Small Business CGT Concessions: Unlocking Value and Minimising Tax

By Jaye Mankelow

Building on our previous articles around business valuation and planning, it's essential to understand how to protect the wealth you've built when the time comes to sell or transition your business. For Australian small business owners, the tax implications of selling can be significant, especially due to Capital Gains Tax (CGT).

Fortunately, Australia's small business CGT concessions offer a way to significantly reduce or even eliminate CGT liabilities, providing substantial tax relief. However, accessing these concessions requires a solid understanding of eligibility criteria and careful planning.

This article introduces the key CGT concessions available for small businesses and explores the complexity of qualifying for them.

In the next article, we will provide a worked example to illustrate the significant financial impact these concessions can offer, especially when compared to the outcome if they are unavailable.

What Are Small Business CGT Concessions?

The Australian government offers several CGT concessions to eligible small business owners to ease the tax burden when selling business assets or the business itself.

These concessions recognise the dedication required to build a successful business and aim to help owners retain more of the proceeds from their efforts. The primary CGT concessions include:

• 15-Year Exemption: If you are 55 or older and have owned the business asset for at least 15 years, you may be eligible to disregard the capital gain entirely. This is particularly valuable for those planning to retire and allows for a full exemption on CGT.
• 50% Active Asset Reduction: This allows eligible small businesses to reduce the capital gain on active assets by an additional 50%, stacking with the general 50% CGT discount. Effectively, this reduces the taxable portion to just 25% of the original gain.
• Retirement Exemption: With this concession, business owners can disregard up to $500,000 of capital gains over their lifetime, provided certain conditions are met. If under 55, the exempt amount must be contributed to superannuation, adding an extra benefit to retirement planning.
• Rollover Relief: If you reinvest the proceeds from the sale into a similar asset, this concession allows you to defer CGT, carrying over the gain to the new asset instead of paying it immediately.

Navigating Eligibility Requirements: Complexity and Planning

Accessing these CGT concessions can be highly advantageous, but the eligibility criteria are complex and require precise planning. Each concession has specific requirements, and meeting the criteria for one concession does not automatically qualify you for others. Some of the main eligibility considerations include:

• Net Asset Test: To qualify, the combined net assets of the business owner and any connected entities must not exceed $6 million. This means personal and business assets must be carefully valued, and any increases in asset values over time can affect eligibility.
• Active Asset Test: The asset being sold must have been actively used in the business for at least half of the ownership period. This excludes passive investments, making documentation essential to demonstrate active use.
• Significant Individual Test: If the business operates under a company or trust structure, at least one individual (often the owner) must meet minimum participation requirements—generally, holding a minimum interest of 20%.

Due to these detailed requirements, small business owners are encouraged to work with a tax professional to ensure eligibility and maximise the benefits of these concessions.

The Value of CGT Concessions for Small Business Owners

For eligible business owners, these CGT concessions can significantly improve the net proceeds from a business sale, providing more financial flexibility for future goals. Whether planning for retirement, reinvesting in another venture, or using the funds for personal financial growth, CGT concessions offer multiple benefits:

• Significant Tax Savings: These concessions can substantially reduce or even eliminate CGT, resulting in substantial financial savings for business owners.
• Enhanced Retirement Planning: The Retirement Exemption allows owners to make a tax-free contribution to superannuation, providing a boost to retirement savings with tax-deferred growth potential.
• Flexibility for Reinvestment: Rollover Relief enables business owners to defer CGT if they reinvest in a similar asset, supporting further business growth without an immediate tax burden.

Small Business CGT concessions are a powerful tax-saving tool, but accessing them requires an in-depth understanding of eligibility requirements and strategic planning.

For business owners planning to sell or transfer their business, these concessions provide a rare opportunity to maximise the value of their hard-earned capital, preserving wealth for future ventures or retirement.

In our next article, we'll illustrate these concepts with a worked example, showing the difference in outcomes when the Retirement Exemption is applied versus a scenario where CGT is paid at the top marginal rate.

This example will demonstrate the tangible financial impact of effective CGT planning for small business owners, underscoring the value of these concessions in real-world terms.

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