For many business owners, the prospect of selling a business after decades of hard work has traditionally been supported by a range of generous capital gains tax (CGT) concessions. However, as the tax landscape continues to evolve, the small business 15-year exemption is increasingly likely to become one of the most powerful, and potentially one of the last remaining, tax-effective pathways available to business owners looking to exit.
The removal of the general 50% CGT discount for gains arising after 1 July 2027 will mean that business owners can no longer rely on the 50% CGT discount for goodwill created after that date. While the small business CGT concessions in Division 152 remain in place, we believe the importance of the 15-year exemption is will grow significantly, and in many cases, it will be prudent to obtain a formal valuation as of 30 June 2027 to ascertain the value of the business capital assets created to that date.
The challenge for many business owners
One of the most common stories in Australian small business is the owner who starts with little more than an idea, a modest amount of share capital, and a willingness to take risks.
A company may have been established years ago with only a handful of shares issued for a nominal amount. Over many years, the owners build brand value, customer relationships, intellectual property, goodwill and market presence. The result can be a business worth millions of dollars despite having had a very small original cost base. When the time comes to sell, the overwhelming majority of the sale proceeds can become a taxable capital gain.
Historically, the general 50% CGT discount, combined with the small business active asset reduction and other Division 152 concessions, often produced favourable outcomes for sellers, which was a welcomed relief after their years of hard work and sacrifice, often at the cost of their own superannuation contributions. This will mean that the 15-year exemption will become increasingly valuable as a complete exemption rather than a mere reduction.
Why the 15-year exemption stands out
In many cases, the removal of the 50% CGT discount will effectively double the amount of tax that business owners would have otherwise needed to pay on a sale of their business. This is unless the business owner is able to utilise the small business 15-year exemption, which may be able to be used to completely disregard the gain. In other words, if all conditions are satisfied, the entire capital gain may be tax-free.
For a business owner selling a business with substantial goodwill that has been built over many years, the difference between paying CGT and completely disregarding the gain can be significant.
Business owners planning an exit in the next five years should take notice
For owners who anticipate selling their business within the next five years, it may be worthwhile considering whether access to the 15-year exemption is achievable within that timeframe, or whether it would be beneficial to delay the sale until it is available.
A strategic review today may reveal that delaying an exit slightly could be the difference between a substantial tax liability and a completely exempt capital gain.
Key requirements to satisfy
While the benefits are significant, the requirements are strict.
Broadly, taxpayers must first satisfy the basic eligibility conditions for the small business CGT concessions, including the relevant turnover or net asset value tests and the active asset requirements. In addition to the these, the 15-year exemption also generally requires:
- Continuous ownership of the relevant asset for at least 15 years
- The asset to satisfy the active asset requirements
- The individual disposing of the asset to be at least 55 years old and the sale to occur in connection with retirement
- Additional requirements where shares in a company or interests in a trust are involved, including significant individual tests that must have been satisfied for the required period.
The detailed rules can be complex, particularly where businesses operate through companies, discretionary trusts, family groups or multiple entities. This is one of the reasons why we recommend strategic tax planning each year for groups and discretionary trusts, regardless of whether the business owner believes there is a need for a profit distribution or not. If a discretionary trust fails the significant individual test during the relevant period, it may be an extremely costly mistake that goes unnoticed until the business owner is wanting to rely on the 15-year exemption, which they many no longer be eligible to use.
The bottom line
The Australian small business sector has been built by generations of entrepreneurs who started with very little and created substantial value over long periods of time. For many of those owners, the business represents both their life’s work and their retirement plan.
As the CGT environment is changing, the small business 15-year exemption is likely to become increasingly relevant. For eligible taxpayers, it remains one of the few concessions capable of eliminating an otherwise substantial capital gain entirely.
Business owners contemplating an exit within the next five years should consider undertaking an early review of their eligibility. Understanding whether the 15-year exemption can be accessed, and what steps may be required to preserve that opportunity, could be one of the most valuable planning exercises they undertake before selling their business.
If you would like to discuss your eligibility to use the 15-year exemption, please don’t hesitate to contact us.
Disclaimer: This article contains general information only and should not be relied upon as taxation advice. Professional advice should be obtained having regard to individual circumstances before implementing any strategy.
