Selling a business is a major milestone whether you're retiring, moving on to a new venture, or simply cashing in on years of hard work. But before you celebrate the sale, there’s one crucial financial consideration that can significantly impact your net proceeds: Capital Gains Tax (CGT).
At OZ Advisory, we help business owners plan smarter exits by understanding how CGT applies, what concessions are available, and how to structure deals to minimise tax exposure. Here’s what you need to know.
What Is Capital Gains Tax?
Capital Gains Tax is the tax you pay on the profit or “capital gain” you make when selling certain types of assets. In Australia, CGT isn’t a standalone tax. Instead, it’s part of your income tax and is calculated based on the gain you’ve made from the sale.
A capital gain occurs when the sale price of an asset exceeds its original purchase price, plus any associated costs like legal fees, improvements, or selling expenses. Conversely, if you sell an asset for less than what you paid, you may incur a capital loss, which can be used to offset future capital gains.
Does CGT Apply When Selling a Business?
In most cases, yes. If you’re selling a business in Australia and the sale includes assets such as goodwill, business premises, or intellectual property, CGT will likely apply. However, the amount you owe and whether you owe anything at all depends on several factors:
- The structure of your business (sole trader, partnership, company, or trust)
- The type of assets being sold (e.g. shares, goodwill, property)
- How long you’ve held the business
- Whether you qualify for small business CGT concessions
Understanding these variables is key to planning a tax-efficient exit.
Common Business Assets Subject to CGT
When selling a business, CGT is typically calculated on the gain made from the sale of certain assets. These may include:
- Goodwill: The intangible value of your brand, reputation, and customer relationships
- Business premises: If owned by you or your business entity
- Plant and equipment: When sold for more than their depreciated value
- Intellectual property: Including trademarks, patents, and proprietary systems
- Shares in a private company: If you’re selling equity in the business
Each of these assets can trigger a CGT event, and the gain is added to your assessable income for the financial year in which the sale occurs.
What’s Exempt from CGT?
Not all assets attract CGT. Some common exemptions include:
- Trading stock: Inventory is generally excluded from CGT and taxed as ordinary income
- Depreciating assets: Items used solely for business purposes and claimed as deductions
- Personal-use assets: Items not used to generate income
- Certain small business assets: If you meet eligibility criteria, you may qualify for CGT concessions or exemptions
Knowing what’s exempt can help you structure your sale more strategically and avoid unnecessary tax.
Small Business CGT Concessions
The Australian Taxation Office (ATO) offers several CGT concessions for small business owners, which can significantly reduce or even eliminate your CGT liability. These include:
- 15-Year Exemption If you’ve owned the business for at least 15 years and are retiring or permanently incapacitated, you may be exempt from CGT entirely.
- 50% Active Asset Reduction You may be eligible to reduce the capital gain on active business assets by 50%.
- Retirement Exemption You can disregard up to $500,000 of capital gains over your lifetime if the proceeds are used for retirement. If you’re under 55, the amount must be rolled into a complying superannuation fund.
- Rollover Relief This allows you to defer CGT if you reinvest the proceeds into another active business asset within two years.
Each concession has specific eligibility criteria, and in many cases, you can apply more than one. However, the rules are complex, and professional advice is essential to ensure compliance and maximise your benefits.
How Business Structure Affects CGT
Your business structure plays a critical role in how CGT is calculated and what concessions you can access:
- Sole Traders and Partnerships: Gains are taxed at the individual’s marginal tax rate, but small business concessions are often easier to access.
- Companies: CGT is paid at the corporate tax rate, and some concessions may not apply.
- Trusts: Gains are distributed to beneficiaries, who then pay tax at their individual rates. Trusts can be tax-effective but require careful planning.
Choosing the right structure at the outset or restructuring before a sale can have a major impact on your CGT outcome.
Planning Ahead: Why Timing Matters
CGT is assessed in the financial year the sale occurs, so timing your transaction can influence your tax position. For example:
- Selling in a year with lower income may reduce your marginal tax rate
- Holding an asset for more than 12 months may qualify you for a 50% CGT discount (for individuals and trusts)
- Planning ahead allows time to restructure or qualify for concessions
At OZ Advisory, we help clients map out their exit strategy well in advance to ensure they’re not caught off guard by tax implications.
Real-World Example
Let’s say you’re a sole trader who started a café 10 years ago. You sell the business for $500,000, including $300,000 in goodwill and $200,000 in plant and equipment. You originally purchased the business for $200,000.
Your capital gain is $300,000 (sale price minus original cost and improvements). However, because you’ve owned the business for over 15 years and are retiring, you may qualify for the 15-year exemption, meaning you pay no CGT on the sale.
Without proper planning, you might have missed this opportunity and paid tens of thousands in unnecessary tax.
How OZ Advisory Can Help
Selling a business is more than just finding a buyer—it’s about exiting on your terms, with your financial future intact. At OZ Advisory, we specialise in helping business owners:
- Understand their CGT obligations
- Identify and apply for relevant concessions
- Structure deals to minimise tax
- Collaborate with accountants and legal advisors for a seamless exit
We believe that knowledge is power and when it comes to CGT, the right advice can save you more than just money. It can give you peace of mind.