Small Business CGT Concessions

Is it Better to Sell the Business out of the Company, or Sell the Shares in the Company?

For those looking to exit their businesses, there is no simple answer to this question.

Initially, we need to consider in whose interest we are looking for the ‘best’ outcome – the company’s or the shareholder’s? Ideally, in many small businesses, these two groups will agree with the option selected.

When selling a ‘small business’ that is operated by a company, the best outcome will depend upon many factors, some of which include:

1.      Does the company hold a specific license or authority that enables the business to be operated? If so, often the shares in the company will be sold to enable the existing company to seamlessly continue to operate the business;

2.      How much risk is associated with the existing corporate structure – the purchaser may prefer to buy the business (rather than the shares) to mitigate any risk of prior year claims surfacing that relate to the company (notwithstanding warranties contained in any share purchase agreement), and to retain privacy over prior year accounting information;

3.      Who holds the shares in the company – individuals, trusts or another company? Where discretionary trusts hold the shares, who is the distribution to be made to in the year of the CGT event (and in the prior 15 years where the Small Business 15 year exemption is to be utilized)? Also, are any direct or indirect shareholders spouses of each other?;

4.      How many shareholders does the company have? Do they all agree to sell their shares?

5.      Does the company own other assets that the shareholders would like to retain after the sale?

There may be very different taxation and cashflow outcomes where the company sells their business compared with where the shares in the company are sold.

Where a company sells their business, it is unable to access the 50% general CGT discount to reduce the capital gain, which is currently available to individuals (and under review by the Government at the time of writing). The 50% general discount is applied after any prior or current year losses are utilized, and prior to the small business CGT concession being applied, to reduce the resulting capital gain by 50%. Also, where the 50% Active Asset Reduction is utilized, these proceeds are unable to be automatically distributed by the company to the shareholders.

The taxation and cash flow differences based on the type of sale (business or shares) may lead shareholders to prefer to sell their shares, whereas many purchasers find it much more beneficial from a tax  and risk perspective to purchase the business, especially where deductions are immediately available, such as where depreciable plant, equipment and other assets are acquired.

The share sale versus business sale question may result in diametrically opposed positions for vendors and purchasers, with negotiation possibly resulting in both the business and shares being sold. Vendors may find it difficult to meet the additional tests under the CGT small business concessions, discussed in this article, to enable a share sale to be successfully undertaken.

The requirement that a shareholder is a CGT concession stakeholder in the company (generally a 20% or greater interest) just before the CGT event may enable some shareholders to access this concession while precluding others with smaller interests, which may result in differing positions for shareholders as to which option is preferred.

Regardless of the type of sale and whether you are a shareholder or have another connection to the company or business, it is essential that you seek professional advice that considers all of your personal circumstances before proceeding.

This article will consider a simple scenario, where directors of a company operating a small business have been approached by a purchaser to sell the business operated by the company, and the purchaser is open to either a business sale or share sale.

Prerequisites to access the CGT Small Business Concessions

The small business CGT concessions enable a seller to disregard, reduce or defer some or all of the taxable gain on disposal of an ‘active asset’.

An active asset is one that is used and ready for use in the course of carrying on a business by you, your affiliate or an entity connected with you. It can be tangible or intangible, but the CGT concessions don’t extend to depreciating assets or stock on hand on the sale of a business.

An asset must have been active for more than half of the ownership period, or 7.5 years where it has been owned for more than 15 years. The ownership time period is measured from the date of acquisition to either the date of sale, or the date the business ceased to be an active asset, if this occurred before sale.

Note, 80% of the market value of assets held by the company must be active assets – this includes the assets of the business itself, as well as the financial instruments and cash that are inherently connected to the business. Where the company owns passive assets (property, shares, interests in other related companies), these may need to be valued to determine whether the market value of the active assets of the company exceeds 80% of the market value of the total assets of the company.

To be eligible to access the concessions, the aggregated turnover (aggregated with connected entities and affiliates) of the business must be less than $2m or the net market value of assets of the business, affiliates and connected entities (where an interest of at least 40% is held) is less than $6m. There are also specific rules for passive assets used in a connected small business, interests in a partnership and assets used in the partnership business.

Note, the requirement to consider levels of aggregated turnover may exclude a business from accessing these concessions where it is part of a larger operating group (note, internal transactions between the entities may be excluded from the aggregated turnover tests). Similarly, assets held outside a business by other entities connected with the business may also result in the net market value of assets exceeding $6m.

We recommend that you speak to your accountant or professional advisor to determine whether your business meets the basic requirements to access these concessions before proceeding.

Selling the Business

For a business sale, on the basis that you meet the active asset requirements, turnover and/or net asset tests and other requirements, you may be able to access the small business concessions. In some instances, this may be a much simpler option than the alternative of meeting the additional tests required to access the concessions for the sale of shares in the company.

Some of the taxation issues to be considered when selling the business include:

1. The nature of the assets being sold (tangible or intangible) and whether the contract price is required to be allocated to specific assets or presented as one contract price (stock is often identified as a separate value to be calculated on settlement);
2. Both stock on hand and depreciating assets are revenue assets, and are not included in the small business CGT concession calculation, with profit on sale being separately calculated on the disposal of these assets;
3. Are there any assets owned by the company and used in the business that are not included in the sale?
4. Is the sale price inclusive or exclusive of GST?

GST is a separate matter to be considered. On the basis that the business being sold is registered, or required to be registered, the additional conditions under the ‘GST - Sale of a Going Concern provisions’ must be met to enable the sale to be GST free.

These conditions include that all things necessary to operate the business are included in the sale; the business is operated until the day of settlement; the supply is for consideration; both vendor and purchaser are registered (or required to be registered) for GST and have agreed in writing that the sale is a GST free sale of a going concern – see GSTR 2002/5 on the ATO website for further detail.

Sale of a Share in a Company

Where the business has met the requirements to access the CGT small business concessions, and the decision is made to sell the shares in the company, rather than the business being sold out of the company, the concessions are not automatically applied to the capital gain on the sale of the shares in the same way that they would have been to the business sale.

There are a number of additional conditions that must all be met for the entity owning the shares to be able to apply the CGT small business concessions to a share sale. These tests are designed to ensure that the shares being sold are themselves active assets.

There are a couple of key terms to be discussed before we consider the additional conditions.

• Significant individual – where an individual’s direct and indirect interests in the company total at least 20% of the shares in the company. Only an individual can be a significant individual (a company or trust can’t be a significant individual);
• CGT concession stakeholder – either a significant individual or the spouse of a significant individual with a 20% or more interest in the company (note, the spouse’s small business participation percentage must be greater than zero where they are an affiliate of a CGT concession stakeholder);
• Total small business participation percentage – total of the direct and indirect interests in the company. It is the smallest percentage of each of the following that is applied to the shareholding:

o   Percentage of voting power that the shareholder may exercise;

o   Percentage of dividend payments that the shareholder is entitled to receive:

o   Percentage of return of capital the shareholder is entitled to receive.

Where all issued shares are ‘ordinary shares’, on the basis that all shares have the same entitlement to vote, receive dividends and capital distributions, the small business direct and indirect percentages will most likely be a reflection of the number of shares held.

Where different classes of shares have been issued (other than redeemable shares), for example, dividend only shares, the total small business participation percentage for that shareholder may be zero, as it is smallest percentage of voting (zero), dividends (100%) and capital (zero) interests will be applied to the total shareholding.

The additional tests to be met to access the small business CGT concessions, where shares in a company are to be sold, are:

1.      Where no-one has obtained financial instruments or cash to assist an entity to meet the active asset concession, the shares may be considered active assets;

2.      Where the company selling the shares controls any other entities, those interests are also considered in whether the modified active asset test is met (see below);

3.      The person or entity that owns shares in the company operating the business is either a small business entity in their own right or meets the net asset test;

4.      Just before entering into the contract for the sale of the shares, the vendor was a CGT concession stakeholder in the company and all CGT concession stakeholders had a total small business participation percentage of 90% in the company;

5.      The modified connected entity rule is met – this is where the company or trust must include the turnover of it’s affiliates and other entities connected to it to determine whether total turnover exceeds $2m, with the connected entities percentage being 20% (half the general small business connected entity measure for the company operating the business). The 20% rate is the deemed ‘control’ percentage when looking at the sale of a share in the company;

6.      Modified active asset 80% test is applied – this is looking at the assets held by the company whose shares are being sold – what companies or trusts does it have an interest in? Where the ultimate significant individual (the individual, trust beneficiary or company shareholder) has a 20% or more direct and indirect interest in other entities, these must be valued to determine whether more than 80% of the assets of the company selling its shares are active assets;

Example:

Paper Plane Pty Ltd (PPPL) is a small business (turnover less than $2m) that was created 10 years ago and manufactures aircraft components from recycled materials. PPPL meets the basic requirements to access the small business CGT concessions. The company has been approached to sell its business or its shares to a competitor. The sale price is $2.4m and it is assumed 100% of this relates to goodwill.

Jan has a discretionary trust (JT) that owns 50% of the shares in PPPL. Jan’s trust only holds the shares in PPPL and no other assets or business interests. Jan will be the sole beneficiary in the year of the CGT sale event.

Peter has a discretionary trust (PT) that own the other 50% of the shares in PPPL. In addition to the shares held in PPPL, Peter has a small business that he also operates through PT, but the aggregated turnover of PPPL and PT’s small business is less than $2m. Peter will be the sole beneficiary in the year of the CGT sale event.

Jan and Peter are the founding shareholders of PPPL, both hold ordinary shares with identical voting, dividend and capital rights and are not related to each other. They are unsure as to whether the tax outcome would be best if the business or shares in the company were to be sold.

On the basis that both the sale of the business or sale of the shares will enable access to the CGT small business concessions, following discusses the possible outcomes.

Outcome on Sale of the Business

If the business is sold by the company, in the absence of any capital or revenue losses, and with access to the small business CGT concessions:

Depending upon the future plans for the company, remaining assets held, the number of significant individuals (potential maximum of 8) and the size of the gain etc, the company may choose not to access the 50% active asset reduction on the sale of the business. Professional advice should be sought at this stage to determine whether the 50% active asset reduction provides the best cash flow outcome for the owners, as these funds may be retained by the company until it is wound up.

In the above example, the options for the balance of $1,100,000 include:

1. Tax can be paid by the company in the year of the CGT event on this amount - currently at 25% for base rate entities. A ‘base rate entity’ is a company with aggregated turnover less than $50 million and 80% or less of its income for the year is passive income. Where the company is not a ‘base rate entity,’ the 30% tax rate generally applies. The balance of the sale proceeds may then be available to distribute as franked dividends;
2. The CGT retirement exemption may be applied ($500,000 is the lifetime limit per significant individual or CGT concession stakeholder for this exemption), with the $500,000 being contributed to a complying superannuation fund or retirement savings account on behalf of significant individuals of CGT concession stakeholders under 55 years of age in the proportion of their shareholding – for those over 55 years of age, the funds may be paid directly to the CGT concession stakeholders. There are record keeping requirements and the timing of payments into superannuation are critical for successfully accessing this concession;
3. The CGT small business rollover may be applied to the $1,100,000. Alternately, if the retirement exemption is accessed and $500,000 each was contributed to superannuation for Jan and Peter (on the basis that neither had previously accessed the CGT small business retirement exemption) the CGT small business rollover may be applied to the remaining balance of $100,000. Within 2 years of the date of the CGT business sale event the company must have acquired active assets that will be offset against the amount rolled over. Any of the small business rollover amount remaining after 2 years will either be assessable to tax at that time or may be distributed to CGT concession stakeholders under the CGT retirement exemption (only where their lifetime limit has not previously been reached).

Generally, options 2 and/or 3 will be selected. The issue remains that $1,100,000 under the CGT 50% Active Asset reduction remains trapped within the company – this amount may be released on the winding up of the company as a liquidator’s distribution at a future time.

Outcome on Sale of the Shares

Both Jan and Peter need to consider the additional small business CGT tests where they decide to sell their shares in PPPL:

-         No financial instruments or cash were obtained to assist the company in meeting the active asset test,

-         PPPL does not own interests in any other companies, so this does not need to be considered for the modified asset test.

-         Regarding the entity holding the shares in the company, PT operates a small business and JT holds only the shares in PPPL. We have also assumed that the combined net assets of JT, PT and PPL are less than the $6m net asset value threshold.

-         The shareholders must be CGT Concession stakeholders just before the CGT event.

-         JT and PT each own 50% of PPPL, so both of these entities are connected to PPPL.

Outcome for JT

If Jan receives 100% of the distribution from JT in the year of the CGT event (on the basis that JT doesn’t have losses carried forward in excess of the expected gain), she is a significant individual of JT. As the sole beneficiary for the year, Jan meets the 90% small business participation percentage in JT.

JT has a direct small business participation percentage of 50% in PPPL. Individually, Jan also has an indirect small business participation percentage of 50% in PPPL, as she receives 100% of the distribution from JT in the year of the CGT event.

As Jan’s small business participation percentage exceeds 20% in PPPL, she is considered a significant individual and CGT concession stakeholder of PPPL.

Outcome for PT

             If Peter receives 100% of the distribution from PT in the year of the CGT event (on the basis that PT doesn’t have losses carried forward in excess of the expected gain), he is a significant individual of PT. As the sole beneficiary for the year, Peter meets the 90% small business participation percentage in PT.

PT has a direct small business participation percentage of 50% in PPPL. Individually, Peter also has an indirect small business participation percentage of 50% in PPPL, as he receives 100% of the distribution from PT in the year of the CGT event.

As Peter’s small business participation percentage exceeds 20% in PPPL, he is considered a significant individual and CGT concession stakeholder of PPPL.

             For JT, PPPL is also connected to PT, and for PT, PPPL is also connected to JT. These connections need to be considered to determine whether the company and connected entities exceed the $2m turnover and $6m net asset threshold.

On the basis that all of the additional tests for the sale of the shares in the company are met,

following may be the outcome for Jan and Peter, where each trust distributed 100% of the

income and capital of the trust to each of them during the year:

 *the 50% CGT discount is under review by the government at the time or writing tis article.

Jan and Peter may choose to contribute the remaining capital gain to a superannuation fund under the CGT retirement exemption where they are under 55 years of age, or if over 55 years of age, they may choose to retain these funds.

Another option for the remaining capital gain is to select the CGT small business rollover option for the following two years and invest this amount in full or part in other active assets. Where any amount of the gain remains after the two years, the CGT retirement exemption may still be accessed (if the $500,000 cap has not been reached). Alternately the remaining gain at this time may be subject to income tax in the individual’s hands.

In the above example, the business had been owned for 10 years. Where a business meets the basic conditions of the concessions, and has been owned for 15 years, it is possible that the gain may be disregarded in full.

For this to occur, where the sale is by an individual, the disposal must be in connection with the retirement of at least one significant individual (over the age of 55), or due to their permanent incapacity and if the asset is a share in a company or a trust, that entity must have had a significant individual for periods totaling at least 15 years of the total period  the individual owned the shares (even if not the same significant individual each year).

Where the asset being disposed of is an asset/business owned by a company or trust, that entity must have had a significant individual for periods totaling at least 15 years of the total period of ownership (even if not the same significant individual each year) and:

• a significant individual just before the CGT event is over 55 years of age and the event occurs in connection with their retirement; or
• a significant individual was permanently incapacitated at that time.

Apart from the capital gain being disregarded, on meeting all requirements of the concessions, significant individuals may access the proceeds of sale (not the net capital gain). These funds may be deposited to superannuation for significant individuals in their holding proportion, within two years of the CGT event, up to the CGT cap (prior to the individuals 75th birthday). The cap is a lifetime amount and previous superannuation contributions under the CGT small business retirement exemption or 15 year concession reduce the available cap. For 2026, the cap is currently $1,865,000 (indexed by $5,000 per year).

For some accessing the 15 year concessional cap and contributing large amounts to superannuation, they may need to consider the impact of Division 296 tax from 1 July 2026, which increases the rate of tax on superannuation earnings for those with balances in excess of $3 million.

In summary, as can be seen from this simple example, there may be a taxation and cashflow benefit to the shareholder of a small business for the shares to be sold in the company, rather than where the business is sold by the company. There are many variables to consider when an offer to sell business assets is received, and taxation and cashflow are only two of these. Where the shareholders are also employed by the company, as in many small businesses, this adds an additional layer of complexity to the decision making process.

A successful business or share sale is often many years in the making, with the business being prepared and presented in the best possible light for the eventual sale. Consideration early in this process as to whether a business or share sale will be pursued may impact whether new shareholders are introduced to the company in the interim, how trust distributions are made in the current or future year and other decisions of both directors and shareholders.

This article is not intended to be advice for any individual or entity, but to simply raise some of the questions that a director or shareholder may ask their accountant or professional advisor when approached to sell their small business. It is always recommended that you seek professional advice from the outset in relation to any small business share or business sale, to ensure the best, and most tax effective, outcome is obtained.

Michelle Wilson

April 2026