I’ve been encouraged by the responses to my post last week, but also disappointed by the speed at which the recent Bill dealing with negative gearing and CGT changes has been introduced, and the lack of proper consultation that has accompanied it.
If these measures are genuinely being described as the most significant tax reforms in more than 25 years, then this is precisely the moment to do it once and do it properly.
Small business and CGT: the real problem
The removal of the blanket 50% CGT discount and the shift toward CPI indexation and a 30% minimum tax is intended to address long‑standing distortions in asset markets. The Government’s response to concerns raised by small business owners has been that there are already four existing small business CGT concessions, and that these will remain unchanged.
At first glance, this appears to protect “mum and dad” businesses. In reality, it preserves a system that is overly restrictive and accessible to only a small minority of the small business community.
The illusion of generosity
On paper, the small business CGT concessions look extraordinarily generous. In theory, they allow eligible business owners to eliminate CGT entirely on exit.
In reality, the data tells a very different story.
ATO statistics for the 2022–23 financial year (the latest I could find) show that around 35,000 individual taxpayers accessed small business CGT concessions, sheltering approximately $10 billion in capital gains, at a revenue cost of $2.5–$3.5 billion.
Those numbers sound large — until they are put into context.
According to the ABS, Australia has approximately 2.68 million small businesses, using the widely accepted definition of businesses with fewer than 20 employees. ABS data also shows that around 370,000 businesses exit the economy each year, although the ABS does not track business sales specifically.
Industry benchmarks from Australian business brokers suggest that only 10–15% of business exits result in a formal sale to an external party, implying roughly 37,000 to 55,000 business sales annually.
On the surface, 35,000 individual taxpayers accessing CGT concessions might suggest the system is working. But those claims frequently relate to the same underlying transaction, split across multiple family members and trust beneficiaries.
The reality is that the overwhelming majority of small business owners never benefit from these concessions at all.
The $2 million turnover trap
The main reason small business owners miss out is a fundamental mismatch in how Australia defines a “small business”.
The ABS definition notes that turnover for these businesses typically falls between $2 million and $10 million, depending on the industry.
Across most of the tax system, a small business is defined as having aggregated turnover under $10 million.
For CGT concessions, however, the turnover threshold remains stuck at $2 million, a figure that has been frozen since 2007.
Businesses that grow beyond this outdated limit are forced to rely on the alternative $6 million maximum net asset value test, which has also been frozen since 2007. In a modern economy, this test is easily breached simply by owning business premises or appreciating commercial property, often also captures other assets of the taxpayer and their connected entities.
In practice, even where businesses technically qualify, the rules are so complex that accessing relief becomes an expensive and high‑risk exercise.
Since their introduction, the small business CGT concessions have effectively shrunk into “micro‑business” CGT concessions.
ABS data shows that approximately 200,000 actively trading businesses, typically employing between 5 and 19 people and turning over $2–$10 million, are the businesses most likely to have real goodwill and a genuine sale value. Yet, unless they can satisfy the $6 million net asset value test, they receive no CGT relief at all for their lifetime of work.
Many will face effective CGT outcomes of up to 47% on exit.
An accidental penalty regime?
Paradoxically, company tax at 30% on capital gains is often a far better outcome.
In this context, the restrictive nature of the small business CGT concessions, in their current form, operate less as a concessionary regime and more as an accidental penalty regime for small business owners.
Why this matters in the current reform debate
Small business owners are typically capital‑poor but value‑rich. They often have little or no cost base in the businesses they’ve built, and they realise their gain only once, on exit.
When you combine:
high marginal tax rates,
limited access to small business CGT concessions, and
the removal of broad‑based relief such as the 50% CGT discount,
the result is that many small business owners face very high effective tax outcomes at the moment they exit.
A missed opportunity
The Treasurer has indicated that consultation is underway on how the new indexation rules interact with start‑ups and businesses holding low or zero cost bases.
If this reform package is to be genuinely about creating a simpler, fairer and more neutral tax system, then the small business CGT concessions cannot remain in their current form.
Aligning them with the $10 million small business definition, and replacing four overlapping concessions with a single, accessible concession, would provide certainty and genuinely reward entrepreneurs who take risks and “have a go”.
What do you think?
Mike
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