: : FACT SHEET
Small Business CGT
Concessions
What CGT Concessions are available to Small
Businesses?
If you operate a small business there are a number
of CGT concessions available to you in the event
that you dispose of your business. These are in
addition to the general CGT discount concession,
and are as follows:
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The 15-year asset exemption
The 50% active asset reduction
The retirement exemption
Rollover relief
In order to qualify for these concessions generally,
you must first satisfy the basic conditions for small
business relief. The main conditions include:
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Disposing of your business or relevant
capital assets for a capital gain
The relevant assets being “active assets”1
satisfying the “active asset test”2
A selection of conditions which you must
satisfy at least one of, including qualifying
as a “small business entity” 3 in the year the
disposal occurs, satisfying the maximum net
asset value test, or if applicable, satisfying
conditions for passively held capital assets
There are additional conditions where a company
or trust is involved.
The 15-Year Exemption
You may disregard a capital gain arising from
disposal of your business (or capital assets within
the business) entirely if:
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You owned the business or relevant capital
assets continuously in the 15 year period
leading up to the disposal date
You are over 55 and the disposal is
connected with your retirement or you
become permanently incapacitated
There are additional considerations when a
company or trust is involved.
If you qualify for the 15-year exemption and decide
to contribute some or all of the capital gain to a
complying superannuation fund, the contribution
will not count towards your non-concessional
superannuation contributions. This is the case
provided the lifetime limits in relation to the small
business CGT concessions are observed.
The 50% Active Asset Reduction
You may reduce the capital gain arising from
disposal of your business (or relevant capital assets)
by half provided the assets sold are active assets.
This reduction can be used in conjunction with the
general CGT discount concession if the active
assets were held for more than 12 months.
Therefore you will potentially be assessed on only
25% of the gross capital gain. You can apply any
existing capital losses against the gross capital gain
before applying the active asset reduction and
general CGT discount concession.
The Retirement Exemption
Subject to a lifetime limit of $500,000, you may
disregard a capital gain arising from disposal of
your business (or relevant capital assets) if the
capital proceeds from the transaction are used in
connection with retirement. In order to qualify, you
must:
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Be under 55 just before electing to use the
retirement exemption, and
Contribute an amount equal to the capital
gain to a complying superannuation fund
You may first apply capital losses, the general CGT
discount concession and the active asset 50%
reduction against the gross capital gain before
applying the retirement exemption in order to
maximise the possible tax break.
1 An “active asset” is an asset used in the course of conducting a business activity
2 The “active asset test” requires an asset be an active asset for at least half the ownership period, or 7.5 years, whichever is lesser
3 A “small business entity” is defined as carrying on a business satisfying the $2m aggregated turnover test. Holding passive investments such as investment properties do not
constitute a business activity
: : FACT SHEET
Small Business CGT
Concessions
As with the 15-year exemption, contributions made
to complying superannuation funds under the
retirement exemption do not count towards your
non-concessional superannuation contributions,
provided the lifetime limits applying to the small
business CGT concessions are not breached.
There are additional considerations when a
company or trust is involved.
Rollover Relief
If you conduct a small business, you may defer the
recognition of a capital gain resulting from disposal
of your business or relevant capital assets if you
acquire a replacement capital asset within 2 years
of the disposal transaction. For instance, you might
dispose of your business in exchange for shares in
the acquiring company. This is known as
replacement asset rollover relief. When
replacement asset rollover relief is used, the cost
base of the replacement capital asset is
determined as market value of the replacement
asset less the value of the capital gain ignored.
You may first apply capital losses, the general CGT
discount concession and the active asset 50%
reduction against the gross capital gain before
applying replacement asset rollover relief.
Replacement asset rollover relief may be utilised
before or after the retirement exemption.
Tips
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The small business CGT concessions provide
the most benefit when disposal of your
business or relevant capital assets is
connected with your retirement. Therefore if
you are considering sale of your business
and you are approaching retirement age, it
is worth considering deferral of the disposal
decision until you are of (or close to)
retirement age
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Alternatively, if you are considering sale of
your business and you have held the
relevant capital assets for almost 15 years, it
is worth considering deferral of the decision
until you are eligible for the 15-year
exemption
Consider small business CGT concessions
when considering re-structuring your
business, particularly if you are close to
retirement age. Restructures may
undermine the potential tax breaks you
could otherwise utilise, for instance,
changes in the ownership structure could
mean the 15-year exemption is no longer
available to you
Consider small business CGT concession in
your planning prior to executing any
disposal transactions. For instance, how you
will apply the capital proceeds received
and where do you stand with the likes of
lifetime limits applicable to the small
business CGT concessions
Consider how various combinations of the
different small business CGT concessions
can minimise your overall tax exposure
What Next?
Refer to the worked example on the
following page to assist you in your
understanding of the small business
CGT concessions. If you are a business
owner and you are considering selling
your business, contact your manager
or partner at Isaacs & Cole to discuss
your options and the various tax
outcomes.
: : FACT SHEET
Small Business CGT
Concessions
This page contains an example of a sale of a business and the tax outcomes associated with different situation variables:
Example: You own a business via a wholly owned corporate structure (Company A) and decide to sell your entire shareholding to Company B in order to divest
yourself of the business. The cost base of your shares is $100,000 and the market value of the shares is $2,600,000. The shares are regarded as active assets.
Scenario
Tax Outcome
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If you receive cash or cash equivalent in respect of the sale proceeds:
Your prima facie gain is $2,500,000. You can minimise your tax exposure by calculating your capital gain as follows:
You are not retiring, and
You have held the shares for
longer than 12 months
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First, apply the general CGT discount concession to reduce the gain by 50% from $2,500,000 to $1,250,000
Second, apply the active asset reduction to reduce the gain by a further 50%, from $1,250,000 to $625,000
Your assessable capital gain is $625,000.
If you receive a replacement asset in lieu of sale proceeds such shares in Company B:
Nil. Recognition of the capital gain of $625,000 as calculated above is essentially deferred. The cost base of the shares in
Company B is $1,975,000, being the market value of $2,600,000 less the deferred capital gain of $625,000.
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You are retiring, and
You have held the shares for
more than 15 years
You are retiring, and
You have NOT held the shares
for more than 15 years, but you
have held them for longer than
12 months, and
You have not used up any of
your lifetime limit in respect of
the retirement exemption
Nil. The capital gain is completely tax-free under the 15-year exemption.
If you receive cash or cash equivalent in respect of the sale proceeds:
Your prima facie gain is $2,500,000 and your capital gain exposure is $625,000 as calculated above. If you choose to utilise
the retirement exemption and contribute $500,000 in non-concessional contributions to your superannuation fund, you
reduce your tax exposure to an assessable capital gain to $125,000. Otherwise, your assessable capital gain remains at
$625,000.
If you receive a replacement asset in lieu of sale proceeds such shares in Company B:
Nil. Recognition of the capital gain as calculated above is essentially deferred. The cost base of the shares in Company B is
$2,475,000 or $$1,975,000 depending on whether the retirement exemption is utilised, calculated as market value of
$2,600,000 less the value of the capital gain deferred.
Disclaimer: The information contained in this fact sheet is not intended as specific advice.
Please contact Isaacs & Cole to discuss your individual situation.
Suite 55, 117 Old Pittwater Road, Brookvale NSW 2100 Locked Bag 2222, Brookvale Business Centre NSW 2100
T 02 9939 4668 | F 02 9939 4710 | www.isaacscole.com.au