Selling Your Business: A Guide to the Small Business CGT Concessions

Selling a business you have spent years building can trigger a large capital gain. The good news is that Australia’s small business capital gains tax (CGT) concessions can reduce that gain significantly, and sometimes eliminate it altogether. The rules are detailed, so planning well before the sale is essential.

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The basic conditions

To access any of the concessions, you first need to meet the basic conditions. In summary:

• Size test: you are a small business entity with aggregated turnover under $2 million, or the net value of your assets (and those of related entities) is no more than $6 million. Your home, super and personal-use assets are generally excluded from this net asset test.
• Active asset test: the asset was used in carrying on a business. If you owned it for 15 years or less, it must have been active for at least half of the time you owned it; if more than 15 years, for at least 7.5 years.
• Extra conditions for shares and trust interests: if you are selling shares in a company or units in a trust rather than the business assets, further tests apply, including who holds a significant interest.

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1. The 15-year exemption

If the business asset has been owned continuously for at least 15 years and you are 55 or older and retiring, or permanently incapacitated, the entire capital gain is disregarded. This is the most powerful concession, and if it applies you do not need the others.

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2. The 50% active asset reduction

You can reduce the capital gain by 50%. For individuals and trusts this applies on top of the general 50% CGT discount (for assets held at least 12 months), so only 25% of the original gain may remain taxable before applying the remaining concessions. Companies are not entitled to the general CGT discount but can still use the active asset reduction.

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3. The retirement exemption

You can disregard up to $500,000 of capital gains over your lifetime under the retirement exemption. Despite the name, you do not have to retire. If you are under 55, the exempt amount must be paid into a complying super fund or retirement savings account.

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4. The small business rollover

You can defer the gain if you buy a replacement active asset, or spend money improving an existing one, within one year before and two years after the sale. If you do not, the deferred gain becomes taxable at the end of the two-year period.

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Other things to plan for

• Assets or shares? Selling the business assets and selling the shares in your company can have very different tax outcomes for you and the buyer.
• GST: the sale of a business as a going concern can be GST-free if both parties are registered, everything needed to run the business is supplied, and it is agreed in writing.
• Super contributions: amounts from the 15-year exemption and retirement exemption can often be contributed to super under a separate CGT cap rather than the normal contribution caps.
• Records: you will need evidence of ownership dates, cost base, turnover and asset values, sometimes going back many years.

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Final thoughts

The small business CGT concessions can be worth hundreds of thousands of dollars, but the conditions are strict and some decisions must be made before the contract is signed. If you are thinking about selling, retiring or restructuring in the next few years, talk to us early so we can check your eligibility and plan the best way to sell.

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