Capital Gains Tax When Selling a Business in Australia: What to Know in Advance

CGT does not only apply to selling a house — a business is caught too

Capital Gains Tax (CGT) is a tax on the profit (the capital gain) when you sell an asset acquired after the Australian CGT system was established. When you sell a business — whether you sell the assets or sell the shares of a company — CGT usually arises.

A particularly important point: CGT is not a separate tax in Australia. The capital gain is added to your ordinary income and taxed at the income tax rate that applies to you for that year. If the profit from selling the business is large, your total income for that year can rise sharply.

Which assets give rise to CGT when you sell a business?

When you sell assets (an asset sale): Each asset is sold separately. Equipment, stock, and other depreciating assets usually do not give rise to CGT in the ordinary sense — they create balancing adjustments within the depreciation system. Goodwill, intellectual property, and other intangible assets are usually CGT assets.

When you sell shares in a company: The shares you sell are CGT assets. The capital gain is the difference between the sale price of the shares and their cost base (usually what you paid when you bought them or the money you put into the company when it was set up).

Small Business CGT Concessions — important but conditional

The ATO has a set of Small Business CGT Concessions for small businesses — one of the most important tax concessions in Australian tax law, which can significantly reduce or completely eliminate CGT when an eligible business is sold.

There are four main concessions:

1. 15-year exemption: A full CGT exemption if you have owned an active asset of the business for at least 15 continuous years and meet the age or retirement conditions
2. 50% active asset reduction: A 50% reduction of the capital gain from active assets
3. Retirement exemption: Excludes a capital gain (up to a lifetime limit) if the amount is paid into super or you have reached the required age
4. Rollover: Defers the capital gain if you buy a new business

The conditions for using these concessions are not simple — they include thresholds for aggregated turnover or net asset value, and conditions under the “active asset” test. Many small businesses qualify — but not automatically and not all of them.

The concessions can be combined in some cases, and the order in which they are applied matters. This is why you need an accountant who specialises in CGT and small business tax before you sign a sale agreement.

Why you should prepare early — not just before you sell

Many of the conditions for qualifying for the CGT concessions depend on your ownership history and how you have structured the business. Some things you need to have done years before the sale:

• Maintain the right business structure to meet the active asset test
• Correctly record the ownership period and cost base of each asset
• Avoid inadvertent events (restructuring, distributions) that could affect your eligibility for a concession

If you are thinking about selling the business within the next three to five years, talk to your accountant now about how to prepare — not three months before you sign the sale contract.

Buying assets versus buying shares — different CGT effects

From the buyer’s and seller’s point of view:

Sellers usually prefer to sell shares (they may be able to use the small business CGT concessions, and the whole transaction is tidier).

Buyers usually prefer to buy assets (they do not take on the company’s hidden liabilities, and the cost base of the assets is reset to the purchase price — useful for depreciation later).

The two sides often have opposing interests on this point — and it is an important point of negotiation in the deal. The accountant and solicitor for each side will advise on the right position.

Further reading

The ATO has detailed guidance on the Small Business CGT Concessions at ato.gov.au/individuals/capital-gains-tax/small-business-cgt-concessions — a more technical document, but worth reading to understand the scale of the concession you may be able to receive.