Selling a business or one of its assets can be a big milestone. However, many business owners are surprised by how much tax they may need to pay on the profit, known as capital gains tax (CGT).
The good news is that small business capital gains tax concessions can greatly reduce, or even remove, the tax you owe. These concessions can significantly reduce the tax you pay when selling your business, yet many owners don’t realise they’re eligible.
In this article, we explain everything you need to know about small business CGT concessions, including eligibility, different types of concessions, examples, and how to apply them step by step.
What are Small Business Capital Gains Tax Concessions?
If you meet the eligibility requirements, you may be able to:
- Reduce your capital gain
- Defer your tax liability
- Eliminate your CGT
These capital gains tax concessions are designed to support business growth, facilitate retirement planning, and ease business transitions.
Why Small Business Capital Gains Tax Concessions Matter
For many business owners, selling a business reflects years of hard work and dedication. Without proper planning, a large part of the profit could be lost to tax.
However, by using ATO small business CGT concessions, you may be able to:
- Keep more of your business profits
- Reinvest in new opportunities
- Plan for retirement more effectively
- Improve your overall financial position
CGT rules can get complex; many business owners choose accounting outsourcing support to keep their records accurate and ensure everything is handled correctly at tax time.
When used correctly, these concessions can potentially save business owners hundreds of thousands of dollars.
The 4 Main Small Business Capital Gains Tax Concessions
1. 15-Year Exemption
This is the most generous capital gains tax concession.
If you qualify, you can completely disregard your capital gain (100% tax-free).
Key conditions:
- You must have owned the asset for at least 15 years
- You are aged 55 or over and retiring, or permanently incapacitated
- The asset must be an active business asset
This concession is often used when business owners are exiting or retiring.
2. 50% Active Asset Reduction
This concession cuts your capital gain in half, which directly reduces how much tax you pay.
It is one of the most commonly used small business CGT strategies and can be combined with other concessions.
Important: This reduction applies after the general CGT discount (if eligible), leading to substantial tax savings.
3. CGT Retirement Exemption
The CGT retirement exemption allows you to disregard up to $500,000 of capital gains over your lifetime.
Key points:
- If under 55, the amount must be contributed to superannuation
- If over 55, you can receive the amount directly
4. Small Business Rollover
The rollover concession allows you to defer your capital gain.
How it works:
- You defer the gain for up to two years
- You must reinvest in another business asset
This option is useful if you are restructuring or expanding your business rather than exiting.
Basic Eligibility Criteria for Small Business CGT Concessions
To qualify for small business capital gains tax concessions, you must meet specific conditions set by the Australian Taxation Office. These criteria ensure that only eligible small businesses benefit from these valuable tax concessions.
1. A CGT Event Must Occur
2. You Must Have a Capital Gain
The concessions apply only if you make a profit from the transaction. This means the sale proceeds must exceed the asset’s cost base, including purchase price and associated expenses.
3. The Asset Must Be an Active Asset
- It should be used for at least half of the ownership period, or
- If owned for more than 15 years, it must be used for at least 7.5 years
This is a key requirement for accessing small business CGT benefits.
4. You Must Meet One of the Eligibility Tests
You must satisfy at least one of the following:
- Aggregated Turnover Test: Your annual turnover is less than $2 million
- Net Asset Value Test: Your total net assets do not exceed $6 million
Meeting these thresholds determines your eligibility for ATO small business CGT concessions.
Step-by-Step: How to Apply Small Business CGT Concessions
Applying small business CGT concessions in the correct order is essential to maximise your tax savings and remain compliant with the Australian Taxation Office guidelines.
Step 1: Calculate Your Capital Gain
Step 2: Apply Capital Losses
If you have any carried-forward capital losses from previous years, deduct them from your current capital gain. This reduces the amount of gain subject to tax before applying any concessions.
Step 3: Apply the CGT Discount
Step 4: Apply Small Business Concessions
Finally, apply the relevant small business concessions in the correct order:
- 15-year exemption (if eligible, this can eliminate the entire gain)
- 50% active asset reduction
- CGT retirement exemption or rollover
Following this sequence is crucial, as each step builds on the previous one to minimise your overall tax liability. Because these steps must be applied in the correct order, many business owners rely on outsourced tax services to avoid mistakes and make sure they’re not paying more tax than necessary.
Example: How Much Tax Can You Save?
Let’s look at a simple example.
Scenario:
- Capital gain: $200,000
- Capital losses: $20,000
Calculation:
- Net gain: $180,000
- Apply 50% CGT discount: $90,000
- Apply 50% active asset reduction: $45,000
- Apply retirement exemption: $0 taxable gain
In this case, your small business CGT concessions reduce your tax liability to zero.
Special Situations to Consider
Selling Shares or Units
- You must meet the 80% active asset test
- You must be a CGT concession stakeholder
Retirement Planning
The small business CGT retirement exemption is especially useful for:
- Funding your retirement
- Contributing to superannuation
- Reducing long-term tax obligations
These concessions can form a key part of your financial strategy.
Common Mistakes to Avoid
The ATO has identified several risks when claiming small business capital gains tax concessions.
Common errors include:
- Not meeting the active asset test
- Incorrect turnover calculations
- Applying concessions in the wrong order
- Poor documentation
These mistakes can lead to audits or penalties, so accuracy is essential.
How to Maximise Your Tax Savings
To get the most from small business tax concessions, especially CGT-related concessions, consider the following:
- Plan your business sale in advance
- Structure your assets correctly
- Combine multiple concessions strategically
- Keep accurate records
- Seek professional advice
With the right strategy, these tax concessions can significantly reduce your overall tax burden.
For ongoing savings beyond one-off CGT events, you can also read our article on small business tax deductions to understand how to reduce your yearly tax bill.
Final Thoughts
Small business capital gains tax concessions can help Australian business owners save money when they sell, retire, or restructure. When used effectively, they can help you retain more of your profits and improve your overall financial performance. However, the requirements can be complex, so careful planning is required. Getting expert counsel early can make a big difference.
Need help applying small business capital gains tax concessions correctly? Contact Befree today for experienced help with tax planning, compliance, and strategic advice. We help businesses across Australia in confidently navigating CGT laws and maximising possible opportunities.
Frequently Asked Questions (FAQs)
Who is eligible for small business CGT concessions in Australia?
To qualify for small business CGT concessions, you must meet specific criteria set by the ATO. This typically includes having a turnover of less than $2 million or net assets under $6 million, and the asset must pass the active asset test. You must also have a capital gain from a CGT event.
Can I apply more than one CGT concession at the same time?
Yes, eligible businesses can combine concessions. For example, you may use the 50% CGT discount, then the active asset reduction, followed by the retirement exemption to lower tax significantly.
What is the $500,000 CGT retirement exemption?
This exemption lets eligible owners disregard up to $500,000 in capital gains over their lifetime. If under 55, the amount usually goes into superannuation. If over 55, it can be taken directly.
Do I need to pay CGT if I reinvest in another business asset?
Not always. The small business rollover concession may let you defer CGT for up to two years if you reinvest in another eligible business asset.
What are the most common mistakes when applying CGT concessions?
Frequent mistakes include failing the active asset test, incorrect turnover calculations, applying concessions in the wrong order, and poor record-keeping. Professional advice can help avoid costly errors.