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  • What CGT concessions are available for small business?

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    Overview of the CGT concessions for small business

    The government announced in the 2008–09 Budget that it will increase access to the small business capital gains tax (CGT) concessions for businesses with turnover less than $2 million via the small business entity test, for

    • taxpayers owning a CGT asset used in a business by a related entity, and
    • partners owning a CGT asset used in the partnership business.

    The changes will apply with effect from the 2007–08 income year. At the time of publication of this guide, legislation to give effect to these changes had not been enacted. Access to the concessions as a result of these changes will not be available until the legislation is enacted.

    As part of the government's broader superannuation changes, certain consequential amendments have also been made to the retirement exemption by the Superannuation Legislation Amendment (Simplification) Act 2007 which apply to the 2007-08 or later income years.

    The effect of these changes on the retirement exemption mean that a payment made under the retirement exemption is no longer an eligible termination payment (ETP) or taken to be an ETP, and there is no requirement to report the payment for reasonable benefit limit (RBL) purposes. ETPs and RBLs were abolished from 1 July 2007.

    The government introduced changes to the law in the Tax Laws Amendment (Small Business) Act 2007 (80 of 2007)External Link which has made it easier for small business to claim tax concessions from 1 July 2007.

    Small businesses with turnover less than $2 million a year are eligible to claim a range of tax concessions. This includes the capital gains tax concessions for small business.

    The changes also mean that businesses with a turnover of $2 million or more can access the capital gains tax concessions for small business as long as they satisfy the net asset test. The threshold for this test has increased to $6 million. These businesses must, however, satisfy certain conditions.

    These changes apply to CGT events in the 2007-2008 income year and beyond and are incorporated into this guide.

    For more information about eligibility and the concessions available to small business entities, visit www.ato.gov.au/SBconcessions

    If you made a capital gain from a CGT event (such as the disposal of a CGT asset) that happened after 11.45am on 21 September 1999, you may be able to reduce the capital gain using:

    • the CGT discount, and/or
    • one or more of the four CGT concessions available for small business.

    CGT discount

    • You may be eligible to use the CGT discount to calculate your capital gain if you owned the asset involved for at least 12 months.

    The CGT discount isn't limited to capital gains from business assets.

    The discount allows individuals (including partners in partnerships) and trusts to reduce their capital gain by 50%. There are more rules for beneficiaries who are entitled to a share of a trust capital gain. The discount for complying superannuation funds is 33⅓%. Companies can't use the CGT discount.

    When to apply the CGT discount

    You apply the CGT discount after offsetting your capital losses against your capital gains, but before applying the small business CGT concessions (apart from the small business 15-year exemption).

    Small business CGT concessions

    The following four CGT concessions are available only for small business.

    1. The small business 15-year exemption provides a total exemption for a capital gain on a CGT asset if you have continuously owned the asset for at least 15 years and the relevant individual is 55 or over and retiring, or is permanently incapacitated.
    2. The small business 50% active asset reduction provides a 50% reduction of a capital gain.
    3. The small business retirement exemption provides an exemption for capital gains up to a lifetime limit of $500,000. If the individual is under 55 just before they make the choice, the amount must be paid into a superannuation (or similar) fund.
    4. The small business rollover allows you to defer all or part of a capital gain on a business asset for a minimum of two years. If you acquire a replacement asset or make a capital improvement to an existing asset within the period allowed, the gain is deferred until the replacement or improved asset is disposed of or its use changes in particular ways. In this case, the deferred capital gain is in addition to any capital gain made when the replacement or improved asset is disposed of.

    How the CGT concessions work

    To be eligible for any of the concessions, you must first satisfy several basic conditions, which are outlined in step 1.

    Note:

    • more than one of the four concessions may apply to the same capital gain if the conditions for each are satisfied
    • they may apply in addition to the CGT discount if it also applies
    • if the small business 15-year exemption applies, you can disregard the entire capital gain and, therefore, don't need to apply any further concessions
    • with the exception of the small business 15-year exemption, you apply the small business concessions after reducing any capital gains by all available capital losses
    • if you have more than one capital gain, you can choose the order in which to reduce capital gains by capital losses, and
    • the small business CGT concessions don't apply to gains from depreciating assets.
    Last modified: 13 Jul 2020QC 21900