The Expanded Small Business CGT Concession: Who Benefits and Where the Limits Remain

0:00

You’re listening to Explain That by Velocity Legal, the podcast that keeps business owners and professional advisers ahead of the curve in an ever-changing legal landscape.

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Welcome to another episode of Explain That. Today we’re talking about the expanded small business CGT concessions.

To do so, I’m joined by Special Counsel Ani Tuna.

0:21

Hi, Andrew.

0:23

Welcome back. Small business CGT concessions. You know, as practitioners, we do a lot of it, right?

0:29

We do, yeah.

0:31

It’s a little bit of a baby of both of ours. We’ve both done a bit of work in it.

0:35

So, yeah, it’s something we get a lot of questions about too.

0:37

Yeah, yeah.

0:40

Well, I guess the genesis for this episode is that there’s been an announcement and a change.

Perhaps let’s start with that and then maybe go back through a bit of the history and talk about what the benefit is here and what opportunities there are.

0:55

Yeah, sure. So it all came off the back of the Budget announcements in May 2026, which, as you’ve said previously, is a date that’s probably going to be etched in our minds forever.

1:07

The day the world of tax changed.

1:09

That’s a bit dramatic, but it’s pretty relevant to Australian tax.

1:13

Yeah, yeah. Not far off.

1:15

So, yes, I guess that was the catalyst for these changes to the small business CGT concessions, the driver being the changes to the CGT discount.

At the time of the Budget, there wasn’t actually a comment about considering the small business CGT concessions specifically as part of the package. But as the government started to get some feedback, let’s call it...

1:38

Damage control.

1:41

I was going with feedback, but you’re right. It was probably the PR bit of, okay, what can we do immediately?

It happened really quite quickly. The Budget was, you know, the second Tuesday of May 2026. Then, around, I think, 18 June, we got an immediate announcement.

It had been in the media, I think, a day beforehand, where the Prime Minister had suggested they were going to look at some changes to the concessions and expand them.

2:05

I love when there’s this intersection between politics and tax, where you might see a bill and it’s worded in such a way that it’s like, is this about tax or is this about the narrative?

So it’s called the small business CGT expansion. They announced they were going to do that.

Then, pretty much, I think the bill hadn’t even gone into the Senate yet. It was being considered by the Economic Committee. Within about a day, they’d amended the bill.

Two days later, it passed through the Senate and it’s now law, with no consultation. At the time, I think we barely even had the bill.

2:42

Basically, what they’ve done is change the small business entity rules for the purposes of the small business CGT concessions, being the turnover test.

Really, the only change, super simple, is that it’s gone from a $2 million aggregated turnover test to a $10 million aggregated turnover test for the purposes of the small business CGT concessions.

3:03

Great, because that’s aligning it with all the other small business concessions or incentives, which is a really great initiative.

But we’ll talk in a second about some of the ways in which that expansion is just going to add more confusion, because it’s unfortunately not a wide expansion in the sense that it only applies to the active asset reduction.

3:23

So, unfortunately, I can’t say that the $2 million test is now $10 million, and you can walk away and it’s all pretty simple.

It actually only applies to that one concession, making it super complex.

3:36

You used the words “super simple” and then “super complex”, I think.

3:38

I think both are true, because if you look at the legislation that has passed, it’s very simple.

But, to the other point, it actually makes an already complicated system even more complicated.

3:52

Yeah. We can talk to that. I guess maybe we go to the background first, like you said.

3:56

Let’s go back in the time machine.

4:00

And you might need to help me with the dates.

But I guess, as we said, this is all around CGT, which was introduced, obviously, as we know, in 1985. Then, in the 1990s, there was the introduction of concessions for small businesses. Then the small business CGT concessions were introduced.

There were some changes around some other older concepts, because there used to be a plethora of different types of concessions. Interestingly enough, we got this concept of aggregated turnover and small business entity when it was introduced.

The whole idea of these small business concessions broadly was to have a set of concessions with one set of requirements or conditions to meet. Then, once you got through that gateway, you could choose which one of those concessions you were going to have.

I think it worked that way for a little while.

4:47

Yeah. I think the timing is interesting on that because it was in the late 1990s and the biggest concession is the 15-year exemption.

So, if you think about the timing, what’s 15 years before the late 1990s? Well, it’s around 1985.

I wasn’t practising at the time, but I can imagine that if your business was before 1985, it’s not an issue. And if it was shortly after, you at least think, okay, 15 years, we’re going to be okay.

We’re going to get the sale tax-free or close to it.

5:20

Yeah, absolutely. That’s exactly right.

The idea was that it was designed for those businesses that, at the time, may not have existed when CGT was introduced, and those businesses or assets that were acquired shortly thereafter, to assist with those in a small business context.

But, unfortunately, what we then ended up seeing was that, as reforms happened over time, for certain purposes the $2 million threshold slowly started to creep up.

We saw the $2 million become $10 million, for example, for certain small business concessions like depreciation and things like that.

Then we saw $10 million become $50 million. It got to the stage we’re at now, where you’ve got a $2 million test for CGT concessions, you’ve got $10 million for other concessions, and you’ve got $50 million, which is a new concept for your medium taxpayer.

6:15

It’s not what was intended to be simple.

If you think about why we have these concessions, the idea is that they’re supposed to involve low compliance costs. That’s one of the reasons we have them, not the only reason.

On a small scale, where the risk is low and you’ve only sold for, you know, you might have a capital gain of only $100,000 or a couple of hundred thousand dollars, you shouldn’t have to seek expert advice because the rules are so complicated that you can’t even figure them out, putting risk aside.

That’s not what they’re designed for.

Interestingly, that’s what happened when the Board of Taxation, in 2019, so seven years ago, actually...

I’d forgotten this when I looked at it just before coming into the recording. It actually did that Board of Taxation review of the small business concessions on its own initiative.

The Board did that of its own volition, off the back of stakeholders, being small businesses and the tax profession, all being concerned that the concessions were too hard.

If you look at that 2019 report, the key things they were trying to do were reduce compliance costs, simplify the rules and align them to the business journey.

One of the other key comments they made was that they were trying to reduce this need to create overly complex structures just for the purposes of getting concessions, which we’re seeing now sometimes with small business CGT concessions, along with some real anomalies too.

So it’s interesting that we had that in 2019. Their recommendation was partly what’s happened, the super simple, super complex point.

7:54

It’s like they read the first two words of that report.

7:57

They read the report that said we think the $2 million threshold should be replaced by $10 million.

What they didn’t read was the rest of the report, which said that, to simplify it, that should be applied globally.

In fact, to the fear of a lot of practitioners like you and me who love the concessions, they were actually suggesting replacing everything with one concession.

But the idea was that it would be simplified. You shouldn’t have to apply one condition for one set of tests and another condition for another, but that’s where we’re at now.

8:24

So, I guess, to summarise where we’re at now, we’ve got this framework for the last 25 years, give or take, of the concessions as concepts.

We’ve had some tinkering with some of the thresholds. Then we had some, we’ll call them, integrity measures, although that could be debated, in 2018 that limited the concessions for share sales.

We had the sort of between 20 and 40 per cent rules.

Now we’ve got another, essentially, another tinkering rather than looking at it as a whole. So it’s just adding on top of what is already there.

8:59

It is, yeah.

9:01

I guess the thresholds into the concessions, you’re generally talking about two different thresholds, right?

You’ve got your net asset value threshold, which is your $6 million, or you’ve got your $2 million threshold at the moment.

When do you use one versus the other?

9:24

Yeah. You can use either if you’re eligible or if either is applicable. You don’t have to pass both.

As you would know, generally the bit people forget is that they say, yes, somewhere in this group or somewhere in my fact pattern, there’s a business and it’s got less than $2 million of turnover.

What you need to be careful of is that the turnover test actually requires the taxpayer to be carrying on a business and to have aggregated turnover of $2 million.

So if you’re a passive shareholder, for example, and we’re talking about shares, you’re not carrying on a business.

You may be carrying on another business, but let’s say you’re just a passive investor who is a shareholder. You’re not carrying on a business.

So the fact that you’ve got shares in a company that has aggregated turnover of less than $2 million means that first test is not going to apply to you.

In that example, you’d need to use the $6 million MNAV test.

So, generally, if I was advising on a business sale by a company, for example, and it’s carrying on a business, I’d first look at the $2 million turnover test.

In most cases, generally, I’d say I have very few scenarios where we get in under that gateway. Then we end up looking at the $6 million net asset value test.

10:38

Yeah. So a business can use the turnover test generally.

If you’re not in business, which is generally your equity situations, you can only use the MNAV test, essentially.

10:51

So then, I guess, and we won’t go into the specifics of all the different concessions, but essentially you might get the 50 per cent discount under the current law, and then you’ve got this whole smorgasbord of concessions.

Now, what effect does this change have? What does it actually do?

11:08

It turns the threshold to $10 million.

So, I guess, if we think about who, as your question rightly pointed us towards, can be eligible or who is this going to benefit?

The test is only going to be of benefit to taxpayers that are carrying on a business.

So the first place I would look is, if you’re selling the business or business assets, then you’re going to be looking at this new test.

It could benefit you if you’ve now got turnover between $2 million and $10 million. You’d be able to use the active asset reduction for that sale.

If you’re selling shares in the company, as we’ve just said, this is not going to be very helpful to you unless that particular taxpayer otherwise has another business that they’re carrying on.

So that’s where we’re looking. Then we might get to the next steps: how does that play out? What does that look like in a sale example?

11:59

Yeah. So we’ve got to be a business, essentially.

I’d say 99 times out of 100, it’s probably going to be the business entity, whether that’s a company or maybe a trust, that’s carrying on a business with that turnover.

12:11

Okay, what do I get? What do I get as a result of this?

12:15

Yep. So wherever that business sits, if it’s in a company or a trust, the company or trust will get the 50 per cent reduction.

So that’s the additional 50 per cent. That’s a freebie.

You don’t get anything else, because the additional turnover threshold only applies to the active asset reduction.

So you get your extra 50 per cent discount.

Let’s put some super simple numbers to it and maybe disregard the CGT discount for the time being, just for simplicity.

If it’s $1 million of proceeds, you’d use the active asset reduction and get that down by 50 per cent to $500,000.

So now we’ve got $500,000 sitting in a company or trust that carries on a business. That’s the remaining capital gain, and then you’ve got this tax-free amount, being your 50 per cent reduction, in the company or trust as well.

13:01

The next question is, okay, great. Let’s say it’s a company.

I think if it’s not a company, the issues are a bit simpler because you don’t have the same levels of taxpayers.

But let’s say it’s a company. We’ve reduced the rate and let’s just say, essentially, you’ve gone from a corporate tax rate of, let’s say, 30 per cent to effectively 15 per cent.

What do you do? What can you do with that money from there?

13:27

Yeah. Then the question becomes, how do you get that money out?

How do you extract the amount that you generated by using the active asset reduction?

So the question is, what are the circumstances? Did you just sell part of the business? Is there still a business in there?

Because if there is still a business in there, you’re going to have this tax-free gain, and the only way you could get it out while the business or company is still operating would be by way of an unfranked dividend.

13:54

Not ideal.

13:55

Generally, though, that’s not going to be the case.

You would imagine that the entire business would go out. Then you’d have to do something like a members’ voluntary liquidation to get the funds out.

The way in which that ends up being taxed is that the amount that represents the active asset reduction, in my example I think it was $500,000, the good news is that doesn’t get taxed to you as part of the liquidator’s distribution.

But when you then cancel the shares as part of that winding-up process, that $500,000 then gets effectively added to your capital gain.

When we’re working out the cancellation of your shares, or your proceeds, I should say, the question becomes, okay, that $500,000 could result in a capital gain on the cancellation of my shares.

Once I wind up the company, can I apply the small business CGT concessions?

Then that brings us to the question of, well, you said that there were two gateways: turnover or net assets.

Am I, as the shareholder, carrying on a business? In most cases, probably not.

So you’re not going to be able to use the $2 million or $10 million turnover test. The only way you’ll get in is via the MNAV test.

Now, if you’ve just received a liquidator’s distribution and there’s been a sale, you might not be able to, because you’ve just benefited from a large sale and you probably have quite a lot of cash.

So the question then becomes, can you apply the concessions there?

As you and I would know, with a bit of careful planning, you might be able to, but not in all cases.

15:30

So that’s a long way of saying that it is entirely possible that it’s just a temporary tax benefit, because on the way out you might still need to pay tax at the shareholder level.

15:46

I think that’s an excellent summary of it, because I’ve heard two different views.

One view is that this change to $10 million is completely useless because, okay, if it’s a company, the company doesn’t pay tax, but how is it going to come out?

Then, on the other hand, you say, well, now it’s a $10 million threshold. Doesn’t that mean we’re all good and can do whatever we want?

I’ll give you a comment on that, but it seems like the answer is probably somewhere between those.

16:16

Yeah. I think, look, it’s one of those situations where you might see five scenarios and four of them, factually, are just not going to work out quite right, because the shareholder themselves was never going to meet the MNAV test anyway, which might actually be why you structured it in this way.

So, I guess, what we’re going to see is that some are going to be okay, depending on the circumstances, and for some it’s not.

But I think the simple way of wording it is that it’s not a wide expansion.

It’s not like, “We’re all saved. The government’s come along and put in this expansion to the small business CGT concessions. This $10 million threshold is just going to help everybody out.”

I think the devil is in the detail, and I don’t think you should assume that you’re definitely going to get a long-term benefit, even if you do somehow find your way into these rules.

17:11

One thing I wanted to ask is, under the changes to the 50 per cent discount, we’re essentially losing that.

Some have equated it to, okay, well, you’re losing that, now you’re getting the concession, so, net, you’re not getting anything.

But one interesting point in the timing is that, for existing businesses, they still get the benefit of the discount up until 1 July 2027, which is also the same date that these new rules happen.

Are there situations where you can essentially get the benefit of both?

You kind of get the discount up to 1 July 2027, but then you also get the $10 million threshold and could potentially use both?

17:51

Yeah. When I read it, I was a bit concerned because of how complex everything else was.

As I read it, I was holding my breath with a level of concern, because I was worried it was going to be something like the active asset reduction only applying from this point to that point, and it was going to be pro-rated.

Then we’d have pro-rating for the CGT discount and pro-rating for the active asset reduction.

I was genuinely holding my breath. Given how complex everything else was, I was a bit worried.

The good thing is that the rules apply from 1 July 2027, but broadly we’re not having to pro-rate that active asset reduction.

So, yes, to the extent that the gain is for the entire period of time, there would be a portion of the gain where you’re getting the CGT discount and effectively the active asset reduction, which I’m quite grateful for because it simplifies it a lot.

18:45

Ani, we were talking earlier about the complexity of the concessions. I wanted to do a bit of a scale of one to 10.

Firstly, on a scale of one to 10, how complex are the small business concessions already, and how complex are they now with this additional change?

19:03

Are we factoring in the CGT discount changes too, or just the small business CGT changes?

19:07

Add that in too.

19:08

All right. So, just small business CGT concessions pre-May 2026, I’d say probably an eight.

The most complex would be if you had a trust taxpayer selling shares.

Yeah, that would probably be my most complex scenario: a trust selling shares with various entities in the group.

I’d say that would be probably an eight, a strong eight.

We are well and truly at a 10. I can’t imagine anybody doing this without some level of advice.

In fact, when I said that compliance costs...

Sometimes you look at a job and think, the risk is really low. It’s only a $200,000 gain. You probably don’t need a full...

19:55

We can just confine it to certain issues.

19:57

I’m not even sure that we’re going to be able to do that in this landscape, because there are so many issues.

I feel like the complexity is at a point where we can’t even comfortably step back and go, okay, we’re just going to look at this and this, because there are too many things at play.

So, yeah, absolutely a 10 out of 10.

I worry because I know that this is not the intention of the small business CGT concessions, to make it more complex.

But, as we also know, it comes down, and I think I say this on every episode that I’ve been on, to planning.

Because we already knew there were circumstances where you might get a better or different outcome if you did a business sale versus a share sale with the small business CGT concessions.

Again, this is even more amplified with the CGT discount and all the changes. You can look at so many different scenarios just with the CGT discount where a business sale versus a share sale might be different.

So planning will take the complexity of 10, or eight, slightly down a couple of notches, because you can probably plan your way out of some of the complexity and into the concessions if done properly, I think.

21:06

Yeah. I think that’s an excellent end note.

We’ve talked about the journey of the concessions and debated their usefulness.

I think we’ve agreed that there is a place for this expansion, but it’s not going to apply in all situations.

I think we both agree that the variations and possible different outcomes are greater now, and with that comes a higher complexity score.

But getting advice and planning can help with that.

21:35

Certainly can.

21:40

So, yeah, I very much encourage people to come to an adviser before the sale and have those discussions, because I think you can get a much better outcome, hopefully.

21:44

Yeah, I couldn’t agree more.

Thanks once again for being part of this episode, Ani.

21:49

Thanks, Andrew.