Capital gains
Small business CGT concessions
The small business CGT concessions are a set of four concessions that can reduce, defer or eliminate a capital gain on business assets if strict eligibility conditions are met.
Small business owners who sell active business assets may be able to reduce the capital gains tax payable using the small business CGT concessions. There are four of them: the 15-year exemption, the 50% active asset reduction, the retirement exemption and the small business rollover. They can be used separately or combined, and when they work together they can wipe out a large gain.
To use any of them, you must first satisfy the basic conditions. A CGT event must happen to an asset, and that event must have produced a capital gain. You must be a small business entity, or satisfy the maximum net asset value test, or be a partner in a partnership that is a small business entity. The asset must also be an active asset, meaning it is used or held ready for use in carrying on a business.
The 50% active asset reduction cuts the remaining gain by half, and applies in addition to the general 50% CGT discount where that is available. The retirement exemption allows exempt gains up to a lifetime limit set in the legislation. If you are under 55 at the time you choose the exemption, the exempt amount must be paid into a complying super fund. The rollover allows you to defer the gain if you acquire a replacement asset or improve an existing one within a set period, generally two years.
The 15-year exemption is the most generous, because it can remove the whole gain where you have owned the asset for at least 15 years and are aged 55 or over and retiring, or permanently incapacitated. It applies without the need to pay anything into super in the way the retirement exemption can require.
Order matters when you combine concessions. The usual sequence is to reduce the gain by any capital losses, then apply the general CGT discount, then the 50% active asset reduction, and then the retirement exemption or rollover to what remains. Choices are made in the income tax return, and there are time limits and record requirements, including proof of the net asset value calculation.
The concessions deal with income tax only. A sale of business assets may also need GST analysis, since the sale of a going concern can be GST-free and some other sales are taxable. Specific thresholds and caps change, so check the ATO website for the current figures. This is general information only, so confirm eligibility with the ATO or a registered tax professional before relying on any concession.
Worked example
Dana sells her café business after 10 years. The goodwill produces a capital gain of $400,000. She has no losses, and the general 50% discount reduces it to $200,000. She then applies the 50% active asset reduction, leaving $100,000. She chooses the retirement exemption on the remaining $100,000, within her lifetime limit, and the net capital gain included in her assessable income is nil.
Practical tips
- Confirm you meet the basic conditions before planning, since all four concessions depend on them.
- Apply concessions in the correct order, because the sequence determines the final taxable amount.
- Check the current lifetime retirement limit and net asset threshold on the ATO website, as these figures are set by legislation.