From 1 July 2027, the general 50% CGT discount for individuals and trusts will be replaced by cost-base indexation and a 30% minimum tax on capital gains. At the same time, the small business CGT concessions will be expanded.

While the expansion is welcome, its practical application is much narrower than it may first appear.

Here are four points business owners and advisers should know about the expanded small business CGT concessions applying from 1 July 2027.

Eligibility for only one of the four concessions is expanding

From 1 July 2027, the aggregated turnover threshold will increase from $2 million to $10 million for the purposes of accessing active asset reduction.

The active asset reduction reduces a qualifying capital gain by 50%. It applies automatically where the basic conditions are satisfied, unless the taxpayer chooses not to apply it.

The higher turnover threshold will not extend to the other three small business CGT concessions, being:

• the 15-year exemption;
• the retirement exemption; and
• the small business rollover.

Access to those concessions will continue to depend on the existing eligibility gateways, including the lower $2 million turnover test or the $6 million maximum net asset value test, together with any conditions specific to the particular concession.

A taxpayer may therefore qualify for the active asset reduction under the new $10 million gateway but remain unable to apply the retirement exemption or rollover to the remaining gain. Each concession must be tested separately.

Conversely, an entity with turnover of $10 million or more may still qualify for the concessions if it also satisfies the $6 million maximum net asset value test and the other relevant conditions.

Businesses with $2 million to $10 million aggregated turnover will benefit from the expanded concessions

The expansion will principally assist taxpayers that:

• carry on a business with aggregated turnover of $2 million or more but less than $10 million;
• cannot otherwise qualify under the $6 million maximum net asset value test; and
• dispose of an asset that satisfies the active asset test.

The expansion may also assist taxpayers that do not themselves carry on an operating business but own an asset used in a business carried on by an affiliate or connected entity.

The expansion does not dispense with any of the other basic conditions. The taxpayer must still make a capital gain from a relevant CGT event, the asset must satisfy the active asset test and any additional conditions applying to shares, units or passively held assets must be met.

Passive shareholders may still miss out

Where the asset being sold is a share in a company or an interest in a trust, a taxpayer that does not satisfy the maximum net asset value test must be carrying on a business just before the CGT event. Merely holding shares as an investment will not ordinarily satisfy that requirement.

Accordingly, a passive shareholder who:

• does not carry on a business; and
• cannot satisfy the $6 million maximum net asset value test

will generally be unable to rely on the new $10 million turnover gateway, even if the company whose shares are being sold has turnover of less than $10 million.

This is one of the most important limitations of the reform. Although the operating company may be eligible for the active asset reduction on an asset sale, its passive shareholders may not be eligible for the same concession on a sale of their shares.

As such, the small business CGT outcome may differ significantly depending on the sale structure. Two transactions that transfer substantially the same underlying business can produce materially different concession outcomes, even under the expanded concessions.

The benefit may be temporary if the proceeds cannot be extracted efficiently

Where a company or unit trust sells an active business asset, reducing the gain at the entity level is only the first step. A separate tax consequence may arise when the sale proceeds are ultimately transferred to the owners.

If the company continues after the sale, for example because it has retained other assets or intends to undertake another activity, it may distribute the proceeds as a dividend. The extent to which the dividend can be franked will depend on the company’s available franking credits. Because the active asset reduction reduces the tax paid by the company, it does not generate corresponding franking credits. Unless the company has credits from other sources, the amount attributable to the reduction may therefore be distributed as an unfranked dividend.

Alternatively, if the company is no longer required, it may be wound up through a members’ voluntary liquidation. The part of the liquidator’s distribution attributable to the active asset reduction is generally not treated as a dividend. Instead, it forms part of the shareholder’s capital proceeds when the shares end under CGT event C2.

The shareholder may then make a separate capital gain. The small business CGT concessions may apply to that gain, but the shareholder must qualify in their own right. A passive shareholder will generally need to satisfy the $6 million maximum net asset value test. This may be difficult if the sale proceeds remain within the relevant asset pool, so the timing of distributions and the shareholder’s asset position require careful planning.

The benefit of the expanded concession may therefore be temporary if the proceeds are ultimately taxed as an unfranked dividend or as a capital gain to which the small business CGT concessions do not apply.

A similar issue can arise for unit trusts, including under CGT event E4 or when units are cancelled.

The takeaway

The expansion will be useful for operating businesses with aggregated turnover of $2 million or more but less than $10 million, as well as qualifying entities that hold assets used in those businesses.

However, it is not a general expansion of the small business CGT concessions. The higher threshold applies to only one concession. It will not assist passive shareholders, and the benefit of the concessions may be reversed when the sale proceeds are paid to the owners.

Before a transaction proceeds, business owners should consider:

• an asset sale compared with a share or unit sale;
• eligibility for each concession separately; and
• how the sale proceeds will ultimately be extracted.

Early planning is important, particularly where a company or unit trust will use the expanded concession and the owners may later need to rely on the small business CGT concessions in their own right.

To discuss how the expanded active asset reduction may apply to a proposed transaction, please contact Velocity Legal’s tax team.

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.