Capital Gains Tax in Australia: Chapter 2 - Small Business CGT Concessions - The Basic Eligibility Rules You Must Get Right

Future Accounting
2 hours ago
5 min read

In Chapter 1, we covered how capital gains tax works at a general level.

For business owners, however, the real planning opportunities sit within the small business CGT concessions — a set of rules that can significantly reduce, defer, or even eliminate a capital gain.

But before any of those concessions are available, there is a critical gateway:

You must first satisfy the basic eligibility conditions.

And this is where many opportunities are either created — or lost.

Why the basic conditions matter

The small business CGT concessions are extremely valuable. In the right circumstances, they can:

reduce a capital gain by 50% (on top of the general discount)
defer tax entirely
or eliminate the gain altogether

However, none of this matters if the basic conditions are not met.

In practice, we often see situations where:

the business is profitable
the sale price is strong
but the structure or asset ownership fails the eligibility tests

The result can be a significantly higher tax outcome than expected.

The four key small business CGT concessions eligibility pillars

To access the small business CGT concessions, you generally need to satisfy four key areas:

1. The entity test (turnover or net assets)

2. The active asset test

3. Aggregation rules (who is grouped together)

4. Additional conditions for shares or trust interests

We will walk through each of these.

1. The entity test — turnover or net assets

You only need to satisfy one of the following:

Option A: Small business entity test (turnover test)

You are a small business entity if your aggregated turnover is less than $2 million.

This includes:

your business turnover
plus turnover of any affiliates
plus turnover of any connected entities

This is where many people underestimate their size — particularly in family groups or where multiple entities operate together.

Option B: Maximum net asset value test ($6 million test)

Alternatively, you may qualify if the total net value of relevant assets is less than $6 million just before the CGT event.

This includes:

your own assets
assets of connected entities
assets of affiliates (and entities connected with them)

Importantly, this is based on net value (assets less liabilities), not gross asset value.

Common misconception

Many clients assume:

“My business turnover is under $2 million, so I qualify.”

But once you factor in a related property entity, a family trust, or a spouse’s business, you may exceed the threshold.

This is why group structuring matters well before any sale is contemplated.

2. The active asset test

Even if you satisfy the entity test, the asset itself must qualify.

To access the concessions, the asset must be an active asset.

What is an active asset?

An asset is generally active if it is:

used in the course of carrying on a business, or
held ready for use in a business

This includes:

goodwill
plant and equipment
business premises (in many cases)

Time requirement

The asset must be active for:

at least half the ownership period, if owned for 15 years or less, or
at least 7.5 years, if owned for more than 15 years

Where things get tricky

Not all assets qualify as active assets.

For example:

assets held purely for investment may fail
rental properties can be problematic (depending on use and structure)
excess or unused assets may not qualify

Practical example

A business owner operates through a company, but the business premises are held in a separate trust.

If structured correctly, the premises may still qualify as an active asset — but if the connection between entities is not properly established, the concession may be lost.

3. Aggregation rules — who is included?

The aggregation rules determine whose turnover is counted and whose assets are included.

This involves two key concepts:

Affiliates

Individuals or entities that act in accordance with your directions or wishes.

Connected entities

Entities where there is control (generally 40% or more ownership or influence, subject to detailed rules).

Why this matters

These rules can significantly expand the scope of turnover calculations and asset values.

A structure that looks “small” on paper can quickly exceed thresholds when aggregated.

4. Additional rules for shares and trust interests

If the asset being sold is a share in a company, or an interest in a trust, additional conditions apply.

This is where the concept of a “Significant individual” or “CGT concession stakeholder” becomes critical.

What is a significant individual?

Broadly, this is someone who has at least a 20% interest in the company or trust (directly or indirectly).

In many cases:

at least one significant individual must exist
and additional participation requirements must be satisfied

Why this is important

This is one of the most common failure points.

We often see discretionary trusts with unclear entitlements, complex family structures, or passive beneficiaries where the significant individual test is not satisfied — and access to concessions is lost.

5. The $6 million test — what assets are excluded?

When applying the maximum net asset value test, not all assets are counted.

Some common exclusions include:

superannuation balances
life insurance policies
certain assets already counted elsewhere in the group

Understanding what is included and excluded can make a material difference to whether the test is passed.

Practical example (bringing it together)

A business owner operates through a trading company, a property trust holding premises, and a family trust holding investments.

Individually, each entity may fall below thresholds.

But when turnover is aggregated and assets across the group are included, the group may exceed the $2 million turnover test but still pass the $6 million net asset test.

If this analysis is not done properly before the sale, the outcome can be unexpected.

Strategic insights — where value is created

1. Structure early, not at exit

Restructuring close to sale can be ineffective or trigger tax issues. The best outcomes are achieved years in advance.

2. Separate active and passive assets carefully

Holding business assets separately can be effective — but only if the connection rules are satisfied.

3. Review eligibility regularly

Businesses evolve. What qualified five years ago may not qualify today.

4. Model outcomes before selling

Understanding whether concessions are available can influence timing, sale structure and negotiation strategy.

Key takeaway

The small business CGT concessions are not automatic.

They depend on the structure of your affairs, how assets are owned, and whether the detailed eligibility rules are satisfied.

Getting these fundamentals right can be the difference between paying full tax on a gain or significantly reducing — or eliminating — that tax altogether.

Book a strategy session to review your structure, confirm your eligibility, and identify opportunities before a sale is locked in.

Disclaimer  

This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.  

Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder 

Liability limited by a scheme approved under professional standards legislation.