point-in-time test, so timing and asset values matter.
One detail worth marking: the $6M figure is not indexed for inflation. As asset and property values rise over time, more owners drift above the threshold without realising it, which makes early planning more important, not less.
The Active Asset Test
The asset you are selling must be an active asset. Broadly, that means it has been used or held ready for use in the course of carrying on a business, by you or a related entity, for a required period of ownership.
Some assets are excluded, and assets whose main use is to derive rent can be a particular sticking point. This is where owners of mixed-use property or passive investments are often surprised, because an asset that feels like part of the business may not meet the definition.
Extra Conditions For Shares And Units
If you are selling shares in a company or units in a trust rather than a business asset directly, additional conditions apply. These are designed to confirm the concessions flow to genuine small business participants.
You generally need a CGT concession stakeholder, which means a significant individual (someone with a small business participation percentage of at least 20%) or their spouse where that spouse has a participation percentage above zero. Further tests, including a 90% test, can apply where entities are interposed between the stakeholders and the entity being sold.
These layers are easy to fail by accident, particularly where ownership has shifted over the years or the structure has grown organically. Structure reviews well ahead of a sale are where most of the value is protected.
Why Owners Miss Out
The concessions are usually lost for ordinary reasons, not exotic ones. Owners leave the analysis until the contract is signed, when key facts are already locked in. Trust distributions, shareholdings or asset ownership are arranged in ways that quietly break a test.
Sometimes the asset turns out not to be active. Sometimes the net asset value has crept over $6M because nobody revisited the number as the business grew. Sometimes the right concessions are claimed in the wrong order, leaving money on the table or creating a superannuation complication.
The common thread is timing. These are decisions to make before you sell, ideally years before, not in the closing weeks of a deal.
Plan Before You Sell
The small business CGT concessions can transform the outcome of a sale, but only if your structure, your asset and your eligibility line up well before the event. The earlier you map your position, the more options you keep open.
Foothold Advisory works with Australian SME owners to think through structure and exit strategy ahead of a sale, then coordinate with your registered tax agent so the technical work is done properly. If you are considering selling in the next few years, a structure and tax review now is the single most useful step you can take. Book a consultation with Foothold Advisory to map where you stand and what to tidy up before it counts.
General information only. This article provides general information about Australian tax and business concepts and is current as at its publication date. It does not take into account your objectives, financial situation or needs. It is not tax, financial or legal advice. Foothold Advisory is not a registered tax agent. Tax laws and figures change and apply differently depending on your circumstances. Before acting, obtain advice from a registered tax agent and verify all figures against the ATO.