No one likes the idea of handing over more tax than they have to. But here’s the thing: many Australian business owners do exactly that when they sell a business asset and don’t understand how Capital Gains Tax (CGT) works.
If you’re running a business and thinking of selling a property, shares, or equipment, you could be looking at a hefty CGT bill. The good news? There are ways to reduce it, and in some cases, you might not have to pay it at all.
So, what exactly is Capital Gains Tax, and how can you make it work in your favour? Let’s break it down.
What Is Capital Gains Tax (CGT)?
In simple terms, Capital Gains Tax is the tax you pay when you make a profit from selling an asset. It’s not a separate tax, it’s part of your income tax.
When you sell or dispose of something your business owns, like property or shares, you either make a capital gain or a capital loss. The difference between what you paid for the asset and what you sold it for determines how much you owe.
Let’s say you bought a commercial property for $400,000 and later sold it for $600,000. That $200,000 profit is your capital gain, and it’s added to your taxable income.
Sounds simple enough, right? But not every asset sale triggers CGT, and not every gain is taxed at the full rate.
What Is a CGT Event?
A “CGT event” is just the moment something happens to your asset that affects your tax position. Selling an asset is the most common event, but it’s not the only one.
Here are a few examples of when CGT can come into play:
- You sell or give an asset to someone else
- You lose an asset or it’s destroyed
- You stop being an Australian resident
- Your company cancels or redeems shares
- You use part of your home for business and later sell it
That last one catches a lot of people off guard. If you’ve claimed part of your home as a business space, that section could attract CGT when you sell the property.
It’s the sort of thing you don’t think about until you’re sitting in front of your accountant, wishing you’d asked sooner.
The Good News: There Are CGT Concessions for Small Businesses
If you run a small business in Australia, the ATO gives you a few generous options to reduce, defer, or even eliminate your capital gain. These are called small business CGT concessions.
There are four main ones, and you can use more than one if you meet the conditions. Here’s how they work.
1. Small Business 15-Year Exemption
This is the big one. If your business has owned an asset for at least 15 continuous years, and you’re 55 or older and retiring or permanently incapacitated, you won’t have to pay any CGT on that asset.
That’s right; zero tax on the gain.
Think about what that means for someone selling a business they’ve built over decades. It’s a well-earned break that rewards long-term effort.
2. Small Business 50% Active Asset Reduction
If your business owns an active asset (something used in day-to-day operations) for 12 months or more, you can reduce the capital gain by 50%.
So if you made a $100,000 gain, only $50,000 would count towards your taxable income. It’s one of the most commonly used concessions and can make a massive difference come tax time.
3. Small Business Retirement Exemption
Here’s another smart option. If you sell a business asset, you can claim a CGT exemption of up to $500,000 over your lifetime.
If you’re under 55, the exempt amount has to go into a complying super fund or retirement savings account. Over 55? You can take it directly without contributing it to super.
This can be a big help if you’re planning to slow down or transition into retirement without losing a chunk of your savings to tax.
4. Small Business Rollover
Maybe you’re not ready to retire just yet, but you’re selling one business asset to buy another. In that case, you might not have to pay CGT straight away.
The small business rollover lets you defer your capital gain for up to two years, or even longer if you buy a replacement asset or make improvements to an existing one.
You only pay the tax when something else triggers a new CGT event, like selling the new asset later down the line. It’s like pressing pause on your tax bill while you reinvest in your business.
Why You Should Care About This Now
It’s easy to think, “I’ll deal with that when I sell.” But waiting until you’re ready to retire or cash out can cost you.
These concessions have strict eligibility rules, and some require that your business structure and ownership stay consistent over time. If you make a change now that disqualifies you later, there’s no fixing it after the fact.
So before you sell, or even restructure, talk to a tax professional like Clear Tax Accountants who understands small business CGT. The right advice can save you tens of thousands of dollars, maybe more.
Common Mistakes Business Owners Make
You’d be surprised how often business owners miss out on tax savings simply because they didn’t plan ahead. Here are a few traps to avoid:
- Not keeping proper records of asset purchases and improvements
- Mixing personal and business use of assets without clear documentation
- Changing business ownership without checking how it affects CGT eligibility
- Selling before meeting time requirements for concessions
A bit of planning can turn a painful tax bill into a much smaller one.
Frequently Asked Questions
Do I have to pay CGT if I sell my small business?
Yes, if you make a capital gain. But if you meet the conditions for small business CGT concessions, you may reduce or even eliminate it.
Is CGT a separate tax?
No, it’s part of your income tax. Your capital gains are added to your taxable income for the year.
What happens if my business asset was destroyed?
If an asset is lost or destroyed, that’s also considered a CGT event. You may still make a capital gain depending on any insurance or compensation you receive.
Can I apply more than one CGT concession?
Yes. You can use multiple concessions if you qualify for them, which can significantly reduce your taxable capital gain.
The Bottom Line
Capital Gains Tax doesn’t have to be a bad surprise. By understanding how CGT works and planning ahead, you can hold on to more of the money you’ve worked hard to earn.
If you’re thinking about selling a business or asset, don’t leave it until the last minute. The earlier you plan, the more options you have and the more control you’ll keep over your financial future.
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