What is the 15-year small business CGT exemption?

How the 15-year exemption works

The exemption sits in Division 152 of the Income Tax Assessment Act 1997, alongside the 50% active asset reduction, the retirement exemption and the small business roll-over. Where it applies, the whole capital gain is disregarded, not just part of it. You choose to apply it, and the ATO says it is applied first.

For an individual, all of these need to be true:

• The basic conditions are met: in short, aggregated turnover under two million dollars or a pass on the maximum net asset value test, and an asset that passes the active asset test. Shares and trust interests have extra conditions.
• You owned the asset continuously for the 15 years ending just before the sale, and it was an active asset (used in, or inherently connected with, a business) for at least 7.5 years in total.
• You are 55 or over and the sale is connected with your retirement, or you are permanently incapacitated.
• For shares or trust interests, the company or trust had a significant individual (someone with a small business participation percentage of at least 20%) for at least 15 years in total while you owned them.

A company or trust can use the exemption for its own assets too. It needs the same 15 years of ownership, a significant individual for at least 15 years in total, and someone who was a significant individual just before the sale and is 55 or over and retiring, or permanently incapacitated.

Retirement is judged on the facts. The ATO looks for at least a significant cut in hours or change in activities, and the sale can come before or after you step back. Interests bought at different times are separate assets, each with its own 15-year clock.

Where market value still matters

If the whole gain can be disregarded, does the value of the business still matter? Often it does, because two of the eligibility tests use market values.

• The maximum net asset value test. If turnover is two million dollars or more, this is usually how the basic conditions are met. It adds up the market value of the CGT assets of you, your connected entities and your affiliates (only assets used in your business) just before the sale, less related liabilities and certain provisions, and the total must not exceed six million dollars. Goodwill counts, so the business is often the largest figure. Your home and super are generally left out.
• The 80% test for shares and trust interests. Shares in an Australian resident company, or interests in a resident trust, generally count as active assets only if the active assets of the company or trust, plus certain business cash and financial instruments, make up at least 80% of the market value of everything it owns. That has to hold for at least 7.5 years of your ownership, so past years can matter, not just the sale date.

Independent Business Valuation prepares independent market valuations of businesses, shares and trust interests for your adviser to use with these tests, each prepared and signed by a suitably qualified business valuer at Valuo. Independent Business Valuation values; your tax adviser decides whether a concession applies.

The 15-year exemption after 1 July 2027

All four small business CGT concessions continue after 1 July 2027. From the income year that includes 1 July 2027 the turnover threshold rises to 10 million dollars for the 50% active asset reduction only. The 15-year exemption keeps its existing tests: aggregated turnover under two million dollars, or net assets of no more than six million dollars.

For Australian resident individuals and trusts with at least one eligible beneficiary, CGT assets held on 30 June 2027 are generally treated as sold and bought back just before 1 July 2027. If you are counting on the 15-year exemption for a later sale, ask your tax adviser how that rule works with your ownership period and the age and retirement tests. If a condition is not met when you sell, the size of the gain matters again. A market value as at 30 June 2027 is one way to set the part that built up before 1 July 2027; an apportioning method may be another, once one is made.