What are the Small Business CGT Concessions?

There are four specific CGT concessions that may apply to the sale of business assets:

• The small business 15-year exemption

• The small business 50% reduction

• The small business retirement exemption

• The small business roll-over.

Where an asset qualifies for one or more of the small business CGT concessions, any capital gain generated by the sale of a qualifying small business asset may be reduced, deferred, or eliminated.

The basic conditions

To qualify for one or more of the concessions, basic conditions need to be met as follows:

1. The active asset test

2. The small business entity test (or the maximum net asset value test)

3. CGT Concession Stakeholder (the significant individual test).

It should be noted that the conditions are anything but basic. Rather, these are the basic conditions is their most rudimentary form.

The active asset test

The active asset test needs to be satisfied on all occasions when looking to utilise the small business CGT concessions. This is one of the key conditions as the concessions are only available to assets that are active assets. An active asset is one that is used or is held ready for use in a business.

Small business entity test

Furthermore, the small business entity test must be satisfied (aggregate turnover of less than $2 million) or the $6 million maximum net asset value test.

CGT Concession Stakeholder (the significant individual test)

The significant individual test applies where the asset being disposed of are shares in a company, an interest in a trust or the entity disposing of an asset is a company or trust (in this instance the taxpayer looking to claim the concession is an individual who has a participation percentage of 20% or more in the entity).

The 15-year exemption

The 15-year exemption is the most favourable of all the concessions for the following reasons:

• The entire capital gain is disregarded

• Claiming the 15-year exemption does not utilise any capital losses

• The entire proceeds from the sale of the asset up to $1,780,000 (indexed lifetime limit as at 2024/25) may be contributed to superannuation and exempt from the non-concessional contributions cap.

To qualify for the 15-year exemption, specific conditions must be met in addition to the basic conditions:

• The entity must continuously own the asset for the 15 years preceding the sale

• If an individual owns the asset:

• they are at least aged 55 and the sale of the asset is “in connection with their retirement” or they are permanently incapacitated at the time the asset is sold

• If the asset is a share in a company or an interest in a trust the company or trust must have a significant individual for a total period of 15 years (it does not need to be the same individual for the whole period).

• If a company or trust owns the asset:

• The company or trust must have a significant individual for a total period of 15 years (does not need to be the same individual for the whole period); and

• The individual who was a significant individual just before the asset is sold was at least 55 years of age and the sale occurred “in connection with their retirement” or they were permanently incapacitated at the time the asset is sold.

Example

Peter and Katie, both 64 years of age, are shareholders in a business, Jackson Pty Ltd. The business has been operating for 17 years, and they are both looking to retire from the workforce.

Peter and Katie each own 50% of the shares in Jackson Pty Ltd. The shareholding in the company has not changed since it was established 17 years ago. Peter and Katie are therefore both significant individuals (as their ownership interest in Jackson Pty Ltd is greater than 20%).

The business is considering selling its premises which has been owned and used by the business since it was established. The cost base of the premises is $600,000, with the sale price anticipated to be $2.4 million. Assuming Jackson Pty Ltd satisfies all the basic conditions it may be able to utilise the small business 15-year exemption to eliminate the $1.8 million capital gain on the sale of the premises.

As the entity utilising the small business 15-year exemption is a company it becomes a method of distributing the exempt CGT amount from the company to shareholders (that are CGT concession stakeholders) tax free.

Both Peter and Katie are CGT concession stakeholders in Jackson Pty Ltd, so the total amount of the capital gain is tax free as follows:

Stakeholder’s participation percentage x exempt amount

Therefore 50% x $1,800,000 = $900,000.

Furthermore, the cost base of $600,000 can be distributed to Peter and Katie, so the total amount they can receive tax free is $900,000 (50% of the capital gain) + $300,000 (50% of the cost base) = $1.2 million.

As the proceeds from the sale of the asset are within the CGT cap amount ($1.780 million indexed lifetime limit as at 2024/25) the entire $1.2 million each may be contributed to superannuation and exempt from the non-concessional contributions cap.

Please note the CGT small business concessions can be extraordinarily complex so specialist advice should be sought from a suitably qualified tax professional.