Australia’s capital gains tax rules are changing significantly from 1 July 2027.
For business owners, those changes could make the Small Business CGT Concessions even more important when planning a future business sale.
The reason is simple: while the existing Small Business CGT Concessions remain, some of the broader CGT concessions available outside Division 152 are becoming less favourable.
What is changing?
From 1 July 2027, major changes will apply to the general CGT regime.
Broadly, these include:
- changes to the general 50% CGT discount
- changes to the treatment of pre-CGT assets
- a new 30% minimum tax applying to certain capital gains.
Transitional rules apply, meaning the outcome can depend on when the gain accrued and when the relevant CGT event occurs.
One Small Business CGT Concession is also expanding
There is also an important change for certain business owners.
From 1 July 2027, the aggregated turnover threshold applying to the Small Business 50% Active Asset Reduction increases from $2 million to $10 million.
This may allow some larger businesses to access that particular concession where they could not previously qualify through the turnover pathway.
Importantly, the change is specific to the 50% Active Asset Reduction. It does not mean the eligibility rules for all Small Business CGT Concessions have increased to $10 million.
Why this matters when selling a business
For many business owners, the tax outcome on a future sale may increasingly depend on whether the Small Business CGT Concessions are available.
That can make a significant difference to the amount ultimately retained after tax.
The important point is that eligibility cannot usually be determined from the sale price or turnover figure alone. The answer depends on the specific business, ownership structure, transaction and concession being considered.
That is why business sale planning should start before a transaction is locked in.
From 1 July 2027, understanding your Small Business CGT Concession position may become even more valuable than it is today.
General information only. The CGT reforms apply from 1 July 2027 and are subject to detailed transitional and eligibility rules. Professional advice should be obtained before entering into a business sale or relying on any CGT concession.
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Can You Still Access the Small Business CGT Concessions on a $10 Million Capital Gain?
A common misconception is that if your capital gain exceeds $6 million, you automatically cannot access the Small Business CGT Concessions.
That is not necessarily correct.
The $6 million Maximum Net Asset Value Test is not a cap on the size of the capital gain.
It is one of several pathways that may allow a taxpayer to satisfy the basic conditions for the Small Business CGT Concessions.
A $10 million capital gain does not automatically mean you fail
For example, a taxpayer may qualify as a CGT small business entity where their aggregated turnover is less than $2 million.
If that pathway is satisfied, and the other relevant Division 152 conditions are met, the fact that the capital gain itself is $10 million does not automatically prevent access to the concessions.
The taxpayer does not also have to satisfy the $6 million Maximum Net Asset Value Test simply because the gain exceeds $6 million.
What if turnover is above $2 million?
If aggregated turnover is $2 million or more, the CGT small business entity pathway may not be available.
However, the taxpayer may still potentially qualify through the $6 million Maximum Net Asset Value Test or another applicable pathway.
The MNAV test looks broadly at the net value of relevant CGT assets just before the CGT event.
Importantly, the calculation can extend beyond the entity selling the asset and may also involve connected entities and affiliates.
Not every liability is necessarily taken into account either, so the calculation can be more complex than simply subtracting total liabilities from total assets.
The important question is how you qualify
When considering the Small Business CGT Concessions, the question should not simply be:
“Is my capital gain over $6 million?”
The better question is:
“Which Division 152 eligibility pathway applies to my circumstances?”
That can depend on turnover, net asset values, connected entities, affiliates, the asset being sold, the active asset requirements and the structure of the transaction.
A capital gain above $6 million does not automatically prevent access to the Small Business CGT Concessions.
But neither does a capital gain below $6 million automatically mean you qualify.
That is why eligibility should be reviewed carefully before a business sale is locked in.
General information only. Eligibility for the Small Business CGT Concessions depends on the particular facts and the detailed requirements of Division 152 of the Income Tax Assessment Act 1997. The application of the aggregated turnover and Maximum Net Asset Value tests can involve connected entities, affiliates and specific rules regarding which assets and liabilities are included. Professional advice should be obtained before entering into a business sale or relying on the concessions.
Business Sale Valuations: What the Kilgour Case Means for Small Business CGT Concessions
Valuation can be critical when determining whether the Small Business CGT Concessions are available.
The recent Kilgour v Commissioner of Taxation decision provides an important example.
In 2016, all of the shares in Punters Paradise Pty Ltd were sold to News Corp for approximately $31 million.
The shares were held by three corporate trustees for three trusts. One held a 60% interest, while the other two each held a 20% interest.
The two 20% shareholders each received approximately $6.21 million for their respective shareholdings.
This was significant because the market value of the shares was critical to determining whether the relevant $6 million Maximum Net Asset Value Test could be satisfied.
Could the 20% interests be worth less?
The taxpayers argued that their individual 20% shareholdings should be valued separately from the overall sale of the company.
Expert valuation evidence put each 20% interest at substantially less than the amount actually received and argued that part of the price paid by News Corp reflected strategic or synergistic value.
The Full Federal Court rejected the taxpayers' appeal.
A particularly important aspect of the decision was that the minority shareholdings were not being sold in isolation.
All three shareholders had decided to sell, cooperated in the sale process and offered 100% of the company to a single purchaser.
The Court considered that commercial reality relevant when determining the market value of each shareholding.
What does this mean for business owners?
The case does not establish that the actual sale price will always automatically equal market value.
However, an actual arm's-length transaction — particularly one occurring at or very close to the valuation time — can provide strong evidence of market value.
It also shows that a minority shareholding cannot necessarily be valued as though it were being sold independently where, in reality, it forms part of a coordinated sale of the entire company.
For Small Business CGT Concession purposes, that distinction can be significant where the value of the shares is material to whether the $6 million Maximum Net Asset Value Test is satisfied.
Don't leave valuation until after the deal
Business owners should not assume that a minority discount or theoretical standalone valuation will necessarily determine their Division 152 position.
The actual sale process, the willingness of shareholders to sell together, the purchaser market and the commercial circumstances surrounding the transaction can all affect the valuation analysis.
Where eligibility for the Small Business CGT Concessions depends on valuation, the position should be reviewed carefully before the sale transaction is locked in.
General information only. Eligibility for the Small Business CGT Concessions, including the application of the Maximum Net Asset Value Test and market value principles, depends on the specific facts and circumstances and the detailed requirements of Division 152 of the Income Tax Assessment Act 1997. Professional advice should be obtained before relying on any valuation or entering into a business sale.
The Cost of Failing to Plan Before Selling Your Business
When business owners think about selling, the focus is usually on the sale price.
But the amount you actually keep after tax can be just as important.
For eligible business owners, the Small Business CGT Concessions can significantly reduce — and in some circumstances eliminate — the capital gain arising from the sale of a business or business asset.
The problem is that eligibility can depend on a range of factors, including your business structure, turnover, net asset position, connected entities and affiliates, active asset history, ownership arrangements, whether the sale involves shares or individual business assets, and how the transaction is ultimately structured.
That is why the tax planning should start well before a buyer is at the table.
Eligibility can change before you sell
A business owner may qualify for the concessions today but not necessarily qualify several years from now.
The reverse can also occur.
That is why, when a business owner says:
“I'm probably going to sell the business in three to five years.”
one of the first questions worth asking is:
If you sold the business today, would you qualify for the Small Business CGT Concessions?
If the answer is no, we need to understand why.
If the answer is yes, we need to consider whether anything planned before the eventual sale could jeopardise that position.
Planning can identify problems while there is still time
Eligibility for the Small Business CGT Concessions involves detailed requirements.
Depending on the circumstances, issues can include:
- whether the relevant CGT asset satisfies the active asset test
- whether the taxpayer satisfies the relevant small business eligibility requirements
- the taxpayer's and connected entities' assets and business activities
- interests held through companies, trusts or partnerships
- ownership percentages and participation requirements
- additional conditions applying to shares or trust interests
- how long an asset has been owned and used in the business
- how the business or asset will ultimately be sold.
Some issues may simply require proper analysis.
Others may need to be addressed well before a proposed sale.
Importantly, restructuring shortly before selling does not automatically solve the problem. A restructure can itself have CGT, duty, integrity and eligibility consequences that need to be considered carefully.
Don't wait until the contract is signed
Once a business sale has progressed, many of the important decisions may already have been made.
The parties have been identified.
The assets or shares being sold have been determined.
The price has been negotiated.
The contract may already be binding.
At that point, an adviser may still be able to determine which concessions are available, but there may be far fewer opportunities to improve the position.
Planning beforehand gives the business owner something much more valuable:
choice.
There may still be time to review the structure, confirm eligibility, identify risks, obtain appropriate valuations, consider the proposed transaction and understand the likely after-tax proceeds before committing to the sale.
Know your likely tax position before you negotiate your exit
A business sale should not only be considered in terms of the headline sale price.
What ultimately matters is:
How much will I actually retain after tax and transaction costs?
For a significant business sale, the difference between qualifying and not qualifying for the Small Business CGT Concessions can be substantial.
That is why exit planning should not start when a buyer turns up.
Ideally, business owners should understand their potential CGT position well before they intend to sell.
The objective is not to manufacture eligibility immediately before a transaction. It is to understand the rules early enough to make informed commercial decisions and avoid unintentionally losing concessions that may otherwise have been available.
If selling your business is part of your three-to-five-year plan, the tax planning should start before the sale process does.
General information only. The Small Business CGT Concessions are subject to detailed eligibility requirements under Division 152 of the Income Tax Assessment Act 1997. Eligibility and the interaction between the concessions depend on the taxpayer, asset, business structure, ownership history, connected entities, affiliates, transaction structure and other circumstances. Specific tax and legal advice should be obtained before implementing a restructure or entering into a business sale.