Small business CGT reform — Expanded access from $2 million to $10 million

As part of the 2026-27 Federal Budget, the Government announced a range of tax reforms, including with respect to the 50% capital gains tax (CGT) discount and restricting negative gearing for residential property investments to new builds from 1 July 2027. The Treasury Laws Amendment (Tax Reform No.1) Act 2026 (the Act) has now been enacted, following the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 receiving Royal Assent on 26 June 2026.

The Act forms part of the first tranche of legislation to implement the tax reforms announced in the 2026-27 Federal Budget. In particular, the Act amends the tax legislation to replace the 50% CGT discount for individuals, trusts and partnerships, with cost base indexation and a 30% minimum tax rate on capital gains accruing from 1 July 2027. The Act also introduces the announced amendments to negative gearing on residential investments.

Increase in turnover threshold — small business 50% reduction

Following the announcement of the reforms in the Federal Budget, the Government undertook consultations with a range of stakeholders, including small businesses.

Following these consultations, the Government has announced that from 1 July 2027, the turnover threshold for the small business 50% reduction (the 50% reduction) will increase from $2 million to $10 million.

This increase only applies to the 50% reduction under the small business CGT concessions. The eligibility thresholds for the remaining three concessions (the 15-year exemption, retirement exemption and roll-over relief) unfortunately remain unchanged, with the $2 million turnover threshold continuing to apply to those concessions.

This increase in turnover threshold is a significant development for business owners with an annual aggregated turnover of between $2 million and $10 million, who were previously unable to access the small business CGT concessions via the $2 million turnover test (and assuming they could not satisfy the $6 million maximum net asset value test (MNAVT)). Such business owners accordingly will, from 1 July 2027, be entitled to reduce the capital gain on the disposal of an active business asset by 50%, resulting in substantial tax savings.

This announcement must be viewed in the context of the abolition of the general 50% CGT discount from 1 July 2027, and replacement with cost base indexation and a 30% minimum tax rate on capital gains. The announcement ensures that business owners with turnover of up to $10 million can effectively still access some form of a 50% discount, albeit it via the 50% reduction.

The other three concessions will remain subject to the $2 million aggregated turnover test (or the MNAVT). Businesses with turnover between $2 million and $10 million may qualify for the 50% active asset reduction, but they will generally still need to satisfy the existing eligibility requirements for the remaining concessions, such as relying on the $6 million maximum net asset value test where the $2 million turnover threshold is no longer available.

Overview of the small business CGT concessions

The tax legislation contains four concessions that allow small business owners to disregard or defer some or all of the capital gains derived from the sale of an ‘active asset’ that is used in their business.

In order to access the concessions, the following basic conditions must be satisfied:

1. The taxpayer must either:
   1. constitute a ‘CGT small business entity’ — this test is satisfied if the taxpayer carries on a business and meets the $2 million aggregated turnover test in the year of the CGT event; or
   2. satisfy the MNAVT just before the CGT event — the total net value of CGT assets owned by the taxpayer and their connected entities and affiliates must not exceed $6 million.
2. The CGT asset must be an ‘active asset’ — broadly, this test is satisfied if the CGT asset is used by the taxpayer while carrying on a business for at least half of the taxpayer’s ownership period, or for at least 7½ years if the asset is owned for more than 15 years.

The four small business CGT concessions are briefly discussed below.

50% reduction

This concession permits business owners to reduce the taxable capital gain made on the sale of an active business asset by half. As noted above, from 1 July 2027, the turnover threshold to access this concession will increase from $2 million to $10 million.

15-year exemption

The small business 15-year exemption is a priority concession and will result in the entire capital gain being CGT-free, on the basis that additional conditions are satisfied. Broadly, an individual can disregard a capital gain under the 15-year exemption if they have continuously owned the CGT asset for at least 15 years prior to its disposal, and either the individual was 55 or over at the time of the CGT event and the event happened in connection with their retirement, or they were permanently incapacitated at that time.

Retirement exemption

A small business owner may disregard a capital gain under the retirement exemption, up to a lifetime limit of $500,000. Where a taxpayer is under 55 years of age, the exempt capital gain must be contributed to a complying superannuation fund or retirement savings account. A taxpayer who is 55 years or older does not need to contribute any amount into their superannuation.

Small business roll-over

The roll-over allows a taxpayer to roll-over a capital gain into a replacement asset that is acquired during the ‘replacement asset period’, which starts one year before, and ends two years after, the CGT event. If no replacement asset is acquired within this period, the deferred capital gain crystallises. A taxpayer may accordingly defer the making of a capital gain for up to two years, or a longer period where a replacement asset is acquired.

Tax planning is critical

The expansion of the 50% reduction to businesses with aggregated turnover of up to $10 million will enable many more businesses to access CGT relief, which will be invaluable given the abolition of the general 50% CGT discount.

However, for all taxpayers, the ability to access the small business CGT concessions depends on satisfying a range of technical requirements, which often need to be managed several years prior to the sale of a business.

Such initial planning is also particularly relevant where the taxpayer is a company or a trust, as further tests must be satisfied, including the ‘significant individual’ and ‘CGT concession stakeholder’ tests.

Planning considerations include the following matters:

• Connected entities — the $10 million aggregated turnover test from 1 July 2027 will include the turnover of a taxpayer’s connected entities and affiliates. As a consequence, a taxpayer’s aggregated turnover may inadvertently exceed the $10 million limit. Broadly, an entity is ‘connected with’ another entity if it controls that entity. For example, a taxpayer controls a company if they hold shares that carry the right to receive at least 40% of any income or capital distribution, or if they hold 40% of voting rights. A taxpayer controls a discretionary trust if (amongst other things) they have received a distribution of 40% of any income or capital in any of the four income years before the CGT event. Given the inclusion of connected entities in calculating the $10 million aggregated turnover test (and the $2 million aggregated turnover test), it is necessary to review a taxpayer’s ownership structures, including reviewing trust entitlements, some years prior to the CGT event, with a view to reducing or eliminating any control percentages.

• 15-year exemption — where the taxpayer is a company or a trust, the taxpayer must demonstrate it had a ‘significant individual’ for at least 15 years during the time it owned the CGT asset, to access the 15-year exemption. Additionally, the significant individual immediately before the CGT event (i.e. when the contract of sale is executed) must either be over 55 at the time of the CGT event and the event happened in connection with their retirement, or the individual was permanently incapacitated at that time. The identity of the person who will be the significant individual in the year of the CGT event is critical, and the sale of the business must be connected with their retirement. While it is not necessary that the individual permanently retires from the workforce, there must be a significant reduction in the number of hours the individual works.
• Small business retirement exemption — Where an individual is under 55 years, the gain must be contributed into their superannuation fund up to a lifetime limit of $500,000. If the taxpayer is aged 53 or 54 in the year of the CGT event and do not wish to contribute funds into their superannuation, they may apply the small business roll-over to defer taxation on the capital gain for a two-year period, and then apply the retirement exemption. As the individual will then be over 55 years of age, they will not be required to contribute the CGT exempt amount into a superannuation fund. Where companies and trusts seek to access the retirement exemption, planning will also be required to ensure the CGT exempt amount is paid to at least one of its CGT concession stakeholders within the statutory timeframe.
• Active asset test — The taxpayer must ensure their CGT assets satisfy the active asset test for the requisite period. This is particularly important where taxpayers have also leased their business premises, as an asset is not considered an active asset if its main use is to derive rental income.

The above considerations highlight the necessity to review current ownership structures, proposed trust distributions and consider exit strategies (including identifying the individual for whom the sale is connected to their retirement), well in advance of a proposed business sale.

Taking advantage of expanded 50% reduction

The expansion of the 50% reduction to business with aggregated turnover of up to $10 million is beneficial, particularly given that the general 50% CGT discount will be replaced with cost base indexation. While the indexation regime should theoretically reduce capital gains to account for inflationary factors, business founders with a low cost base will be significantly disadvantaged under the indexation method. For that reason, the increase in the turnover threshold for the 50% reduction provides a valuable opportunity for many taxpayers who were previously unable to access the small business CGT concessions.

We have advised various business owners on their ability to access the small business CGT concessions, and have successfully represented taxpayers in seeking private binding rulings from the Australian Taxation Office regarding the ability to access the concessions.

We can work with business owners in reviewing their structures, to ensure the threshold conditions will be satisfied, and to maximise their entitlement to the remaining concessions, particularly the 15-year exemption, being the most generous concession.

Contact us

If you would like to learn more or to discuss your ability to access the small business CGT concessions, please contact Tamara Cardan, Special Counsel in our Tax and Corporate & Commercial groups, on +61 3 9321 7862.