Small businesses are eligible for special capital gains tax concessions, with the retirement concessions tied into the superannuation rules.
The four CGT concessions include the small business 15-year exemption, the small business 50% active asset reduction, the small business retirement exemption, and the small business rollover. Basic eligibility conditions include a turnover test ($2 million) and a maximum net asset value test ($6 million).
Integrity measures which affect the availability of the small business CGT concessions where shares or units are being sold took effect from 1 July 2017. See Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 (now law). The measures amend the additional conditions on application of the CGT small business concessions in relation to company shares or trust interests. See here.
The four CGT concessions are as follows. For the Flow Chart of claims priorities jump here.
The small business 15-year exemption*
A capital gains exemption is available for small business entities which have been continuously owned for more than 15 years. Losses are unaffected. The relevant individual must be at least 55 years old, and retiring, or permanently incapacitated. The rules are in Subdivision 152-B of ITAA 1997. See Sect 152.100
The small business 50% active asset reduction
This concession provides a 50% reduction of a capital gain. The rules are in Subdivision 152-C of ITAA 1997. See Sect 152.200
Article: What is an active asset for the small business CGT concessions? – Colin Biggers & Paisley
The small business retirement exemption*
This concession provides an exemption of capital gains up to a lifetime limit of $500,000. If under 55 years old, the amount must be paid into a complying superannuation fund or Retirement Savings Account. The rules are in Subdivision 152-D of ITAA 1997. See Sect 152.300
The small business rollover
This concession allows the deferral a capital gain from the disposal of a business asset for a minimum of two years or longer until disposal of a replacement asset or a capital improved asset. The rules are in Subdivision 152-E of ITAA 1997. See Sect 152.400
Extension of rollover relief: From 1 July 2016 small business owners can change the legal structure of their business without incurring a CGT liability. The relief extends to the transfer of trading stock, revenue assets and depreciating assets.
See details of the amending legislation here and the following guidance publications:
- LCG 2016/2 Small Business Restructure Roll-over: consequences of a roll-over
- LCG 2016/3 Small Business Restructure Roll-over: genuine restructure of an ongoing business and related matters.
- Determination – Remedial Power – Operation of sec. 40‑340 (depreciating assets)
See also “Are You Being Genuine? Small Business Roll-Over Relief For “Genuine” Restructures“
Basic Eligibility Conditions
The basic conditions for gaining access to the small business CGT concessions require that one of the following four conditions must be satisfied:
- small business entity – carrying on a business with aggregated turnover of under $2 million
‘Carrying on a business’ conditions are described in TR 2019/1 Income tax: when does a company carry on a business?. A company whose only activity is renting out an investment property cannot claim the CGT small business concessions in relation to that investment property – see Taxation Determination TD 2021/2
See also: Aggregated turnover and Tax Determination TD 2021/7 – Aggregated turnover for entities with differing year ends only includes the annual turnover of connected entities for the period that matches your income year.
- not carrying on business – a passively held asset used in the business of an affiliate or a connected entity
- own an interest in small business entity partnership assets, or
- meet the maximum net asset value test – total net value of the taxpayer, connected entities and affiliates is $6 million or less (at a time just before the relevant CGT event).
The Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 (now law) contains additional conditions, which include:
- if the maximum net asset value test is not satisfied then business must have been carried on just before the CGT event
- modification of connected entities for the asset test
- look-through provisions associated with the active asset test
Flow Chart: Order of CGT claims
The arithmetic involved in the determination of a net taxable capital gain is dealt with according to this sequence:
- Eligibility for the small business 15-year exemption means that the capital gain can be completely disregarded. Capital losses are not affected. *
- Capital losses are used to offset remaining capital gains
- If eligible for the CGT discount, the remaining capital gain is reduced by 50% or 33.33% for complying super funds.
- If the capital gain is from a depreciating asset, no further concessions apply.
- Optionally, if eligible for the 50% small business active asset reduction, the remaining capital gain is reduced by 50%
- If eligible, the small business rollover (deferral) can be claimed on the remaining balance
- If eligible, the small business retirement exemption can be claimed, subject to a lifetime limit of $500,000
CGT Non-Concessional Super Contributions Cap
* A retirement exemption amount contributed to a super fund is generally a “non-concessional contribution” which by election can be excluded from the non-concessional contributions cap and counted towards the superannuation CGT cap. The election form (PDF) for this must be lodged with the super fund no later than the time of contribution.
See further: Contributions Caps
Earnout arrangements and CGT
To simplify the CGT consequences of the sale of a business when the sale price is made adjustable by earnout calculations, the government has amended the law to enable a “look-through” approach.
Before this law change, the earnout right is separately considered as an asset for CGT purposes. The new law enables capital gains and losses in respect of a look-through earnout right to be disregarded.
To be eligible for look-through treatment, the earnout right must be limited to 5 years after the CGT event year, and the surrounding arrangements must be conducted on an arms-length commercial basis.
The amendments took effect from 24 April 2015. See further: Legislation details – Discussion Paper
CGT Record keeping
To support the CGT concessions claims evidence is required of:
- the market value of assets showing eligibility for the maximum net asset value test ($6 million)
- carrying on a business and the calculation of turnover to meet the small business entity test
- capital loss calculations
- corporate and trust records and minutes
Note that certain capital gains concessions are provided under the Early Stage Investment (Innovation) Tax Incentives regime.
- Small Business CGT Concessions Checklist (2020) – CA ANZ & Thomson Reuters
- Small Business CGT Concessions Overview – succession.plus
- ATO capital gains guide 2021
- Capital Gains Tax Concessions for Small Business – ATO
- ATO capital gains guide 2020
- ATO capital gains guide 2019
- ATO capital gains guide 2018
- TD 2007/14 Small business concessions: What ‘liabilities’ are included in the calculation of the ‘net value of the CGT assets’?
This page was last modified 2021-06-04