Key Highlights

  • The threshold for the 50% active asset reduction rises from $2 million to $10 million.
  • No. The asset and Business must also satisfy the other applicable conditions.
  • A 50% active asset reduction would reduce the illustrated assessable gain to $200,000.
  • Passive investments, including most rental properties, generally do not meet the active asset requirement.

For many business owners, the sale of a business is the biggest financial event of their working lives, and tax decides how much they keep. The Tax Reform No. 1 Act 2026 has widened one of the most-used small business Capital Gains Tax breaks, lifting the threshold for the 50% active asset reduction from $2 million to $10 million. With the broader CGT overhaul approaching on 1 July 2027, the change deserves close attention from owners planning an exit.

What the change does

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 is ENACTED law. Among its measures, it raises the threshold for accessing the small business 50% active asset reduction from $2 million to $10 million.

The $2 million figure has long been the aggregated turnover test used to define a small business entity for the small business CGT concessions.

Lifting the threshold to $10 million means businesses that are considerably larger than the traditional small business definition may now qualify for the reduction, provided they meet the other conditions.

The change applies from the start date set out in the Act. Owners should confirm which sales and CGT events fall under the new threshold, particularly where a contract was signed around the commencement date.

How the 50% active asset reduction works

The active asset reduction is one of four small business CGT concessions that have been part of Australian tax law for many years. The others are the 15-year exemption, the retirement exemption and the small business rollover.

Under the reduction, a capital gain on an active asset can be cut by 50%. An active asset is broadly one used, or held ready for use, in carrying on a business. Goodwill, business premises and plant used in the business are common examples.

Passive investments, such as most rental properties, generally do not qualify.

The asset must also satisfy the active asset test, which broadly requires it to have been active for a sufficient part of the period it was owned. Owners need to meet the basic conditions as well, such as the turnover test or, alternatively, a maximum net asset value test.

Whether the maximum net asset value test has also changed, and whether the higher threshold extends to the other three concessions, should be checked against the Act. The measure as described lifts the threshold for the active asset reduction.

A worked example: a $400,000 gain

Hypothetical example: Jordan runs an electrical contracting business as a sole trader with aggregated turnover of $7 million. The business's net Assets are above the level that would satisfy the maximum net asset value test.

Jordan sells the business, and after all other applicable adjustments, makes a capital gain of $400,000 on the goodwill, which has been an active asset throughout.

Under the old $2 million threshold, Jordan would not have qualified for the 50% active asset reduction on turnover, and would Fail the alternative net asset test. The full $400,000 would remain in the calculation.

Under the new $10 million threshold, Jordan's turnover of $7 million is within the limit. The 50% reduction would cut the gain to $200,000, a $200,000 reduction in the amount assessed.

If that $200,000 would otherwise have been taxed at the top marginal rate of 45% plus the 2% Medicare levy, the tax difference would be up to 47% x $200,000 = $94,000.

The actual outcome would depend on the timing of the sale, how the gain is calculated under the new CGT rules, and Jordan's other income. The example is illustrative only.

How it fits with the new CGT rules from July 2027

The same Act replaces the 50% CGT discount with cost-base indexation, combined with a 30% minimum tax, for gains accruing from 1 July 2027. That is not a "30% discount". It is a different method of working out the taxable gain, with a floor on the tax rate.

Under the long-standing rules, the general 50% discount and the active asset reduction could apply together for eligible individuals, significantly reducing the assessable gain. How the active asset reduction interacts with indexation and the 30% minimum tax for gains accruing after 1 July 2027 is a technical question that is likely to require professional advice, and one on which further ATO guidance would help.

The ATO has said taxpayers may need market values as at immediately before 1 July 2027, but should not get a valuation early, because "a valuation can't be forward-looking". The alternative apportionment method is still being developed by the government.

Other small business measures already in law

The higher CGT threshold sits alongside changes in the Tax Reform No. 2 Act 2026, which passed the Senate on 19 August 2026.

That law made the $20,000 instant asset write-off permanent from 1 July 2026 for businesses with turnover under $10 million. The government said the measure would cover 2.7 million businesses and save about $32 million a year in compliance costs.

It also reinstated company loss carry-back, for two years and with a refundable offset, for income years from 1 July 2026. The government said it was expected to help 85,000 businesses.

The common $10 million marker across the write-off and the active asset reduction suggests a broader shift in where the government draws the small business line for tax purposes, although each measure has its own eligibility tests.

What to watch

The Senate Economics Legislation Committee is due to report on the Tax Reform No. 3 Bill and the Minimum Tax on Discretionary Trusts Bill on 13 November 2026. Those are still BILLS, not law, but they matter for business owners who operate through discretionary trusts, because the proposed minimum tax would start on 1 July 2028.

Rollover relief for trust restructures is proposed to run from 1 July 2027 to 30 June 2030. Owners weighing a sale, restructure or both may find the order of those steps affects which concessions are available.

MYEFO in December 2026 will update the costings for the reform packages. The ATO is also expected to publish further guidance on CGT valuations and the new indexation regime ahead of 1 July 2027.

For owners approaching retirement, the wider active asset reduction could be valuable, but the details of eligibility and timing will decide the outcome.