CGT small business concessions (Division 152): the four concessions explained

What Division 152 provides

Division 152 of the Income Tax Assessment Act 1997 provides four CGT concessions for eligible small businesses. These concessions are the 15-year exemption, the 50% active asset reduction, the retirement exemption, and the small business rollover.

The concessions are designed to assist eligible individuals and businesses. A taxpayer may be able to apply several of these concessions in sequence to reduce a capital gain.

The concessions apply to gains on active assets used in the carrying on of a business, provided a basic conditions test is met.

The basic conditions

To qualify for the CGT small business concessions, several conditions must be met. A taxpayer must satisfy at least one of three tests relating to net asset value or business turnover. This involves either having a maximum net asset value of $6 million, being a small business entity with aggregated turnover under $2 million for the income year of the CGT event, or being an affiliate of, or connected with, an entity that satisfies one of these tests.

The asset itself must also meet the active asset test. Generally, this means the asset was used in carrying on a business for at least half the ownership period. However, if the asset has been owned for more than 15 years, the active asset test is satisfied if it was used in carrying on a business for 7.5 years.

Certain additional tests may also apply depending on the structure of the business. Where the entity is a company or trust, the ‘significant individual’ and ‘CGT concession stakeholder’ tests may need to be considered.

The four concessions

The CGT small business concessions provide four ways to reduce or defer capital gains tax when disposing of a small business asset. These concessions are designed to assist eligible individuals involved in active trading businesses.

The first two concessions offer direct reductions to the capital gain. The 15-year exemption disregards the entire capital gain if the taxpayer is 55 or older and retiring, or is permanently incapacitated, and has owned the active asset for at least 15 years. The 50% active asset reduction reduces the capital gain by an additional 50% on top of the general CGT discount.

Two further concessions provide alternative treatment. The retirement exemption allows up to a $500,000 lifetime cap to be applied to a capital gain, with the amount preserved in superannuation for individuals under 55. The small business rollover defers the capital gain on disposal of an active asset, provided a replacement asset is acquired within prescribed timeframes.

Practical compliance

Compliance with the CGT small business concessions requires careful attention to detail. The concessions are highly fact-sensitive, and errors in determining eligibility can lead to significant and unexpected tax liabilities. Businesses considering a sale should proactively address potential eligibility issues to avoid costly mistakes.

To assist with demonstrating eligibility, it is essential to maintain comprehensive records. Documentation relating to active asset use, the maximum net asset value calculation, and evidence of significant individual or CGT concession stakeholder status should be organised and readily available well in advance of any proposed sale.

Specific anti-avoidance and integrity rules are in place to safeguard the concessions. These rules are particularly relevant to the retirement exemption’s $500,000 lifetime cap and the small business rollover replacement-asset rules, and require careful consideration to ensure compliance.