Small Business Tax Concessions: What You Are Entitled To

Australian tax law carves out a long list of concessions for small business. Most of them save you a modest amount and a bit of administration. Four of them, applied to the sale of a business, can wipe out a capital gains bill entirely.

The problem is that eligibility turns on tests most owners have never checked, and the most valuable concessions are decided by things you did years before the sale. This is what is available and what actually determines whether you get it.

Turnover Decides Most of It

Nearly every concession is gated on aggregated turnover. That is not just your own revenue. It includes the turnover of entities connected with you and of your affiliates, which is what catches people running two businesses through separate structures and assuming each is assessed alone.

Broadly, the tiers work like this:

• Under $2 million. The small business capital gains tax concessions, which are the valuable ones.
• Under $5 million. The small business income tax offset, for unincorporated businesses. A percentage of the tax on your business income, capped at $1,000 a year.
• Under $10 million. Simplified depreciation, simplified trading stock rules, accounting for GST on a cash basis, and the small business restructure rollover.
• Under $50 million. The reduced company tax rate and a range of fringe benefits tax and prepayment concessions.

These thresholds have moved several times and will move again, so confirm the current figures before you rely on them.

One correction worth making early, because it costs people real money. The $2 million turnover test is not the only way into the CGT concessions. There is a second gateway, and businesses that fail the turnover test frequently qualify through it.

The Everyday Concessions

These are the ones that apply year to year rather than on a sale.

Reduced company tax rate

A company with aggregated turnover under $50 million pays 25 per cent rather than 30. There is a second condition people miss: no more than 80 per cent of the company's assessable income can be passive income such as rent, interest, dividends or royalties. A company that has stopped trading and now just holds investments will fail that test and pay the full rate.

Simplified depreciation

Immediate write-offs for assets under the threshold in force that year, and a general small business pool for the rest, depreciated at a set rate instead of asset by asset. The instant write-off threshold has changed almost every year and is frequently announced late, so check what applies to the year you bought the asset rather than the year you are lodging.

GST on a cash basis

Report GST when money moves rather than when invoices issue. For a business that invoices on thirty day terms this is a genuine cash flow benefit: you stop remitting GST on invoices you have not been paid for. Worth considering alongside your PAYG instalments, which sit on the same activity statement.

Small business restructure rollover

Move assets between entities as part of a genuine restructure without triggering an immediate tax liability. Sole trader to company, or company to trust, where the underlying economic ownership does not change. The conditions are specific and the paperwork matters, but it removes the tax barrier that otherwise locks businesses into a structure they have outgrown. Our guide to business structures covers what you would be moving to.

The CGT Concessions

This is where the money is. Four concessions, and they can be combined.

First, the basic conditions

Before any of the four, you have to clear the same gate. There are two parts to it and both must be satisfied.

One of these two size tests:

• You are a small business entity with aggregated turnover under $2 million, or
• The net value of your CGT assets, together with those of connected entities and affiliates, is $6 million or less just before the sale.

The second test is the one people do not know about. A business turning over $4 million with modest assets can still qualify. The family home is generally excluded from that $6 million, but business goodwill is included, and goodwill on a profitable business is often larger than owners expect.

And the active asset test. The asset must have been an active asset, used in the course of carrying on a business, for at least half the period you owned it, or for at least seven and a half years if you owned it longer than fifteen. This applies to all four concessions, not just the fifty per cent reduction. A commercial property you bought, used in your business for three years, then rented out for a decade will likely fail it.

The four concessions

The Order You Apply Them In

Sequence changes the answer, and applying them in the wrong order leaves money behind.

1. Offset any capital losses against the gain first.
2. Apply the general 50% CGT discount, if you held the asset more than twelve months. This is the ordinary discount available to everyone, not a small business concession.
3. Apply the 50% active asset reduction. Half of what is left.
4. Apply the retirement exemption, the rollover, or both to whatever remains.

Compounding matters. A $400,000 gain reduced by the general discount becomes $200,000, then by the active asset reduction becomes $100,000, and the retirement exemption can take that to nil while using only $100,000 of the $500,000 lifetime limit. The 15-year exemption sits outside this order: where it applies, the whole gain goes and nothing else is needed.

Getting the Money Into Super

An angle that gets overlooked. Amounts exempted under the 15-year exemption or the retirement exemption can generally be contributed to superannuation under the CGT cap, which is separate from and additional to the ordinary contribution caps.

For someone who has spent thirty years putting everything back into the business and has a modest super balance as a result, this is often the single largest contribution they will ever make. The cap is indexed and the timing rules are strict, so this is a conversation to have before the contract is signed, not after settlement.

Where It Goes Wrong

Four failures account for most of the lost concessions we see.

• Structure decided years too late. Who owns the asset, and through what, determines eligibility. That is settled at purchase, not at sale.
• The asset stopped being active. Retiring and renting out the premises for several years before selling can break the active asset test and cost the lot.
• Aggregated turnover misread. Connected entities and affiliates are counted. A second business, a spouse's company, a trust can all pull you over a threshold you thought you were under.
• Nobody asked before signing. Once the contract is executed the CGT event has happened and most of the planning options are gone.

The concessions are generous, and they are also technical. The difference between paying nothing and paying full CGT on a business sale frequently comes down to decisions made three to fifteen years earlier.

Frequently Asked Questions

Can I use more than one concession on the same sale?

Yes, and you usually should. The discount, the active asset reduction and the retirement exemption stack in sequence. The 15-year exemption is the exception because it removes the whole gain by itself.

Do these apply to shares in my company or units in my trust?

They can, but additional conditions apply. There is a modified active asset test looking through to the underlying business assets, and rules about who counts as a significant individual. It is more complex than selling business assets directly and worth advice well ahead of time.

Does the family home count towards the $6 million?

Generally no, your main residence is excluded, along with superannuation and personal use assets. Business goodwill, plant, premises and investments do count, as do the assets of connected entities.

I am under 55. Is the retirement exemption still available?

Yes, but the exempt amount has to be contributed to superannuation. Over 55 you may take it in cash. Either way it is capped at $500,000 across your lifetime.

What if I fail the active asset test by a few months?

Then the concession is not available on that asset. This is exactly why the timing of a sale, and of any decision to lease out premises beforehand, is worth planning rather than leaving to circumstance.

When should I get advice?

Before you list, before you sign a heads of agreement, and ideally years earlier when the structure is set. Advice after the contract is signed is limited to reporting what has already happened.

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Most small business concessions are worth a modest amount and a little less paperwork. The CGT concessions are in a different category, and whether you qualify is generally decided long before you decide to sell.

Trew North Accounting advises Melbourne business owners on structure, sale and succession. See our accounting and tax planning and small business accounting services, or get in touch.

This article is general information, not advice for your circumstances. Thresholds, rates and conditions change, and the CGT concessions in particular are technical. Check current requirements with the ATO or with us before acting.