Selling your business is likely the largest financial transaction of your life. The sale price matters — but what you keep after tax matters more.
In Australia, the sale of a business is generally subject to Capital Gains Tax (CGT). However, generous small business concessions can reduce or even eliminate the tax you pay. Understanding these rules before you go to market is essential to structuring a deal that maximises your after-tax outcome.
This guide covers the fundamentals. It is not tax advice — you should always work with a qualified accountant or tax advisor on the specifics of your situation.
How CGT Works on a Business Sale
When you sell a business, you’re typically selling one or more of the following:
- Goodwill — the intangible value of the business above its net tangible assets
- Plant and equipment — machinery, vehicles, fit-out, tools
- Stock — inventory on hand at settlement
- Intellectual property — trademarks, patents, proprietary systems
- Contracts and customer relationships
Each of these assets may have a different CGT treatment. Goodwill is usually the biggest component and attracts the most attention from both buyers and the ATO.
The Basic CGT Calculation
The capital gain on each asset is calculated as:
Capital Gain = Sale Price - Cost Base
Your cost base includes the original purchase price plus incidental costs (legal fees, stamp duty, improvements). If you built the business from scratch, the cost base of self-generated goodwill is typically zero — which means the entire sale price of goodwill is a capital gain.
The 50% General CGT Discount
If you’ve held the asset for more than 12 months (which most business owners have), you’re entitled to a 50% discount on the capital gain. This applies to individuals and trusts — not companies.
So if you sell goodwill for $1,000,000 with a zero cost base, the taxable capital gain (for an individual) is $500,000 after the general discount.
The 4 Small Business CGT Concessions
This is where the real tax savings come from. The ATO provides four specific concessions for small business owners who meet the eligibility criteria. These concessions can be applied in combination and in sequence, potentially reducing your tax to zero.
Eligibility Requirements
To access these concessions, you generally need to satisfy:
- The $6 million net asset value test — the total net assets of you, your connected entities, and affiliates must be under $6 million (excluding personal-use assets and superannuation); OR
- The $2 million aggregated turnover test — your combined annual turnover is under $2 million
- The active asset test — the asset being sold must have been actively used in the business for at least half the ownership period (or 7.5 years if owned longer than 15 years)
1. The 15-Year Exemption
If you’ve owned the business (or the CGT asset) continuously for 15 years and you’re aged 55 or over (or permanently incapacitated), the entire capital gain is exempt. No tax at all.
This is the most powerful concession, but the conditions are strict. If you qualify, none of the other concessions are needed.
2. The 50% Active Asset Reduction
This provides a further 50% reduction on top of the general 50% discount. For an individual, this means only 25% of the original capital gain is taxable.
There are no age or retirement requirements — you just need to meet the basic eligibility criteria above.
3. The Retirement Exemption
You can exempt up to $500,000 of capital gains over your lifetime. If you’re under 55, the exempt amount must be paid into superannuation. If you’re 55 or over, you can keep it as cash.
This is a lifetime cap — once you’ve used $500,000, it’s gone.
4. The Small Business Rollover
If you’re not ready to pay tax yet, you can defer (roll over) the capital gain by acquiring a replacement active asset or making a capital improvement to an existing asset within 2 years.
This doesn’t eliminate the tax — it delays it. It’s useful if you’re buying another business or reinvesting the proceeds.
How the Concessions Stack
These concessions can be applied in sequence. Here’s the order:
- Calculate the capital gain
- Apply the 50% general CGT discount (if held 12+ months)
- Apply the 50% active asset reduction
- Apply the retirement exemption (up to $500,000 lifetime cap)
- Apply the rollover on any remaining gain
Worked Example: Selling a Small Business
Scenario: Sarah, aged 58, sells the goodwill of her physiotherapy practice for $1,200,000. She started the business 10 years ago (cost base of goodwill is zero). She meets the $6 million net asset value test. She has not previously used any CGT concessions.
| Step | Calculation | Amount |
|---|---|---|
| Capital gain | $1,200,000 - $0 | $1,200,000 |
| 50% general discount | $1,200,000 x 50% | $600,000 |
| 50% active asset reduction | $600,000 x 50% | $300,000 |
| Retirement exemption | $300,000 - $300,000 | $0 |
Result: Sarah pays zero CGT on the sale. She contributes $300,000 to super under the retirement exemption (since she’s over 55, she could also take it as cash). Her $500,000 lifetime retirement exemption cap is reduced by $300,000 to $200,000 remaining.
Without the concessions, Sarah would have owed tax on a $1,200,000 capital gain — potentially $400,000+ depending on her marginal rate. The concessions saved her hundreds of thousands of dollars.
How Business Structure Affects Your Tax Outcome
The structure you operate through has a major impact on how much tax you pay on a sale.
Sole Trader
You personally own the business assets. Capital gains flow directly to your individual tax return. You get the full benefit of the 50% general discount and all four small business concessions.
This is often the simplest structure for accessing CGT concessions.
Company
The company owns the assets and makes the capital gain. Companies do not receive the 50% general CGT discount. However, the company can access the small business CGT concessions.
Extracting the after-tax proceeds from the company adds another layer of complexity — it may trigger Division 7A issues or require payment of a dividend (which is taxed again at your personal rate, albeit with franking credits).
Trust
Trusts are often the most flexible structure for business sales. The trust can access the 50% general discount and all four small business concessions. Capital gains can be distributed to beneficiaries in a tax-effective manner.
However, trust distributions of capital gains need careful planning — the tax law around streaming capital gains to specific beneficiaries has specific requirements.
Partnership
Similar to a sole trader for each partner’s share. Each partner’s share of the capital gain flows to their individual return and is eligible for the general discount and small business concessions (subject to meeting the tests individually).
GST on Business Sales
Good news: if you sell a business as a going concern (i.e., the business is operating and all things necessary for its continued operation are supplied), the sale is GST-free under the GST Act.
To qualify as a going concern:
- The buyer must be registered (or required to be registered) for GST
- Both parties must agree in writing that the supply is a going concern
- The seller must supply everything necessary for the business to continue operating
Most business sales are structured as going concerns, so GST is rarely a practical issue. However, if the sale does not qualify, GST of 10% may apply to certain assets — which can create a significant cash flow impact at settlement.
The Importance of Getting Tax Advice Early
Do not wait until you have a signed contract to think about tax. The time to plan is 12-24 months before you sell. Early planning allows you to:
- Restructure if needed. If your current structure is not tax-efficient for a sale, there may be options to restructure (though this must be done carefully to avoid anti-avoidance provisions).
- Value individual assets correctly. The allocation of the purchase price across different assets (goodwill, plant, stock, IP) affects both your tax and the buyer’s tax. This is a negotiation point.
- Meet eligibility thresholds. If you’re close to the $6 million net asset value test, there may be legitimate steps to ensure you qualify.
- Maximise super contributions. If you’re using the retirement exemption, coordinating with your super fund takes planning.
- Avoid ATO scrutiny. The ATO actively reviews business sale transactions. Proper documentation and compliance reduce audit risk.
Common Tax Mistakes When Selling a Business
- Assuming you qualify for concessions without checking. The eligibility tests are detailed and specific. Connected entities and affiliates can push you over the $6 million threshold unexpectedly.
- Ignoring the asset allocation. Buyers want to allocate more to depreciable assets (plant, equipment) and less to goodwill. Sellers often want the opposite. Get advice on what’s defensible and negotiate accordingly.
- Forgetting about trading stock. Stock sold as part of a business sale is ordinary income, not a capital gain — it’s taxed at your full marginal rate with no CGT discounts.
- Not considering instalments. If the buyer pays in instalments, you may be able to spread the capital gain over multiple income years — reducing your marginal tax rate.
- Leaving money on the table. Many business owners don’t realise they qualify for concessions, or they don’t stack them correctly, and end up paying far more tax than necessary.
Key Takeaways
The Australian tax system provides genuinely generous concessions for small business owners selling their businesses. But accessing those concessions requires planning, documentation, and professional advice.
Start early, work with an experienced tax advisor, and structure the transaction to maximise what you keep — not just what you sell for.
Want to understand what your business might be worth before considering tax implications? Use our free valuation calculator to get an indicative range, or contact us to discuss your specific situation.
Related reading:
- How to Value Your Business for Sale — understand what drives your sale price
- Preparing Your Business for Sale — the 12-month checklist to maximise value