Topic: Capital gains tax basics: what small businesses should know when selling assets

Last reviewed: 17/12/2025

Focus: Accounting Practice Analysis

Capital Gains Tax Basics for Small Business (2025)

Capital gains tax (CGT) is not a separate tax in Australia; it is the part of income tax that applies when a small business sells or otherwise disposes of a CGT asset (for example, business premises, goodwill, equipment, or shares in a company/trust). In practice, what small businesses must know is that CGT is triggered by a “CGT event”, the gain is generally calculated as sale proceeds minus the asset’s cost base, and the tax outcome depends heavily on entity type, asset use (business vs private), eligibility for the 12‑month CGT discount, and whether the small business CGT concessions can apply (often the most material lever for reducing or eliminating CGT). This framework is established under the Income Tax Assessment Act 1997 (ITAA 1997), primarily Parts 3‑1 and 3‑3, and ATO guidance on CGT for business.

Featured Answer: Small businesses selling assets in Australia must identify the relevant CGT event, calculate the capital gain or loss (proceeds less cost base), and then determine whether the 12‑month CGT discount and the small business CGT concessions apply. The biggest practical risks are misclassifying assets (revenue vs capital), failing the “active asset” or turnover/net asset tests, and overlooking GST, depreciation balancing adjustments, and timing issues. Correct structuring and documentation before signing a sale contract is often the difference between paying full CGT and legitimately reducing CGT to nil.

What is capital gains tax (CGT) in Australia and when does it apply?

CGT applies when a CGT event happens to a CGT asset, most commonly on disposal under a sale contract. The ATO’s position is that CGT is part of your income tax assessment: net capital gains are included in assessable income, and capital losses can generally only offset capital gains (not ordinary income), subject to ordering rules.

CGT event timing: The CGT event generally happens when you enter the contract (not settlement), which drives the income year of the gain. This is consistent with ITAA 1997 CGT event rules (notably CGT event A1 for disposals).
CGT assets: Includes goodwill, business real property, shares/units, intangible rights, and many other assets. Some assets have specific interaction rules (e.g., depreciating assets).
Exclusions/special rules: Depreciating assets are typically dealt with under the capital allowances regime (balancing adjustment) rather than CGT, though they can still be CGT assets in certain contexts. This distinction is essential in sale-of-business allocations.

ATO guidance on Capital gains tax and small business CGT concessions (ato.gov.au)
ATO guidance on CGT events and cost base components (ato.gov.au)

Which small business asset sales commonly trigger CGT?

A CGT liability most commonly arises where the sale relates to capital assets rather than trading stock or ordinary income items.

Selling a business (including goodwill): Often the largest CGT exposure sits in goodwill and business premises, not plant and equipment.
Selling commercial property used in the business: Typically a CGT asset; may also be eligible for small business concessions if it is an active asset.
Selling shares in a company or units in a trust: CGT applies at owner level (shareholder/unitholder), with concessions potentially available if conditions are met.
Retiring and selling client list/goodwill in a practice: Usually treated as CGT (goodwill), but classification must be carefully reviewed.

Asset sale vs share sale outcomes can differ materially for both vendor and purchaser. The vendor may prefer a share sale for simplicity; the purchaser may prefer an asset sale for depreciation resets. The tax outcomes must be modelled before negotiation.

How do you calculate a capital gain or capital loss on sale of a business asset?

A capital gain is generally calculated as capital proceeds minus cost base. A capital loss is reduced cost base minus capital proceeds.

Money paid / market value given to acquire the asset
Incidental costs of acquisition and disposal (e.g., legal fees, valuations, agent commissions)
Non-capital costs of ownership in limited circumstances (more relevant for certain assets)
Capital costs to increase or preserve value (improvements)
Capital costs to establish/defend title (certain legal costs)

A small business bought a property for $900,000 and paid $25,000 in legal/stamp duty and later spent $80,000 on capital improvements.
It sells under contract for $1,400,000 and pays $30,000 in agent/legal selling costs.
Indicative gain calculation (high level):

Consideration must be given to market value substitution rules where parties are not dealing at arm’s length, or where proceeds are not fully reflected. The ATO applies market value principles in appropriate cases under ITAA 1997.

Is the sale treated as CGT, ordinary income, or both?

It is established that not all “sale profits” are CGT. Some are ordinary income.

Trading stock: Profits on sale are generally ordinary income (and subject to GST where applicable).
Profit-making undertakings (isolated transactions): Certain transactions can be on revenue account depending on intention and circumstances; the ATO’s approach to isolated profit transactions is discussed in TR 92/3 (profits from isolated transactions).
Depreciating assets (equipment, vehicles, etc.): Often taxed through balancing adjustments under the capital allowance rules rather than CGT, which can create assessable income if sale proceeds exceed written down value.

A “business sale” can generate a mix of:

What are the 12-month CGT discount rules and who can access them?

The general 50% CGT discount may apply where the asset has been held for at least 12 months and the taxpayer is an eligible entity (typically individuals and trusts; companies are not eligible for the 50% CGT discount).

Individuals: May access the 50% discount (subject to conditions).
Trusts: Can access discount at trust level and distribute discounted gains to beneficiaries (subject to trust/tax integrity considerations).
Companies: Do not get the 50% discount; any CGT concessions must come from small business CGT concessions or other specific provisions.

ATO pages on CGT discount eligibility and rules (ato.gov.au)

What small business CGT concessions could reduce or eliminate CGT?

Small business CGT concessions can significantly reduce CGT if eligibility is satisfied. These are legislated in ITAA 1997 (small business relief provisions) and administered per ATO guidance.

15-year exemption: Potentially disregards the entire capital gain if stringent conditions are met (including long ownership period and retirement/incapacity conditions).
50% active asset reduction: Reduces the gain by 50% (in addition to the general discount if available).
Retirement exemption: Allows up to a lifetime cap (subject to conditions) to be disregarded; if under the relevant age threshold, amounts may need to be contributed to superannuation.
Small business rollover: Defers all or part of the gain by rolling into replacement assets or certain expenditure.

Basic conditions: You must satisfy the small business entity tests (e.g., aggregated turnover test) or alternative tests (net asset value test), plus the asset must satisfy the active asset test, and there must be a relevant connection to the business (or affiliates/connected entities).
Active asset test: The asset must be used, or held ready for use, in the course of carrying on a business for the required portion of the ownership period.
Aggregated turnover and connected entities: Must be computed correctly; errors here are common in groups with trusts, bucket companies, and related trading entities.

A trading company sells its business assets including goodwill.
If the shareholders sell shares, the asset is the shares; active asset eligibility depends on underlying business and connected entity rules.
If the company sells goodwill, the company may qualify for small business CGT concessions depending on structure, turnover/net assets, and active asset use.

Consideration must be given to the significant individual and CGT concession stakeholder rules where concessions interact with companies and trusts. These definitions are decisive and must be tested early in the transaction.

How does goodwill work for CGT when selling a small business?

Goodwill is a CGT asset and is frequently the largest component of a small business sale. The ATO accepts that goodwill is a single CGT asset attached to a business, and it is typically realised on sale of the business or part of it.

Allocation in sale contract: The purchase price must be reasonably allocated across assets (goodwill, plant, stock, IP). Poor allocations can create disputes and unintended tax outcomes.
Record keeping: Goodwill cost base can be complex where goodwill has grown organically (often minimal historical cost base), increasing the gain.
Going concern and GST: If structured as a GST-free going concern, GST may not apply, but the contract must satisfy GST law requirements and be drafted correctly.

ATO guidance on goodwill and CGT and business CGT concessions (ato.gov.au)

How do GST and CGT interact when selling business assets?

GST and CGT are separate regimes, but they interact commercially and contractually in business sales.

GST-free going concern: A sale of a business may be GST-free if it meets the going concern requirements, which generally requires that the enterprise is supplied and carried on until supply, and that the parties agree in writing that the supply is of a going concern.
Margin scheme and property: If property is involved, GST property rules can be complex and must be reviewed separately.
CGT unaffected by GST status: Even if GST-free, CGT can still apply.

A contract drafted without a clear GST position can cause price renegotiations, settlement delays, and disputes over “plus GST” clauses, while CGT timing remains locked to contract date.

What records must small businesses keep to support CGT positions?

The ATO expects contemporaneous records to substantiate cost base and eligibility for concessions.

Purchase and sale contracts (including variations)
Settlement statements and adjustments
Invoices for legal fees, agent fees, valuations, due diligence
Depreciation schedules and fixed asset registers
Evidence of active use (leases, business records, insurance, council rates, photos, floor plans)
Group structure and connected entity analysis (trust deeds, company constitutions, distribution minutes)
Working papers supporting eligibility for small business CGT concessions

The cost of reconstructing cost base can be material, and the ATO can deny cost base elements if not evidenced. It is prudent to curate CGT evidence well before sale.

What are common CGT mistakes small businesses make when selling assets?

The most frequent CGT errors are preventable with early advice and transaction discipline.

Signing the contract before seeking advice: CGT year and structure are often fixed at contract date.
Incorrectly assuming “small business means no CGT”: Concessions are conditional, not automatic.
Failing the active asset test inadvertently: For example, property leased to an unrelated party may not be an active asset in the way owners assume.
Ignoring connected entities and aggregated turnover: Group calculations can disqualify concessions.
Confusing depreciation balancing adjustments with CGT: Plant/equipment outcomes can increase taxable income even when CGT is reduced.
Not modelling shareholder vs entity tax outcomes: Particularly in companies where profits may be taxed again on extraction (dividends).

How should small businesses plan a sale to legitimately minimise CGT?

CGT outcomes are typically optimised by planning before heads of agreement and before contract.

Clarify what is being sold: Asset sale, share sale, or mixed transaction.
Map the asset register to tax treatments:
Test eligibility for concessions early:
Model tax outcomes and cashflow: Include GST, PAYG instalments, and timing.
Draft sale allocations and clauses carefully: Ensure allocations are commercially defensible and consistent.
Prepare evidence pack: Cost base documents, active use evidence, group structure support.

CGT rules and small business concessions are contained in ITAA 1997 (Parts 3‑1, 3‑3 and the small business CGT concession provisions). ATO administrative guidance should be used to align interpretation and documentation.

How does MyLedger help accountants handle CGT-related workflow faster than Xero/MYOB?

MyLedger is not a tax return preparer, but it materially reduces the manual accounting work that feeds CGT and small business sale advice, particularly around clean ledgers, asset schedules, and supporting working papers. In Australian practice, CGT work quality depends on accurate transaction classification, reconciled balances, and defensible workpapers.

Automated bank reconciliation: MyLedger AutoRecon delivers 90% faster reconciliation (typically 10–15 minutes per client vs 3–4 hours in manual-heavy workflows), helping firms get to clean year-end numbers earlier.
AI-powered categorisation: MyLedger typically auto-categorises around 90% of transactions, reducing rework and improving consistency when preparing sale-year accounts.
Working papers automation: MyLedger supports automated working papers (including depreciation and other schedules), reducing reliance on manual Excel files that are difficult to audit.
ATO integration accounting software: MyLedger includes deep ATO portal integration (client details, lodgment history, ATO statements/transactions), supporting faster verification and compliance workflows compared with tools with limited ATO connectivity.
Pricing model advantage (practice economics): MyLedger is designed for firms with all-in-one pricing (targeted $99–199/month for unlimited clients, and free during beta) versus per-client pricing often seen in alternatives. This matters where CGT advisory is bundled and margins are pressured.

Reconciliation speed: MyLedger = 10–15 minutes, Xero/MYOB/QuickBooks = commonly 3–4 hours where data and coding are messy
Automation level: MyLedger = AI-powered reconciliation and bulk operations, many competitors = more manual rules and exception handling
Working papers: MyLedger = automated working papers suite, many competitors = Excel-based working papers outside the ledger
ATO integration: MyLedger = direct ATO portal integration, many competitors = limited ATO connectivity
Best fit: MyLedger = Australian accounting practices managing multiple clients, many competitors = general small business bookkeeping focus

Next Steps: How Fedix can help your practice deliver better CGT outcomes

Fedix built MyLedger in Australia for Australian accounting practices to move faster from bank statement to financial statements, which is the foundation for defensible CGT and small business sale advice. If your firm is spending days cleaning data before you can even begin CGT modelling, automation is the immediate productivity lever.

Review your last 5 business sale files and quantify reconciliation and working paper time.
Identify where errors occurred (asset allocation, depreciation vs CGT, missing cost base evidence).
Learn how MyLedger (Fedix) can automate reconciliation and working papers so your team can focus on CGT strategy, eligibility testing, and documentation quality.

MyLedger vs Xero for automated bank reconciliation (Australian practice comparison)
Division 7A automation and year-end compliance workflows
BAS reconciliation software and ATO-integrated accounting software workflows

Conclusion

CGT on small business asset sales is governed by ITAA 1997 and ATO guidance, and the tax outcome depends on correctly identifying the CGT event, calculating cost base, and applying the right combination of discount and small business CGT concessions. In practice, early planning, defensible asset allocations, and robust documentation are what protect clients and minimise tax lawfully. For accounting firms, automation that accelerates reconciliation and working papers (such as MyLedger by Fedix) improves both turnaround time and the quality of CGT support delivered to clients.

Frequently Asked Questions

Q: Is capital gains tax a separate tax in Australia?

No. According to ATO guidance, CGT is part of the income tax system; net capital gains are included in assessable income and taxed at the taxpayer’s marginal rate (or the applicable company rate), subject to discounts and concessions where eligible.

Q: When do I pay CGT when I sell a business asset—contract date or settlement?

In most standard disposals, the CGT event happens when the contract is entered into (not settlement), which determines the income year the gain is recognised. This timing rule is critical for planning around year-end and eligibility conditions.

Q: Can a small business reduce CGT when selling the business?

Yes, but only if the specific conditions are satisfied. The small business CGT concessions can reduce or eliminate CGT where the basic conditions (including small business tests and the active asset test) are met under ITAA 1997 and as administered by the ATO.

Q: Do companies get the 50% CGT discount?

No. Companies are generally not eligible for the 50% CGT discount. Individuals and trusts may access the discount if the asset is held for at least 12 months and other conditions are met.

Q: Will I pay CGT on equipment and vehicles used in my business?

Often, the primary tax outcome on sale of equipment/vehicles is a depreciation balancing adjustment under the capital allowances rules, not CGT—though the correct treatment depends on the asset and circumstances. This is a common area where sale allocations and fixed asset registers must be reviewed carefully.

Disclaimer: This material is general information for Australian small businesses and accounting practitioners as of December 2025 and does not constitute legal or tax advice. Tax outcomes depend on the entity type, transaction documents, and specific facts, and the law and ATO guidance may change. Advice should be obtained from a registered tax agent or qualified adviser before entering into a sale contract.