Selling a business, business property or ownership interest can produce a substantial capital gain. For eligible small businesses, Division 152 of the Income Tax Assessment Act 1997 contains concessions that can significantly reduce, defer or in some cases eliminate the taxable capital gain.

However, the concessions are not automatic. Eligibility should be examined before a transaction is completed, because the ownership structure, the nature and use of the asset, connected entities and the timing of the sale can all affect the outcome.

The basic eligibility gateway

Before considering a particular concession, the basic conditions generally need to be satisfied. Among other requirements, a CGT event must happen in relation to a CGT asset and the event would otherwise produce a capital gain. The taxpayer must also satisfy an applicable small-business eligibility pathway and the active asset test.

One common pathway is being a CGT small business entity with aggregated turnover below $2 million. Another is satisfying the maximum net asset value test, which broadly requires the net value of relevant CGT assets of the taxpayer and specified connected or related entities not to exceed $6 million immediately before the CGT event. The calculations can be more complex than simply looking at the balance sheet.

The active asset test

The asset must generally have been an active asset for the required period. An asset used or held ready for use in carrying on a business may qualify, while assets whose main use is to derive rent are commonly subject to restrictions. Special rules apply where the asset being sold is a share in a company or an interest in a trust.

The four main concessions

1. 15-year exemption

Where the relevant conditions are met, a capital gain may be disregarded entirely. This concession generally requires continuous ownership of the CGT asset for at least 15 years and additional conditions concerning the relevant individual, including retirement at age 55 or older or permanent incapacity.

2. 50% active asset reduction

If the basic conditions are satisfied, the small business 50% active asset reduction can reduce the remaining capital gain by 50%. Depending on the taxpayer and circumstances, this may interact with the general CGT discount and other small business concessions.

3. Retirement exemption

The retirement exemption can allow eligible capital gains to be disregarded up to a lifetime limit of $500,000 for an individual. Despite its name, an individual does not necessarily have to retire. Where the relevant individual is under 55 just before making the choice, specific superannuation payment requirements can apply.

4. Small business rollover

The rollover can defer all or part of an eligible capital gain. The rules provide time to acquire a replacement active asset or make a capital improvement to an existing asset. A later CGT event can cause the deferred gain to crystallise, so the rollover is generally a deferral rather than a permanent exemption.

Why planning before the sale matters

The concessions can interact with each other, and the order in which concessions are applied can affect the result. For a sale of shares or trust interests, additional tests may apply to the underlying entity and its stakeholders. Restructuring immediately before a sale may not produce the expected result and can introduce other tax issues.

For this reason, a CGT review should ideally begin when a business owner starts considering a sale, succession plan or restructure – not after the contract has been signed.

How Amerital can help

Amerital Advisory & Partners can review eligibility for the small business CGT concessions, calculate the capital gain, examine the active asset and ownership conditions, model the interaction of available concessions and work with clients and their legal advisers before a proposed transaction is completed.

Key references: Australian Taxation Office – concessions for eligible businesses and guidance on the small business CGT concessions; Income Tax Assessment Act 1997, Division 152.

Important Disclaimer
The information in these articles is general in nature and is not intended to constitute taxation, legal, financial or investment advice. Australian taxation and foreign investment rules are complex and may change. The application of the law depends on the facts and circumstances of each taxpayer or investor. Professional advice should be obtained before acting on the information contained in these articles.