Typically, the sale of a business will be on ‘capital’ account and if a profit is made, capital gains tax will be payable. The alternative to this is a sale on ‘revenue’ account and if a profit is made, the profit will be treated like other sales revenue.

The small business capital gains tax (CGT) concessions and reduction in CGT for holding an asset for more than 12 months will often significantly reduce the tax you ultimately pay if a sale is on capital account, especially if your business entity is a trust or sole trader.

The 50 percent tax discount for holding an asset for more than 12 months is dependent, however, on when the contract to purchase the asset came into effect. This discount, as well as access to the small business CGT concessions, is dependent and whether the ATO assess the gain on revenue or capital account.

The contract may not come into effect merely when the contract is signed, as there may be conditions in the contract that still have to be fulfilled, such as the assignment of a lease. ATO ID 2004/668 discusses ‘when a contract is formed’ and states that ‘the contract does not come into existence until the condition is met’, whilst referring to the condition as ‘a condition precedent to the formation of the agreement’.

If you sign a contract to purchase a business but have not met all the conditions necessary to fulfil the contract, the commencement date for the 12 months CGT discount may not have started.

Furthermore, if you buy and sell the asset within a relatively short time period, even if it is longer than 12 months, the ATO can assess the gain on a revenue basis and deny access to both the 12 month CGT discount and small business CGT concessions.