Talking Cents

Understanding Capital Gains Tax for Small Businesses in Australia

Capital Gains Tax (CGT) is a critical consideration for small businesses in Australia, impacting financial planning and tax obligations. This critical component of the tax system warrants particular attention, as proper planning can yield substantial savings whilst incorrect handling may result in unexpected tax liabilities.

Understanding the nuances of CGT can provide significant benefits, including potential tax savings and informed decision-making to all small businesses across Sydney.

Overview of Capital Gains Tax

Introduced in 1985, CGT applies to the profit realised from the sale of assets acquired after 20 September of that year. For small businesses, this often involves assets such as property, equipment, or shares.

The taxable gain is calculated by deducting the asset's cost base—which includes the purchase price and associated expenses—from the sale price. This net gain is then included in the business's assessable income for the financial year.

Small Business CGT Concessions

To support small enterprises, the Australian Taxation Office (ATO) offers specific CGT concessions:

1. 15-Year Exemption: If a business asset has been owned for at least 15 years and the owner is aged 55 or over and retiring, or is permanently incapacitated, the entire capital gain may be exempt from CGT.
2. 50% Active Asset Reduction: Businesses can reduce the capital gain on an active asset by 50%, in addition to the general 50% discount available to assets held for over a year, effectively taxing only 25% of the gain.
3. Retirement Exemption: A lifetime limit of $500,000 allows exemption of capital gains on active assets, provided the amount is used for retirement purposes.
4. Rollover Relief: Defers CGT liability when the proceeds from selling an active asset are reinvested into a similar asset within a specified period.

Eligibility for these concessions requires meeting specific criteria, including a net asset threshold of less than $6 million and the asset being actively used in the business.

Recent Legislative Changes Impacting CGT

As of 1 January 2025, significant amendments have been implemented:

• Foreign Resident Capital Gains Withholding (FRCGW): According to Grant Thornton Australia, the withholding tax rate has increased from 12.5% to 15%, and the previous AUD $750,000 de minimis threshold has been removed. This means all transactions involving taxable Australian property with foreign residents are subject to withholding, regardless of the transaction value.
  
  
• Taxation of Unrealised Gains: Proposals to tax unrealised capital gains have been a topic of debate lately. Critics argue that such measures could unfairly impact small businesses by taxing potential gains that have not been realised through a sale, leading to cash flow challenges.

Statistical Insights

In the 2021–22 financial year, CGT receipts were approximately $7.2 billion, representing about 2.2% of the total net tax collected by the ATO. Notably, small businesses contributed around 14% of this amount, highlighting their substantial role in CGT contributions.

Strategic Considerations for Small Businesses

• Asset Review and Timing: Regularly reviewing asset holdings and strategically planning the timing of disposals can optimise tax outcomes, especially when considering eligibility for the 50% active asset reduction or other concessions.
• Succession Planning: Utilising the 15-year exemption can be advantageous during business succession or retirement planning, potentially eliminating CGT liabilities under qualifying conditions.
• Staying Informed: Given the evolving tax landscape, it's crucial for small business owners to stay updated on legislative changes that may affect CGT obligations.

It is evident that navigating Capital Gains Tax complexities requires a thorough understanding of available concessions and recent legislative changes. In 2025, proactive planning and informed decision-making are essential to optimise tax positions and ensure compliance of your small business in Sydney.

Small Business? Gain More With M.A.S. Partners!

For personalised advice customised to your business needs, consider consulting with M.A.S. Partners, experts in small business accounting in Sydney. Our team of experienced small business accountants is dedicated to helping you navigate the intricacies of CGT and other tax-related matters.

Contact us today and ensure your business is well-positioned for the financial success it truly deserves! Because at M.A.S. Partners, we have your back!