Small Business CGT Concessions in Action: A Worked Example Using the Active Asset Reduction and Retirement Exemption

By Jaye Mankelow
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Following our overview of small business CGT concessions, this article provides a practical example to illustrate the substantial tax savings that these concessions can offer. By comparing scenarios with and without access to the valuable Small Business CGT Concessions, we’ll demonstrate how qualifying business owners can achieve a $0 tax outcome on the sale of their business, highlighting the impact of these concessions on net proceeds.

Scenario: Sale of a Small Business With and Without CGT Concessions

To emphasise the difference, we’ll examine Sarah’s business sale in two parts: first, assuming she has no access to CGT concessions, and second, using the full suite of CGT concessions available to small businesses.

Scenario Details:

• Business Owner: Sarah, aged 52
• Business Type: Small retail business, owned for 12 years
• Sale Price: $2.4 million
• Cost Base: $600,000 (original purchase price)
• Capital Gain: $1.8 million

Scenario 1: No Access to CGT Concessions

If Sarah does not qualify for any CGT concessions, her capital gain would be taxed at her marginal rate, assumed here to be the highest marginal rate of 47% (including Medicare Levy).

1. Calculate the Capital Gain:
   • Sale Price: $2.4 million
   • Cost Base: $600,000
   • Capital Gain: $1.8 million
2. Apply the 50% CGT Discount:
   • Since Sarah has held the business for more than 12 months, she qualifies for the general 50% CGT discount.
   • Discounted Capital Gain: $1.8 million × 50% = $900,000
3. Calculate CGT Payable at Top Marginal Rate:
   • CGT Liability: $900,000 × 47% = $423,000
4. After-Tax Proceeds:
   • Sale Price: $2.4 million
   • Less CGT: $423,000
   • Net Proceeds: $1,977,000

In this scenario, Sarah pays $423,000 in tax, reducing her net proceeds from the sale to $1,977,000.

Scenario 2: Full Access to Small Business CGT Concessions

Now, let’s consider the scenario where Sarah qualifies for the 50% General Discount, 50% Active Asset Reduction, and Retirement Exemption. Here’s how these concessions reduce her CGT liability to $0:

1. Calculate the Capital Gain (same as above):
   • Sale Price: $2.4 million
   • Cost Base: $600,000
   • Capital Gain: $1.8 million
2. Apply the 50% General CGT Discount:
   • Discounted Capital Gain: $1.8 million × 50% = $900,000
3. Apply the 50% Active Asset Reduction:
   • As Sarah’s business assets qualify as active assets (actively used in the business), she applies the 50% Active Asset Reduction.
   • Further Reduced Capital Gain: $900,000 × 50% = $450,000
4. Apply the Small Business Retirement Exemption:
   • Sarah uses the Retirement Exemption to disregard the remaining capital gain of $450,000.
   • Since Sarah is under 55, she contributes the entire exempted amount ($450,000) to her superannuation fund.
5. Final Tax Outcome:
   • After applying the 50% General Discount, 50% Active Asset Reduction, and Retirement Exemption, Sarah’s CGT liability is $0.
6. After-Tax Proceeds:
   • Sale Price: $2.4 million
   • CGT Liability: $0
   • Net Proceeds: $2,400,000 (with $450,000 contributed to superannuation)

Thanks to these concessions, Sarah retains the full $2.4 million in sale proceeds and pays $0 in Tax, with $450,000 secured in her superannuation for retirement.

Key Takeaways:

• Without CGT Concessions: Sarah would pay $423,000 in CGT, reducing her net proceeds to $1,977,000.
• With Full CGT Concessions: By using the 50% General Discount, 50% Active Asset Reduction, and Retirement Exemption, Sarah’s tax liability is eliminated. She retains the entire $2.4 million, with $450,000 added to her superannuation, enhancing her retirement savings.

This example highlights the substantial impact of Small Business CGT concessions on the proceeds from a business sale. By strategically applying the General Discount, Active Asset Reduction, and Retirement Exemption, Sarah’s CGT liability drops to $0, and she benefits from an additional $450,000 in superannuation contributions.

For small business owners, understanding and planning for these CGT concessions can result in significant tax savings, preserving more of the wealth created through years of dedication and hard work.

Consulting with a tax adviser ensures all eligible concessions are maximised, helping business owners achieve optimal financial outcomes from their business sale and secure a sound financial future.

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