Bakery sale: small business CGT concessions and a used retirement cap
Maria Papadopoulos has operated a bakery as a sole trader since 2002. On 1 May 2025 she sold the business for $2.6 million: goodwill $1.2 million, plant and equipment $300,000, trading stock $100,000, and the freehold shop premises $1 million. She bought the shop in 2018 for $600,000 and has always used it in the bakery. Maria is 61, has no prior small business CGT concessions, and has a $100,000 carried-forward capital loss from a share sale in 2021. Her other assets are a home worth $1.8 million with a $500,000 mortgage, a rental unit worth $700,000, and superannuation of $600,000. Aggregated turnover for the bakery is $3.5 million. She wants to know whether she can use the 15-year exemption, the 50% active asset reduction and the retirement exemption, and what tax she will pay.
1. Can Maria access the small business CGT concessions? Address the turnover test, the maximum net asset value test and the basic conditions.
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Access requires the basic conditions and either the small business entity test or the maximum net asset value (MNAV) test. Maria's aggregated turnover is $3.5 million, so she is not a small business entity for the CGT concessions if the applicable threshold is $2 million. She must therefore rely on the MNAV test, which requires the net value of CGT assets of the taxpayer and connected entities to be $6 million or less just before the CGT event. Her assets include the home equity ($1.8m less $0.5m = $1.3m), the rental unit ($700,000), the business goodwill ($1.2m), the shop premises ($1m) and plant ($300,000). Trading stock is not a CGT asset. Superannuation is not a CGT asset for this test. That gives $4.5 million, or $5.1 million if plant is included. Either way she is under $6 million. She must also satisfy the basic conditions: the asset must be a CGT asset, she must be a small business entity or meet MNAV, and the asset must be an active asset. Goodwill and the shop are active assets because they are used in the bakery. The $100,000 capital loss does not affect eligibility but will affect the taxable gain.
2. Which concessions apply to the goodwill and the shop, and what is the taxable capital gain after applying the capital loss?
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Apply the concessions asset by asset. Goodwill: Maria has held the bakery since 2002, so the goodwill has been an active asset for more than 15 years. She is over 55. The 15-year exemption applies, making the $1.2m gain on goodwill wholly exempt. Do not apply the 50% reduction or retirement exemption to that gain. Shop: she bought it in 2018, so it has not been held for 15 years. The $1m proceeds less $600,000 cost base gives a $400,000 gain. The shop is an active asset. The $100,000 carried-forward capital loss is applied before the small business concessions, reducing the gain to $300,000. The 50% active asset reduction then reduces it to $150,000. Maria can choose the retirement exemption for the remaining $150,000. She is over 55, so she can take the exempt amount without contributing to superannuation, subject to the $500,000 lifetime cap. She has not used the cap. The result is a nil taxable capital gain from the shop. The plant sale may produce a balancing adjustment, and the stock is ordinary income, so those amounts are separate.
3. What if Maria had used the retirement exemption before, with $450,000 of the lifetime cap already used? How would that change the outcome?
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The retirement exemption cap is $500,000 lifetime, so only $50,000 remains. The shop gain after the capital loss and 50% reduction is $150,000. She can exempt $50,000, leaving $100,000 taxable. The 15-year exemption on the goodwill is unaffected because it is a separate concession and does not use the retirement cap. The order matters: apply the capital loss first, then the 50% active asset reduction, then the retirement exemption. She cannot use the retirement exemption on the goodwill gain because the 15-year exemption already makes it exempt; choosing both would waste the cap. If she wanted to preserve the remaining cap, she could leave the $100,000 taxable and pay tax at her marginal rates, or consider a small business rollover if she acquires a replacement active asset within the required period. The best choice depends on her marginal rate and whether she needs cash. The plant balancing adjustment and stock income must still be included.