What Is Capital Gains Tax (CGT)? A Guide for Small Business Owners

Selling a business asset or the business itself can trigger capital gains tax (CGT) and materially change your after-tax outcome.

This guide explains what CGT is, which transactions and assets trigger it, and how gains are calculated. We also cover the main small-business concessions, practical planning steps, and common pitfalls, so you can spot issues and get advice before you sign.

What is the capital gains tax?

Capital Gains Tax (CGT) in Australia is a tax on the profit you make when you sell or dispose of an asset. It applies to various types of assets, including real estate, shares, and business sales.

CGT is not a separate tax but rather a component of your income tax, meaning it’s included in your annual income tax return.

The basic principle of CGT is that when you sell an asset for more than you originally paid for it, the difference (or ‘capital gain’) is subject to tax. CGT operates by treating net capital gains as taxable income in the tax year in which you sell or otherwise dispose of the asset.

What is a CGT event?

A CGT event occurs when you sell an asset that’s tangible or intangible, which may result in capital gain or loss.

Examples of events that trigger capital gains tax for small businesses include:

• Sale of shares: A sale of a company share is a CGT event.
• Disposal: If you dispose of a CGT asset, you are selling it or giving it to someone else.
• Business sale: A sale of a business will trigger a CGT event. The seller incurs this.

Here is a quick reference table of examples of CGT events and business contexts.

Remember that for many disposals, the contract date — not the settlement date — determines the timing. Also, not every business transaction is a CGT event, so it’s crucial to check asset sales and transfers.

What assets can trigger CGT for small businesses?

A wide range of assets can trigger CGT for small businesses. These include:

• Business goodwill
• Business premises, land, and buildings
• Shares in a company
• Units in a unit trust
• Intellectual property, trademarks, and licences
• Client lists, websites, and digital assets
• Crypto assets held by the business
• Investment assets
• Assets transferred to related parties

Depreciating assets (plant and equipment) often follow balancing adjustment rules under income tax rather than standard CGT treatment. Check the tax treatment of those assets carefully.

How do you calculate a capital gain?

There are several steps to calculate CGT and figure out the taxable amount.

• Determine the cost base: The cost base includes the original purchase price of the asset, along with associated costs such as stamp duty, legal fees, and any costs incurred for improvements to the asset.
• Calculate the capital gain: Subtract the cost base from the sale price of the asset. The result is your capital gain or capital loss.
• Apply any discounts or exemptions: If you’ve held the asset for at least 12 months, you may be eligible for a 50% CGT discount. Superannuation funds are entitled to a 33.3% CGT discount. Small business concessions may also apply in certain circumstances. (More on discounts later on in this guide).
• Determine the tax payable: The net capital gain (after applying any discounts or exemptions) is added to your taxable income for the year. CGT is then taxed at your individual marginal tax rate.

Here is a quick overview of what each term means to facilitate calculation:

Is CGT a separate tax?

CGT is not a standalone tax. Instead, it is a part of your overall income tax. Any net capital gains you make are simply added to your assessable income and taxed at your applicable tax rate for the year.

However, the rules can vary depending on who is paying the tax:

• Individuals: May be eligible for the general 50% CGT discount in Australia if assets are held for at least 12 months.
• Companies: Generally can’t access the general 50% CGT discount.
• Trusts and superannuation funds: Have their own specific rules. For trusts, in particular, gains may flow to beneficiaries, so it is often best to seek professional advice to understand your specific situation.

How does CGT apply when selling a business?

When you sell your business, you’re usually selling several different things at once, and each one might have its own tax rules.

For example, business goodwill, which is basically the reputation and value you’ve built up, is a major asset that often triggers CGT. On the other hand, things like your storefront or office space might create their own separate gains.

It’s also important to remember that physical items like machinery or vehicles (often called “plant and equipment”) are usually handled through “balancing adjustments” in your regular income tax, rather than the standard CGT process.

How you structure the sale — whether you’re selling the assets themselves or selling the shares or units in the business entity — will also play a huge role in your final tax bill.

Here is a quick overview of sale structures and whether they trigger CGT.

Finally, remember that the date you sign the contract is what usually matters for tax timing, not the day the money actually hits your bank account. Other factors, like settlement dates and earn-out arrangements, can also shift your liability.

What is the CGT discount?

Individuals and trusts may be eligible for a 50% discount on their capital gains if they have owned the asset for at least 12 months. However, companies generally do not qualify for this discount. Any capital losses are subtracted before the discount is applied.

Note that small business tax concessions are separate, though they can sometimes be used alongside this general discount.

Note: There are proposed changes to the general CGT discount starting 1 July 2027. It’s important to verify the current rules before making any decisions.

What small business CGT concessions are available?

If you run a small business with assets that are actively used in the business, you can unlock small business concessions and exemptions.

Small business tax concessions come with specific rules, so your eligibility often depends on meeting requirements such as the active asset test, turnover limits, or net asset value thresholds. You must also factor in how your connected entities and affiliates might influence your status.

Here is a quick overview of the available concessions:

Because these concessions can interact with the general CGT discount, always seek professional tax advice well before signing any sale contract.

What is the active asset test?

The active asset test is a key requirement you must meet to access most small-business capital gains tax concessions. It checks whether an asset is actively used in your business operations rather than being held just as a passive investment.

To qualify, the asset generally needs to be used or held ready for use in your day-to-day business activities, such as your business premises, goodwill, or specific intangible assets. Passive investments, like assets held purely for income or capital growth, typically don’t qualify.

Keep in mind that specific rules apply to shares and trusts, so you should always check the specifics before finalising a sale.

Can capital losses reduce CGT?

You can use capital losses to offset capital gains, reducing the amount of tax payable. If capital losses exceed capital gains, you can carry the excess losses forward to future income years.

Let’s say you made a capital gain of $20,000 on the sale of shares and a capital loss of $5,000 on the sale of a different set of shares. You could offset the loss against the gain, resulting in a net capital gain of $15,000.

Capital losses can be carried over indefinitely in Australia to offset future capital gains.

What happens if you transfer or gift a business asset?

CGT can apply even where no cash changes hands. Market value substitution rules often apply to related‑party transfers (e.g., family members, connected companies, or trusts).

Restructures may trigger CGT unless a specific rollover applies. GST, stamp duty, and income tax implications may also arise.

Always consider these when planning succession or restructuring.

What CGT records should small business owners keep?

Here are the essential records you’ll need for business tax compliance:

• Purchase and sale contracts
• Settlement statements
• Legal and valuation invoices
• Improvement cost receipts
• Asset registers and depreciation schedules
• Trust and company records, shareholder registers
• Loan documents, business sale agreements
• Evidence supporting goodwill valuations and business use of assets
• Documents supporting active asset status and prior-year capital losses

Not having the right documents may lead to disputes and fines if the ATO decides to scrutinise your tax position.

Common CGT mistakes small business owners make

CGT can get confusing. Here are typical mistakes business owners make and how to avoid them.

Mistake 1: Thinking CGT only applies to property

Many owners assume CGT only hits on land or buildings. In reality, CGT can apply to shares, business goodwill, intellectual property, trust units, client lists, websites, and other intangible or investment assets.

Review all assets you plan to sell or transfer, not just real property. List intangible assets in the sale documents and obtain valuations for goodwill, IP, and shares to support the cost base or market value.

Mistake 2: Waiting until after signing to check concessions

Small business CGT concessions often require tests based on facts at the contract date and ownership periods. Deciding to rely on concessions after signing can be too late.

Test concession eligibility and active asset status before you sign. Get tax advice early, include protective contract terms where possible, and obtain valuations and supporting records ahead of negotiations.

Mistake 3: Assuming every business asset is an active asset

The active asset test is a gateway for many concessions. For example, passive or investment assets (for example, rental investments or financial assets) usually don’t qualify.

Confirm how each asset is used and for what period. Document business use, hours, or operations associated with the asset, and consider restructuring the timing to meet active asset requirements.

Mistake 4: Forgetting that companies do not get the general 50% CGT discount

The general 50% CGT discount for assets held for more than 12 months applies to individuals and some trusts, but not generally to companies.

Identify your taxpayer type and business structure early. Consider whether selling shares or assets is tax‑efficient, given who holds the asset and whether trusts or individuals can access concessions or discounts.

Mistake 5: Ignoring related‑party transfers

Transfers between related parties can trigger market value substitution rules and anti‑avoidance provisions, so transferring at a nominal value doesn’t avoid CGT.

Treat related‑party transfers like arm’s‑length transactions. Obtain independent valuations, document commercial reasons for transfers, and obtain tax advice to assess rollover or restructuring options.

Mistake 6: Confusing capital losses with ordinary business losses

Capital losses offset capital gains only and don’t typically reduce ordinary trading income or salary. You must report and carry them over if unused.

Separate capital loss tracking from operating loss records. Report losses correctly, keep supporting evidence, and plan the timing of disposals to use losses effectively against capital gains.

Mistake 7: Poor recordkeeping

Weak or missing records undermine cost base calculations, active asset claims, and eligibility for concessions, increasing audit risk and tax costs.

Keep comprehensive records, organise them before sales discussions, and retain them for the required retention period.

CGT checklist before selling a business or business asset

• Identify the specific asset being sold.
• Confirm legal ownership of the asset.
• Identify the CGT event and confirm the contract date.
• Work out capital proceeds and the cost base.
• Check available capital losses and whether the CGT discount applies.
• Test small business concession eligibility and active asset status.
• Review connected entities and affiliate relationships.
• Check the company, trust, or partnership structure and tax implications.
• Consider GST, stamp duty and other taxes.
• Obtain independent valuations where required.
• Speak to a tax adviser before signing the sale contract.

When should small business owners get CGT advice?

Understanding and planning for capital gains tax is crucial for managing your financial obligations in Australia.

If you know how CGT works, you can calculate your potential liability and employ effective strategies to minimise your tax obligations while ensuring compliance with Australian laws and regulations.

For complex business tax compliance cases, consider speaking to a business tax professional with Lawpath. We can help you navigate CGT planning and obligations.

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